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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
1-a
PRESENT:
ALLAN SPROUL, Chairman
Wo RANDOLPH BURGESS
WALTER W. STEWART
F. CYRIL JAMES
W. RIEFLER
JOSEPH^WILLITS
ROBERT D. CALKINS
ADVISORY SUBCOMMITTEE:
LESTER V. CHANDLER
ELMER WOOD
KARL R. BOPP
STAFF:
MILDRED ADAMS, Research Director
ELLEN C. SINGER, Research Assistant
CHAIRMAN SPROUL:
such order as we can.
you.
Gentlemen, let us achieve
The schedule for today is before
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.
It 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 memorandum outline of their
suggestions was sent to you a few days ago.
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. BOPP:
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 wouldnTt 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 histor^,
is point A:
^-^l
"Some of the major objectives of the Compre-
hensive 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
6
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 that point to consider 1 and
2 together.
DR. JAMES:
question.
I was going to ask a technical
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:
New York bank.
I can only speak for the
We have had in mind for a number of years
the desirability of development of archives as distinguish d
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:
this.
I know nothing specific about
On the other hand, the idea would be friendly
A
research.
I donTt know about space requirements.
MR. BURGESS:
Of course, you've got the
Library of Congress and you've got the regular governmenta
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,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 contra-
diction "between the destruction Schedule and the archives
that are needed for this, but in the process of work they
8
sometimes get mixed.
If a reconciliation in the form of 8
phrase or a directive, or something of that sort, could be
arrived at, I think it would be very helpful.
DR. 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 unnecessary
materials.
It istanly in the definitions of necessary and
unnecessary that you begin to trip.
MR. BURGESS:
There is a United States
Government s-chedule too, isn't there?
CHAIRMAN SPROIJL:
Yes, there is.
At least
ours to a considerable extent 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 correspondence that seemed to be important
was just saved at the last moment, and it is that that one
fears.
MR. BURGESS:
I suspect the Treasury has an
9_
even worse system than the Federal Reserve.
They donTt
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:
Number 2, I like very much the
breadth of that, from the standpoint of an author.
to be a very large assignment.
It seems
Take the American back-
ground of this, while I think it is imDortant, I would
thinkit 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 statement concerning
the whole field to be covered, I think it would be fine,
but not to be included in the one comprehensive history*
MR. RIEELER:
I don't quite understand.
the stress in the phrase, development of ideas?
Is
It would
seem to me that the orientation of the history should be
facts and situations.
What happened to the factual
situation against which these ideas have to impinge or
work out of?
You have 15,000 banks being chartered just
after the System started, and collapsing, you have the
whole postwar attempt to get things on their feet again.
It is on those factual situations that I think the focus
of the history ought to be.
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.
It was much more
a curious chain of events, out of which ideas developed.
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 cente
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:
apart.
I think we may not be too far
I will be subject to correction from Les and ElmeP
Our concern was this.
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, if one looks at the facts* who-po-orgr
Jj: seems to us\that in terms of hi "t~Tj /" ijhfth the stock
market became a matter of concern for the System/ that it
7
A
11
felt it had some responsibility with respect to it P
.'. w*4l
It is this development of ideas toward a
reactions to these facts that struck us as being the
more important thingj *he facts tend to be fc&* dramatic*
crftQO'i and we felt that greater attention should be given
?
A
to.this gradual development, ,j**#*- the germ of an idea °mi\ [•
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.
I 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.
DR. 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 semi-automatic 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 S*f ue*tiaM* $M u*^JuU wh-cro
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 positioi
The history of the Federal Reserve is the
history of the most significant institution in 4=te, terms
of the whole economic concept, from one that was devised
to function a-ym* periphery of an automatic monetary system
••'-
the tune of which was called from London, as Sir Henry
Stra^osh put it, to the central institution in the
o
determination of very largely, one can say, the extent
to which the United States is able to call the tune *£ \vu
international affairs.
Now ideas in that sense, I think, have a
very effective theme and make this one of the most importait
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 vitally 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.
MR. BURGESS:
Has somebody got all that down?
CHAIRMAN SPROUL:
o
here except perhaps in wording?
Is there any real conflict
If we thought solely in
terms of ideas, perhaps wefd get an ideal running account
14
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 situations, we might lose track of these
major themes and ideas.
It seems to me if you put in facts and
V
situations as well as ideas in your general outline of
things to be included, there is no real difference of
opinion here.
DR. STEWART:
There islnot in the usage of
words, but there is in the size of the canvas. As Dr.
James has just said, there is a different size canvas.
I think this is worth keeping in mind, that the agreement
doesnTt go so far but what there is a difference of emphas s
between the two approaches.
CHAIRMAN SPROUL:
Yes, thatfs right.
MR. BURGESS:% Somebody should put up a little
flag and say we not only^cpmplete abolition of automaticit
(Laughter) but*there is still room ifrmmit for. the Operation
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 the 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
5
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.) This would require adequate
attention to the whole question of location of control,
the methods of administration, and the development of ideajs
by those who make policy."
Things to be avoided:
"a.
This should not in any sense be consider
an official history and the writer should feel perfectly
free to criticize, evaluate, and interpret.
lf
b.
V
It should not be financial history in th
narrow sense but should be a social history, giving due
16
(
emphasis to intellectual and political, as well as the
narrower economic and financial, philosophies and events.1
MR.BURGESS:
That 4 ^ raises one question
we are going to have to face all through tnis.
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 isnft just an individual judgment,
but is a judgment measured against what some of his peers
may say —
that is an advisory group.
You had it in the
'national oureau.
CHAIRMAN SPROUL:
Perhaps Dr. Calkins could
say something about the general idea of procedure.
DR. CALKINS:
The ordinary procedure that
we follow at Brookin^s^ 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 became an advisoj?yf/
committee to me, where Brookings has the final determinatib
o
on publication.
That determination is in the hands of the
president, and the committee becomes an advisory committee
To
17
to him, making their recommendation as to whether the thir.g
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 organizied an
advisory committee chosen 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 we do at Brookings, and
n
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 isffiot 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
&£• dispute, he may want to get the views of his advisory
18
committee as well as his own j
Brookings,
DR. WILLITS:
How about footnotes of dissent?
DR. CALKINS:
We do not employ them at
We have provisions whereby they may be employejd
The procedure at Brookings has shifted a little in recent
years.
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.
Consequently they have not felt
obliged to record their own dissents.
But there again it
is a procedure which we need to work out and agree upon
for this series of studies.
DR. WILLITS:
Thinking perhaps chiefly of the
)mreau, I always respected very much the means of escape
from a false intellectual unity that the absence of
footnotes connoted.
When they come in, when there are
19
issues of real difference, and people who are entitled to
A
authority, as the members of this committee or an advisory
A
committee,feelA&re important differences they want to
i
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 accepted responsibility for.
He writes what
But the fact that a flag
was up here or there, I always thought *0k was a very good
thing.
DR. CALKINSr
I do too.
As a matter of fact
I was one of the people who urged this in the esta.blishmen
of the C. E. D,
the Jpureau.
I think it worked very well there, as in
It has in our own case.
DR. WILLITS:
Particularly in an area as
this, where you have a straight history, you have the
documentation, put it in order, and 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 Gommittee on the
Mistory will have that in mind as one of the things to
be decided by that committee, and some procedure devised.
f_
20_
MR. RIEFLER:
Is it simply implicit and
not explicit in these words, under special attention: How
money was made available, not how much was made available;
not what the Federal Reserve actually did in terms of a
series of economic and financial developments, but the
methods?
And under things to be avoided, it shouldnTt be
financial history.
When you get down here, where is there
any stress on the actual facts, developments, whelf^you
get down to the narrow financial and economic events.
seems to me it lacks history there.
It
It may be implicit
in the thinking, but someplace we ought to have in the
outline here a history, and not an interpretation of
ideas, i^he change of the United States from a debtor to
is
A
a creditor nation.
DR. CHANDLER:
As a matter of fact, Win, I
think that specific example indicates why we used this
kind of language.
That is, in a very narrow financial
history, one might simply deal with what the Federal Reser ve
did this month and what it did next month, leaving out
the whole question of what kind of an environment it
happened in#
c
MR. RIEFLER:
of financial developments.
It is the terrific impact of
It is the job of a historian
21
to build that whole picture of what it is all about.
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 author.
• DR. 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
*$ J of all the conditions and thinking that led- to the movemen
22
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 broac
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.11
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 incident 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.
"T o
Where the difference between the Aldrich Plan
23_
and the Federal Reserve System fits into it.
Actually,
I donTt 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 SFROUL:
It does,I think, raise agair
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.
W
I feel fairly strongly about that, because in
judgment, very, very few people are going to read
deeply in all of the technical points that come up.
will be a small limited interested audience.
There
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 didnTt know about
24
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 Jr4«te-, and in the sending of it up to Ottawa,
u
as you all know, is a magnificent 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 SPROIJL:
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 accumulat
out of the System in March, 1933.
I am not sure that is
generally known.
DR. JAMS:
On that particular point, there
is a very dramatic letter that <£ James\j¥^mmrd wrote to
his brother, ]^**€tttw~the^ day, •lu^ust 4th, thttt he-received
•^n^l-End had'declared'war, he promptly
u
^cvota
; « CL VH^iC
c. V
25
rer^o go down to New
7""3fridj
some bankers in the president's clearing house went with
him.
time.
They met at the station a few minutes before train
They got on the train and carried on their discussipns,
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 extraordin-
arily 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.
We 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
^
ll \uu
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.
^ R . G4iM#f#fta:
I happened to be one of the
fellows that tried to do some of the negotiating.
We
tried to get the board to order the Chicago Federal to
1
discount, which the board refused to do.
DR. WILLITS:
This is very distressing to an
outsider, ^e-always assume^ that everything went on in the
Federal Reserve System from the point of view of high and
farseeing statesmanship.
CHAIRMAN SPROUL:
Maybe you shouldnft be on
this committee.
(Laughter)
DR. STEWART:
I think it is one of the functi< >ns
of all history to prove that what you are talking about is
not monolithic.
DR. WILLITS:
harder to do.
That may become harder and
>
27
DR. CHANDLER:
I suspect this ought to be
interred with their bones.
MR.RIEFLER:
That is the kind of thing I
think we ought to have in here.
I think that is what
this history is.
DR. WILLITS:
You are not limiting your
historian with that, are you?
DR. CHANDLER:
DR. JAMES:
No.
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.
DR. 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:
i
DR. BOPP:
u
The next point.
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."
28
There was a Congressional Committee on the
question of the number of districts.
CHAIRMAN SPROUL:
Any questions or comments
on "b"?
DR. CALKINS:
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
(make a summary treatment of this thing here in the main
c
A
volume and then let this kind of treatment go into 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 decisionmaking process, even after the bill got through Congress
and was signed by the President, when you had this
iremendous controversy, not only in the original organizati >n
committee, but then in the Federal Reserve Board, as to
whether the Board had power to change the number of distri< :ts,
29_
and so on, and whether it would be a good idea even if
they did have power.
It was quite a period of contro-
versy, and had a tremendous effect.
DR. JAMES:
Isn't that covered very largely
in Paul Warburg's two volumes?
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 volumes 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.
CHAIRMAN SFROUL:
There is perhaps one thread
in one of the underlying themes, and that 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 Bank to the smallest possible size, beginning with
the 2nd Federal Reserve District, going up to Canal Street
and stopping there, and then to the City, and then to the
p
30_
State, and then to finally 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.
DR. CHANDLER:
No doubt Carter Glass thought
he was putting New York in its place.
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 SPROIJL:
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 (jity bankers on a variety of questions because of
their feeling that the System is still trying to take over
the functions of the correspondent banking system.
MR. RIEFLER:
that area?
What place is there here for
I always find myself in a fog about that.
There is the Reserve City Bank*'Association, you do run
A.
into impingement of it ail the time with respect to the
System.
c
It would seem to me it ought to be treated some-
where in this history.
DR. JAMES:
In fact it was Carter Glass's
•
0
impression that he abolished the correspondent system.
He thought he had done it effectively, and I think the
persistence of the correspondent system is really one of
the important problems,
MR. BURGESS:
That is the emotional impetus,
in large measure, back of the Act of 1934.
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 structure 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 1916, 1917, and then the attempt to revert to something
like the original scheme in about 1921 or f 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 operation
tends to obscure the myth.
The operations, of courseware
32
New York.
But there is the political reality of the
amount of protection and insulation that it has given
System.
the
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 consider 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.
DR. 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 organi-
zation,from the opening of the banks, until the entry of
the United States in the First World War.
M
a.
The whole process of determining the
/structure and organization of the Federal Reserve Banks,
the selection of personnel for the Federal Reserve Banks,
Q
33_
the division of control between the Federal Reserve Board
and the Federal Reserve Banks, the location of control
k
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 making earnings in order both to build
prestige and to attract members."
DR. JAMES:
May I ask another question of
fact there, Mr. Chairman?
Have we received from the
various Federal Reserve Banks any undertaking that the
author of this will be able to use the directors1 minute
books?
If you don't have that, then it will be extra-
ordinarily difficult to deal with this section, which is
quite critical.
MR. RIEFLER:
Authorization, from what I put
up, was the idea of pretty frank disclosure before 1933,
and that it should stop there, before you get into personalities.
I think the final letter we wrote was that we
would have to judge on an ad hoc basis what was made
34_
available.
CHAIRMAN SPROUL:
MR. RIEFLER:
I think that's right.
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 ana
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 you don't 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.
into the minutes.
They are pretty cautious of what goes
I am thinking of the records of the
Open Market Committee.
I remember very distinctly in the
middle twenties arguments in the Committee about the
35^
necessity for buying Government securities to keep up
earnings.
They didn't get into the minutes of the Open
Market Committee.
They didn't get into any of the record!
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.
earn a living."
We have got to
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 puttin g
DR. WILLITS:
It would be well if the Board
them in.
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
36_
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 man
whom you trust, and a man whom you trust is entitled to
access to a very high degree.
On that, I canTt 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 Committ
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 that we might then ask for,
MR. RIEFLER:
I think the attitude is
extremely sympathetic, but a guarantee just can!t do it.
DR. WILLITS:
DR. BOPP:
It has to grow in use,
Minutes of the Governors1 Conferen ses
though would be more revealing.
MR. BURGESS: Yes.
DR. BOPP:
At one time they had stenographic
minutes in the early twenties.
c
37
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 stenographic transcripts.
DR. BOPP:
At one time they had conferences
of the members of the Board
and Ujt the chairmen.
the Governors of the banks
This famous May 1920 conference,
which became a Government document, that is complete.
Then No. 3, War and inflation:
!f
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.
!t
b. 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
38
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
V
\V
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
4fe^4rftir«ttJGovernment, playing a part that seems completely
incredible in terms of the Second World War.
I
middle of
f
MR. RIEFLER:
1917-1919.
MR. BURGESS:
The inflation broke in the
20.
MR. RIEFLER: ,the shift i^-wfrWrem-to
inflationjras in 1919, wasn!t it? The shift from war
financing to the inflation was really during 1919.
DR. CHANDLER:
In some ways, this period we
can say was November 1919, when they got their complete
freedom.
MR. RIEFLER:
I would think it would break
somewhere in the first half of 1919.
DR. JAMES:
1918 and 1920
You really have a separate period),
39
DR. CHANDLER:
This could well be, 1917-18,
and then another period, November 1918 to the break of
the inflation in 1920.
It might have been much better to
split it up.
MR. BURG-ESS:
In terms of economic swing, yoi
can swing it through to T 20.
c
DR. STEWART:
I have always felt that the
of sterling was greatly underestimated.
it has
been obscured by the magnitude of domestic events.
In
looking back now, I donTt think many people realized then
the implications.
MR. RIEFLER:
done.
The content here is correctly
The content of No. 3 relates to the structure and
organization of the Federal Reserve System in relation to
the huge debt and getting the money in.
From the end of
1918, on, we began to get into an economic problem.
DR. STEWART:
I think that's right, shift of
emphasis.
DR. JAMES:
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,
40
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:
DR. BOPP:
Yes.
I personally inferred that in the
entire war financing program and ideas relating to it,
as contrasted with the Second World War where the financin T
was public financing.
financing.
The First World War was private
But it could be spelled out.
!l
h
In ^f!l, I think if one were
MR. BURGESS:
revising this, the wording "the tendency to concentrate
power in the New York Federal" sounds as though people
were trying to concentrate.
It was a growth in power,
which was done against resistance.
MR. RIEFLER:
Its scope, its prestige.
CHAIRMAN SPROUL:
MR. BURGESS:
Influence.
The growth of influence of the
federal Reserve Bank of New York.
Then it isn!t the
subordination of the Federal Reserve.
subordinate the Federal Reserve,
DR. STEWART:
(Laughter)
Nobody?
Nobody saidllwe will
A
41
MR. BURGESS:
that.
They did it.
I don't think they ever said
But the choice of language suggests
something a little different from what happened.
DR. CHANDLER:
It makes it sound too conscious
and deliberate.
MR. BURGESS: Yes.
DR. BOPP:
This grew out of the circumstance
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.
MR. RIEFLER:
How do you plan to bring that
into the outline, this whole fiscal agency thing?
MR. BURGESS:
It is the development of the
triangular role of the Board,.New York Bank andTreasury.
The Governor of the New York Bank worked so closely with
the Treasury day by day, that it built that up.
The Board
functioned in approving the discount rates and sat there.
42_
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 rather than anything
deliberate.
The New York Bank I think went ahead and did
things and pushed ahead and didnTt 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.
agents.
DR. STEWART:
Have they ever ceased?
MR. BURGESS:
They still are the fiscal
I donTt think there ever was any date.
But when
they ceased doing their financing, the fiscal agency didn
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 instance, and the period of
1923-24, when Norman and Strong were just short-circuiting
Morgan entirely, and the fiscal agency had become a formal
trust company business.
CHAIRMAN SPROUL:
I donft think they short
circuited them entirely.
. BURGESS:
No, the kind of activity
43
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
there, the real break, comes when the United States
Treasury has direct contacts with the British Treasury.
The time the transfer takes place, the issues become ones
where the two banks are not dealing with each other as
much as they did, and with the magnitude of the money
involved under the monetary and banking activities of the
Treasury, I think both Morgan and the Federal had undergone a theory there where the major activity began to
move through the Treasury.
MR. BURGESS:
do with that.
The Banking Act of 1933 had to
I think when the Treasury walked in and too k
the gold from the New York Bank, that was kind of a
punctuation of it.
That is a very interesting little
incident that could be described in very dramatic terms,
when the Assistant.A44^M»eV--'JSGfi€mrer«ri, a long-haired foreign er,
came in and told us what was going to be done.
DR. CHANDLER:
I would like a record of what
was said at the Chicago Bank.
(Laughter)
44
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?
(Laughter)
MR. BURGESS:
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."
The things
happened step by step.
DR. STEWART:
I think 1 should |*fcs-& on that.
'\
There is a difference of emphasis. 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.
intent to do this.
I think he proceeded with
I think he believed it was the right
way to do it.
CHAIRMAN SPROUL:
DR. STEWART:
He was the man to do it;
He was the man to do it. So
£ k 4" c o v s c i o 0 %
I don't know how m u c h a matter oi"conscie-a^fr you want this
whole thing to b e .
(Laughter)
45
CHAIRMAN! SPROUL:
He spent a good deal of
time in Washington, living there.
He had living quarters
there•
DR. STEWART:
And made a great point of
cultivating Mr.Mellon, and not cultivating Mr. ^issinger.
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
werenTt just sort of forced on by events.
For example,
on many of these thinps 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.
This wasn't by any means unplanned, as far as he was
concerned.
It didnft occur as rapidly as he wanted.
CHAIRMAN SPROUL:
We are still working on
it.
(Laughter)
DR. BOPP:
Reserve and deflation.
The next period is the Federal
46
"Analysis of events during period and of
Federal Reserve policies.
A satisfactory treatment would
include not only actual Federal Reserve actions but a clos e
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 decisionmaking and of the theories and objectives, explicit and
V
implicit, of those who engage in the process."
CHAIRMAN SPROUL:
Any comments or questions
on that?
ME. RIEFLER:
That ought to be pretty broad.
That could include the War Finance Corporation.
CHAIRMAN SPROUL:
That whole Congressional
inquiry?
MR. RIEFLER:
Yes.
This is the one that
Gene Meyer comes on and tells me about at least twice a
year.
CHAIRMAN SPROUL:
MR. RIEFLER:
And he was always right.
How he bailed out the bank.
suspect it is true.
DR. BOPP:
Then No. 5r
"The search for appropriate peacetime
I
47_
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 commer-
cial 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 brokers1 loans. The
need for secondary reserve assets as a factor in the growth
of loans from non-banking lenders to the market.
w
c.
The Sole 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.
"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:
I am not quite certain that I
know what the function of the outline is here.
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.
MR.. RIEFLER:
The heading/search for
appropriate peacetime organizations^ I don't think that
is really quite true.
I think what really happened in
that period was the experience of ^handiilg out the effectiv
techniques.
The role of the open market, and discount
operations, and those kind of things, were achieved and
proved.
We found out in this period what we hadn't known
during the war.
DR. JAMES:
It isn!t really peacetime
49
organizations and practices, it is the assumption of the
responsibility for conducting the entire national monetary
orchestra.
Really the impact in this period partlyX&^vli
changing domestic finance, but it is continuously to b-c
comprehended by the fact that the Federal Reserve System
finds itself suddenly, partly from Strong1s desire, and
partly/fjom 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 dis-
cussion 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. It was not in operation.
DR. JAMES:
term balances before the
I am thinking rather of short
—
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
50
to develop that.
There was certainly beginning in ! 23.
or T 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 didnTt directly raise or lower
the total volume of credit but affected the discounts.
This is a whole mass of development of domestic monetary
policy.
MR. RIKFLER:
things?
Doesn't it take in two or three
This would be the coming of age of the Federal
Reserve first.
There is one theme through there, which
is the appropriate role in domestic stabilization.
Then
there is the other theme in there which was the reconstruction of the world economy to which the Federal Reserv
was the key, as the Marshall Plan was to the post-war
this time.
DR. JAMES:
IsnTt there a third thing, the
concept of monetary stabilization in the technological
age?
MR. RIEFIER:
in here.
It is hard to get all the threat!
It has always seemed to me that one of the thing
that happened during that time with the obsolescence
of intellectual validity for the commercial loan theory
was at the same time a deterioration of the quality of
bank assets.
The surprising or shocking event of 1930
was to find a small contraction in the economy as experienced by 1930 accompanied by the problem of bank failures
acutely all over the picture.
Something happened to bank
assets in that time that ought to be noted if you are
going to lay any base for the troubles of the thirties.
DR. STEWART:
I think that may be the key.
The nature of the thinking that was taking place, in
contrast with the events that were occurring, was
developing a gap.
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 abl e
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 level
and larger amounts of credit.
So that the very thought of stabilization of
52_
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 mustnTt 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 stabilization 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 eaoing
& paying off gold certificates
AS.0 EMS to«^b^e^€b^^g^f!»t'g'.-.i"c,bgniLsm 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
53
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 wer
still searching in 1929 for some sort of an ultimate
method of operation.
CHAIRMAN SPROUL:
Still are.
(Laughter)
MR. RIEFLER:
When you take this in the
broader setting of the international stabilization, as I
understand it, tie broad idea
was that central banks and
investment bankers like Morgan and Company could get
finance in shape by getting budgets balanced, get the
balance out of the central bank, and funding loans.
You
could get currency stable, and pet that part of the choas
in the international economy in shape.
Then the other part of it was -- I think it
was the general ...coniepeaee -- that you could move pari pas
3U
toward reduction of trade barriers, and reduction of tarii" s.
That was the ideology back of that whole move.
Just from memory, I remember how sick I was
in 1927, I think, when Norman gave that statement about
54
now is the time to drop tariffs, and Coolidge
immediately
went out and met the press and said, "The United States
is not going to touch it."
I think you have got to get those threads
into this to give the picture.
That is a much# broader
TiHSi ft v^H
concept than iust the concept of the .i^te^^Hste^li of a
gold standard
A
It is much more basic.
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. RIKFLER:
Yes.
In fact there wasn!t too much
DR. JAMES:
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"ff; Karl?
DR. BOPP:
1
it
"e. The evolution of instruments
of Federal Re serve policy:
changes in both the techniques
J >-«
and relative importance of instruments such as the discoun i
i
55
rate, moral suasion of various types, open market operations,
international stabilization credits, development of the
"factor analysis" of the money market - member bank reserv
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 woull
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 principles
of centralized control and of regional autonomy.
This
involved not only the division of decision-making and
control between the Frederal Reserve Board and the regiona
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 influ-
ence of the Federal Reserve Bank of New York and the incre ise
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.
DR. 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 defla tion
and breakdown - 1929 to 1933
"In analyzing this period the following
important things should be stressed and interrelated:
"a.
The prevailing philosophy of th'e 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.
!t
b.
'Sound money' beliefs carried over from
the pre-1914 days that Tcurrency manipulation1 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 littfLe
to determine them.
57_
"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 adopte
national currency policies.
International developments
such as the cessation of foreign loans, international
financial panics, breakdown of gold standards, wide change
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.
ft
f.
On the other hand, there was a latent
tradition, sometimes referred to as Bryanism, that monetar
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 delibera
monetary expansion to shorten the Trecuperative! period
as harmful.
"h.
But with the deepening of the depression
58_
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.
rt
j.
The diminishing tolerance of the economy
for severe liquidation."
DR. STEWART:
I would like to say for my
part I think that is less satisfactory than the preceding
59
sections.
I don't believe it is just because you have
stated them as conclusions.
I find/it difficult in some
of these to attach datelines.
They seem to be true, but
I don't see why they should, fall particularly in this
period.
There are so many things in T 29, '30 and '31,
even before you get to u h", deep in the depression, which
seem to me not to be things that were learned, observed ,
experienced,.impact of, which I don't see described in
"a" to "g*.
"a" to V ! , I agree with, but I don't quite
see the timing facor in it.
MR. RIEFLER:
khaft 1921.
"B-l" is much more appropriate
That is just what Strong expressed in Congress
MR. BURGESS:
This whole series is not the
way we were thinking inside the Reserve System.
There was
an enormous struggle going on to resist these things and
do the right thing.
MR. RIEFLER:
Letter "c", I think Mr. Hoover
had something to do with that.
It wasn't within the
System.
DR. STEWART:
sense of struggle there.
I think there needs to be more
I think inside the System there
wasn't this lack of recognition of these problems.
was a constant struggle to try to perfect them.
It
*
_60_
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 strugglefromeet this deepening depression by
traditional central banking means, and after '33, the
balance swung over to meeting it by political means.
MR. RIEFLER:
Well, the Reconstruction
Finance Corporation was organized in October, f 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 size of the job had its impact,,
MR. RIEFLER:
I was awfully excited about
that; I remember going over it in a closed meeting of the
Senate, when Meyer presented the R. F. C , and Cohens'**
immediately said, "You don't propose to lend on bad assets
do you, Mr. Meyer?"
He responded, "Of course not, every~
thing has to be sound."
And I remember registering it.
It came to me through a remark that Walter once made. I
had a sneaking feeling at the time that he couldn't take
A
4
that commitment,
he
to get that b i l l through.
>
CD
/*
Certainly^the inability of the R. F. C.^situation, one baaie reason was the fact that they were sucking the sound
assets out of the banks and leaving nothing else there.
¥I
r
i
61
That came right in those hearings.
DR. STEWART:
I don't believe we have any-
where 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.
MR. RIEFLER:
You have got to take this in
terms of development of ideas running jC parallel with the
A
Federal Reserve and its monetary policies, the examination
system and its procedures.
The theory of that was that
the examiners examined banks, and before the capital was
eroded, they closed them to protect depositors.
That was
the basic idea.
MR. BURGESS:
Ordered them to sell out " t U U
security portfolios at the bottom.
MR. RIEFLER:
And what happened was that it
was that very fixed and rigid procedure that kept on
jumping this to pieces.
It was the evolution of the idea
62
that the thing to do was to keep the bank in being, not
to sell it out, to either put in money through the R. F.
C , or preferred stock or something else. That was the
thinking through crucially of a new idea.
DR. WOOD:
deal of this here,
I am the one who wrote a good
I was thinking broadly that we did
have,liquidity of price.s in ! 32 and T 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
W
A
call it now, to cause the creation of money, an unsound
business situation might simply make an unsound situation
more unsound,
I think you had quite a revolution of
ideas down to f33 and then after f 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.
Miller didn't like that because it was done
AM.
63
over his protest, in a sense.
But the System was solidly
behind the use of open market operations to meet a crisis
of that sort.
DR. CHANDLER:
Only last week T a memoA
randum 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 securitie
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 were differences of opinion
in the System and some were moving in that direction more
rapidly than others.
MR. BURGESS:
Who wrote it?
DR.CHANDLER:
I donTt know who wrote it, but
it was signed by the Governor of the bank and sent to the
Board.
DR. 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
64
collateral loans at the Federal Reserve Banks, and so on.
The suggestion of some slight modification in eligibility
requirements.
MR. RliiFLER:
interpretation of that.
well.
No, that isn't the right
I remember that theory quite
It was that if your problem was bailing out risk
assets with losses, tiutfc that was something where the
A
credit risk should be taken by the Treasury1s taxing power
and not by the central bank.
And so you had the develop-
ment of the R. F. C. and the central bank coordinated
operation.
It is a quite different theory.
DR. WOOD:
Was there not a general idea in
the financial and business world at that time that you
didn't deal with a depression by tinkering with the curren
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«
out of the budget.
CHAIRMAN SPROUL:
I think there was some idea
in business and banking circles of the healthy characteristic
65
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.
MR. RIEFLER:
There was an idea that the
central bank needed utmost confidence in its assets, and
that the Treasury should take on the risk.
CHAIRMAN SPROUL:
That would be consistent
with our holding more Government securities and the
Treasury taking risk.
MR. BURGESS:
Of course that whole question
came up after the opening of the banks in March, f 3 3 , as
to how you filled that capital ,p;ap, 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 that time had $400,000,000
worth of capital.
MR. RIEFLER:
I remember very well in 1931
when the Anschluss came, and Luther f s flying around Europe f
the idea that it required a much bigger credit than the
capital of the Federal Reserve Banks, and therefore it was
not proper for them to do it, which I think was an erroneo us
idea.
There was that kind of an idea of the capital struc :ure o
66
DR. STEWART:
I think some period comes there
between September, 1931 and March, T 33, and by covering
the whole thing we make the stock market break as if it
A
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 therefore it ought to be able to readjust itself, and
the over-extensions had worked their way down much more
seriously.
So the tragedy is the ! 31 to T33 period.
MR. BURGESS:
The one interesting point to
hinge that on was the increase in discount rate at the
end of September, 1931, 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 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, and the dominating idea there was
well, England went off the gold standard with a discount
67
rate of 2 per cent.
Now should we be forced,here, with
a low discount rate, when tradition calls for a higher
rate?
DR. STEfART:
With the French taking gold.
MR. RIEFLER:
I have always thought that if
they had known how to handle the failure of the Bank of
Kentucky and Bank ofteire-United States in the fall of
1930, fete* that would have marked a turning point.
I
wouldn't put it in T 32. The failure to handle those two
things set the pattern of the liquidation that then went
C /
('
on and brought down the credit and stock, brought down
everything.
MR. BURGESS:
There again there certainly
was the feeling in the New York Banking Community that it
would be a very helpful thing if these two tew£=s& banks
•
>
could be liquidated out and draw a circle around them and
save the soundness of the structure^ a thing that many of
U.S fought as hard as we could.
Now that isn't 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
A
>
68
exactly appropriate, but when I tried to imagine what we
would do today if we had a repetition of 1929, 1930 and
f
31, the contrast between what was done then and what we
would do today makes it seem like another age completely.
ThatTs right.
MR. BURGESS:
DR. CHANDLER:
Something has happened that
has revolutionized ideas and policy.
DR. STEWART:
most effectively today.
We could handle 1929 and '31
I am not so sure we could handle
1956 as effectively.
DR. JAMES:
You have put your finger on the
point I have been thinking about.
1931 is a stronger
division of these two periods than 1929.
That is really
the time, as Walter said, when events started racing aheac
and we never quite caught up.
MR. 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.
DR. 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.
69
This we need to know.
DR. CHANDLER:
In a list of incidents and
controversies and that kind of thing in this period that
f f
might be dealt with.
MR. RIEFLER:
r jj
Exactly what were the 'propositi ons
7
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 back and put
a motion "... bail them out," and he refused to bail them
out.
He tells that story.
MR. BURGESS:
,
Ah \\ u k
^ &¥&*>
Wha?feT^uut the country telling
the people, "There is a hell oi 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."
DR. CHANDLER:
That indicates that there was
at least one man who might be tagged with the attitudes
described here.
(Laughter)
MR. RIEFLER:
MT?
TlTTftf t? H ^ •
No, he had a broader view.
TTn w a c a 1
t'n^2«-——*"^***"""
70_
MR. RIEFLER:
And he was the one that was
desperately trying to do it.
MR. BURG-ESS:
Of course, the one turning poin
there was what would 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 this.
At the time
they were lending a dollar for every two dollars of assets
MR. RIEFLER:
Couzens, you see.
That was the commitment to
That is where they got committed to
that conservative banking committee.
DR. CHANDLER:
Were there other things of tha
sort that ought to be noted here?
MR. RIEFLER:
It is full of them if you woul
study that period, and really cull it for the factual
history of the period.
Miller attempted to change the
R. F. C. from a lending operation to a preferred stock
subscription operation, which Ogden Mills turned down.
That seems to be 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 assistanc
to banks was really assistance to the whole economy too.
Today I think there would be an attitude that we donTt sav
banks as banks, but you save them because the whole economy
will go to pieces if you don't.
MR. RIEFLER:
that.
There wasn't a failure to see
The problem was a moral problem of how much do you
bail out stockholders or take losses for bad loans?
That
was the moral problem that they were trying to see their
"ft a. M let"*
way through.
And that is why Tra^l^r and Miller came out
with this idea that by subscribing preferred stock you keejp
the bank in operation and keep the money supply there, and
you let the losses, whatever they are, fall on the stockholders who ought to bear the losses.
MR. 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.
the thought was, we will just open the good banks.
And
That
meant three or four thousand banks closed; the effect on
the community was terrific.
volume of credit.
You just cut off that much
I don't know what it was, whether it wajs
15 or 20 per cent of the country's total volume of available
To
72
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.
MR. RIEFLER:
It .» really, technique, it f
p
not the thinking.
A
You take the situation in October, 1930
when the Bank of Kentucky and the Bank of the United States
began to go.
They were rotten banks.
It was rife with
dirt, coming up with security manipulations, real estate
manipulations.
We came up with this moral reaction:
ought to bail out .those .stockholders. ^ ^
CHAIRMAN SPROUL:
H ^
1
5
We
^ ^
Combined with the theory
of banking supervision, which persists somewhat to the
present day, that if a bank becomes insolvent on the basis
of quotations on various boards and markets, you close it.
It seems to me two thoughts or ideas have cone
out of this discussion of this particular section from this
group.
One is that the period ought to be divided into on
that would take account more clearly of the development of
73
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
Angds referred to as paralysis in a blizzard.
•
MR. RIEFLER:
You certainly want to know the
whole history of the war debt controversies, and who put
what propositions up.
CHAIRMAN SPROUL:
ideas of various things.
400y
That is the conflict of
It wasn't tall one way.^ «** y\
A
MR. RIEFLESrjpSe credit Anschluss,* and the
Luther t W y j
(& * ^ * \ ^
d
^H '
DR. STEWART: I was wondering whether this
-
•
tneopy- 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 dealjwith
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, and someone becoming the key participant .
DR. STEWART:
One of the preliminaries
* To KfU»I^ 9ru^ ^ ^ H ^
•
74
of the development of a scandal nearly always is a**ominous ieintt of /scandal, something that is first heard
of, then is quiet for awhile, then grows.
The other is a
political change - AttS 'to treat these as if they were not
part of the story.
I think they are perfectly genuine
parts.
If you find a major scandal in the field
of finance, you ought to be^on notice that maybe underneath
this there are a lot of other things that you ought to
give attention to.
Then you won11 ^e-.off on lifer morale
CHAIRMAN SPROTJL:
J
Maybe l i k e the t.T>Ak.*X^l
Japan in 1920 and the Csredit lAflrsohlucc in Austria?
DR. STEWART:
Yes.
The financial crisis
DR. WILLITS:
Walter, I have no right to
in London.
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 impossible task for one individual
especially if he be an individual who hasn't lived through
it, to try to grasp it all, isjust beyond question.
He
can't do it.
I remember sitting with Henry Clay just aboujt
a year ago.
He had the diary of Montagu^ Norman, and Henr|y
75
would turn over a page, during this same period, 1929-33
and he would give me a lecture OP all the things back of
it,
h
:. little note in Henry s handwriting.
knew it all.
But Henry
To do it all with that kind of intimacy
ancoknowledge is necessary.
It seems to me it has to be
broken down somewhere, at least looking 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*
You
are inside and informed.
DR. WILLITS:
banker.
Pretty soon you will call me a
I think I need a little more input before I
engage in any more output.
CHAIRMAN SPROUL:
I think this is a convenien
point to break up while they rearrange this room for
luncheon.
(Luncheon recess at 12:00 noon.)
(Afternoon session to commence at 2:40 P.M.)
76
AFTERNOON SESSION
CHAIRMAN SPROUL:
Resuming our discussion
with our consultants, I think we had gotten down to 7,
on page 5, Karl.
DR. BOPP:
That f s correct.
I might say that
although we were in a sense a bit apologetic about No. 6,
I think in retrospect I wouldn f t apologize at all.
CHAIRMAN SPROUL:
to ^Uttofc uu "t-U<kt*
T^fSrebuttal? K/ L & lV ^ V ^ T J
Did it take you two hours
h
DR. BOPP:
I am rather hopeful that we will
be able to continue in that fashion on No. 7, which
concerns F^ederal Reserve policy from the banking crisis
of f 33 to our entry into World War II.
s^~
"Federal Reserve policy fromjthe banking crisi s
of 1933 to our entry into World War II - 1933 to 1941
1>
\
"The treatment of this period should trace th
disillusion of the public and the despair that existing
thinking and institutions could provide an adequate soluti on.
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 Feder al
\
Reserve System.
It would try to trace out all the lines
77
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 of leading
groups sponsoring monetary expansion.
A
(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.
"b.
The loss of confidence in business leaders
which came with the collapse resulted in greater receptive
ness to reform legislation.
The popular attitude that
greed and dishonesty were in great part responsible for th
collapse emphasized the necessity of "driving the money
changers from the temples" and diverted attention from the
monetary aspects of the collapse.
78
"c.
Closely related was the idea that the
failure to curb speculation by denying credit to speculator
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 centrajl
banking policy very sensitive to a rise of stock prices
down to the present day.
"d.
The contined misunderstanding of the plac
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
w/4 all
we are a very stimulating group, and,expect some more
stimulation.
MR. BURGESS:
I wonder how much of this was
really due to this change in public thinking, ancuhow much
of it was politics, which rationalized itself by the
first of the very important changes in the Reserve System.
I wonder if they were as important as they seemed.The big
change,it seems to me, was one of thinking;that is,the Banking
Acts of T33 and f35 actually made less difference in the
79
operation of theSystem 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 contro|l
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
about t*#
i
separate from government, and. givef place to the T.°§IX&.^
where the government is completely intermingled with
business?
So there is really a change in philosophy, which
as you say is partially politics.
MR. RIEFLER:
Actually at-re. are making a
terrible mistake, to treat the early recovery period in
terms of ideas.
It was a milling period of action. You
had all the banks to open, you had to get things in shape.
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 activity. It was a busy period, people
working all over the place, not in terms of shifts of
about" $rrm the Government staying out suuL
5 v the Governm nt
ideas
\0
i
80
getting in; that is almost peripheral.
There isn't any
question about the Government being in. .It was the proble m/V
of deciding what was going to be done.
CHAIRMAN SPROUL:
We -o-hoiribd 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:
c
Getting the banking system
to working again.
MR. RIEFLER:
You had that weird period of the
gold.
DR. JAMES:
Yes, and you had the gold block
coming out of the London Economic Conference.
CHAIRMAN SPROUL:
The most important underlyin o
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
81
interest being heard and giving counsel and making their
contribution.
1 think the underlying idea is the acceptar ce
of Government as the prime mover in economic affairs,
DR. JAMES:
And isnTt 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 Boarc
beginning then with the Federal Open Market Committee.
MR. RIEFLER:
And also ¥eri&*&r» tU*.
DR. STEWART:
The period that Bob Warren used
to refer to as the time when there were no involuntary
muscle s.
(Laughter)
The sense of emergency was so dominant, something had to be done always -- action.
action,emergency.
It does fall on
This was the period when Poi*oi&»- took
over -Ike fH'i'elgireTb^ isn't it?
CHAIRMAN SPROUL:
This is when they began to,
yes.
MR. RIEFLER:
I would think that with the
jigglings of the price of gold
—
82_
CHAIRMAN SPROUL:
Beginning in f 33.
MR. 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 complete change in the Reserve System,
or.taking over iafraia- private banking.
The number of chang
made in the banking system were pretty modest.
few actual changes made.
There were
There was tremendous sound and
fury about bringing 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 ^seizing on the immediate things
that turned up.
Some pressure group gets hold of an idea.
DR. JAMES:
period at about \J6.
You really need to divide the
This terrific rush to '36, then it
begins to settle down.
MR. BURGESS:
Yes.
Of course,.the episode
A
[,
83
in which President Roosevelt threatened the Reserve Systen
that if they didn't «wallg inie& the open market in f33 he
to
would use the power of the Thomas Amendment. That was
symptomatic.
change.
They regarded it, of course, as revolutionary
s
DR. STEWART:
I saw something of the Treasury
during those days, and I became convinced that they were
literally frightened of the banks.
they were working up.
This wasnTt something
The first question they always aske
was, has it any connection with Morgan?
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:
Jackjarould be able to cover thaft
DR. STEWART:
Yes, indeed.
A
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.
,x
^-jr
w
^ aL^*Jt juj&du
MR7~"RIEFLER:^ Merle Cochran!s operations.
DR. STEWART:
Merle is someone who would have
some correspondence and notes on this.
MR. RIEFLER:
the avalanche of gold.
84
DR. STEWART:
When was the avalanche of gold?
When does the big movement set in?
MR. RIEFLER:
f
DR. STEWART:
And it runs all through?
MR. RIEFLER:
Then you have the Treasury
36.
starting to sterilize.
CHAIRMAN SPROUL:
your timing on the Treasury.
I think you are right about
I think you are quite right,
Mr. Stewart, about it being as much personalities as
pol itics, and it being the Treasury versus the System
rather than versus the New York Bank or the Board separate
An attempt was made to establish relationships with the
new Secretary of the Treasury, Mr. Morpenthau, up in New
York, which he interpreted as holding a gun to his head
to try to subordinate the Treasury to the System in genera
and the New York Bank in particular, and he never forgot
it and referred to it from time to time, and always had
que stions in his mind about anything connected with banks.
MR. BURGESS:
•
The symbol of this moving in of
Tre asury 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 Syste
85
CHAIRMAN SPROUL:
But just notification,
that was all,
MR. RIEFLER:
f
I remember Gene Black, and
others, saying what can we do to stop them?
I came up
with the idea to try to avert it by getting the deposits
in closed banks freed.
Everybody was neglecting that, so
we thought that was a fine idea.
We got Mort Buckner down
and all the rest. A'j^roy^lwftght it wa'5 fine, but we are
still going to jiggle the price of gold.
(Laughter)
CHAIRMAN SPROUL:
We have had perhaps three
general ideas with respe ct to this section 1, that an
earlier section might be split between 1923426;
second
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:
"a.
V
Then the later recovery period:
Abandonment by the Administration of
monetary action as an important means of increasing generajl
^
demand, andjgreater emphasis upon fiscal policy, increase of
1
farm income, and upon raising wages and other labor income
I
by nonmonetary means."
MR. RIEFLER:
What does that mean, abandonment
of monetary action? X*£ ***sw^v****Q ^ s
DR*. WOOD:
i
I put that in, Mr. Riefler, and I
was thinking of a conversation I had with Harvey Rogers,
I can!t remember the precise year, but it was along in
there, just after the middle of the thirties.
He told me
that the administration was not thinking of recovery in
monetary terms.
MR. RIEFLER:
If you had excess reserves
equal to required reserves, that isnTt abandonment of
monetary action.
The monetary action is there in super-
human terms, and it was a set of circumstances in which
other things had to be brought into play.
DR. WOOD:
Well, it was a different kind of
thing that evidently they had in mind^ say in getting the
Thomas Amendment through, I would think.
-
CHAIRMAN SPROUL:
The piling up of those
reserves was not an act of conscious policy.
It was a
result of the gold inflow which the Government and the
c
monetary authorities accepted but didn!t do anything to
control or effect.
87
MR. RIEFLER:
But if they were going to use
monetary action, what they have done is create excess
reserves.
CHAIRMAN SPROIJL:
MR. RIEFLER:
I t was
there.
So it was there.
So it seems
to me this wasn't in terms of a theory of abandonment,*
It was a loss of faith in the instrument because it was
being used to a very high degree and wasn't doing the job.
DR.. CHANDLER:
I wonder, Win, if your point
would be partially that if 'Hi" came first, and the word
"abandonment" under "dL* had substituted for it "supplementation"?
MR. RIEFLER:
Supplementation, that's the
point.
DR. BOPP:
"c.
I might read •&*;
|Lc
Drop in interest rates to low level
as the result of historical accident rather than deliberate
action.
Reserve.
The drop in long-term rates welcomed by the Federal
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."
88
MR. RIEFLER:
Well, the drop in interest
rate from 1929 to 1930 was deliberate.
DR. BOPP:
sentence.
This was the later recovery period.
MR. RIEFLER:
Yes.
MR. BURGESS:
I donTt know about that last
They thought that haying all those reserves
kicking around was going to get undesirable usage, ao we
-wore—t hi ski&g~ •frott ay -- I guess six billion dollars of
excess reserves*^ the money rate down to one tenth of
one per cent.
DR. BOPP:
Then this drop in rates, >n a oe-nae
A
ieatee at that time*was
a significant drop, but it :vao^ . J.... s^ that height 'is a
relative matter.
MR. BURG-ESS:
I think you would say that the
focus of administration recovery instruments was on other
policies than monetary, partly because the monetary thing
wasnTt working.
Y o u v « * throw any amount of money out,
and it didnTt go to work.
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
89
with directly —
-til*.
the housing, the farm situation, Federal
Farm Mortgage job.
A
The emphasis had to be elsewhere
because the situation wasnTt*in that balance where the
monetary policy proved stimulating.
MR. RIEFLER:
The only effectiveness it seems
to me was creating a market
MR. BURGESS:
-
—
Part of that was due to the
contradictory policies, the combination of reform and
recovery.
They rushed in and scared every businessman 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 combined 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 wave of events.
DR. JAMES:
Isn't it probably the influx
ofAKin-ffl^lj^g theory too, which at the time was a lot talke d
about, that once you got easy money conditions, then you
begin using your money in these various policies?
I don'1
mean in the sense of spending it, but your wage policy,
price policy, was an attempt to ~et it in circulation.
DR. BOPP:
in a sense.
You have to put in active money
90
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 destroye|d
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 didnTt need businesp
confidence.
Government would just press the button and
business would respond.
MR. BURGESS:
And it was a favorite to make
A
fun of businessmen.
CHAIRMAN SPROUL:
By increasing consumer
purchasing power by governmental action, business would
soon get confidence because they would have markets.
. STEWART: I think the .ggitio
•
A
l
the Federal Reserve from going-to 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
92
Reserve functions were not very active in the period.
Just how does one > thentell the story from Federal Reserve
1 to a period in which Treasury is so dominant and influential, and sketching the outline of a business periods
The whole relation Of credit and banking in that period
is not self-evident.
MR. RIEFLER:
If you are going into this
thing on the basis of history of ideas, it would seem to
me t:: most important idea was the general loss of feeling
that interest rates mattered.
That was the big thing.
You got to this point where interest rates didn't matter.
I talked about that in ! 48. It was just baffling.
Good
people would get up and oftp^iwpt even if they didnft want
to do something about it, they always would say interest
rates donTt matter.
MR. BURGESS:
The discount rates ceased to
be of value.
DR. WILLITS:
I remember in T 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
mcipient recovery, and really to pronounce the fact that
a new system of going out of depressions had now been prov n,
93
Later, in ! 3 7 , I met 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:
"d.
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 presM
tige by the Federal Reserve during the depression and
crisis.
lf
e.
The policy of maintaining 'orderly
markets' 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 b
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.
policy of drift was partly the consequence of the unfortunate events following the experiment in tightening
Thi
94
in 1936-37.
*f.
Pegging the Market:
The policy of
maintaining Torderly 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 2-1/2 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:
What do you mean by new powers
of the Treasury over reserves?
The Thomas Amendment ,
and the Agricultural Bill?
MR. RIEFLER:
The gold evaluation.
MR. BURGESS:
The changing of the price of
gold?
DR. WOOD:
For instance, I believe that^some
of those meetings where credit policy was affected, they
had public announcement that this was made by the Treasury
95
and the Federal Reserve together at a joint meeting.
I
think there were two such occasions.
CHAIRMAN SPROIJL:
It was a question of
sterilization of gold, and desterilization of gold*
DR. CHANDLER:
They had the Thomas Amendment
powers, sterilization and desteriiization, and then the
operations of the exchange stabilization fund.
DR. BOPP:
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:
point here?
May I ask about this last
I must have been guilty of writing of the
pegging of rates during the war as just a sort of evolutio nary
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^and
probably would have^without the background, although the
background eased us into it.
96
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
[pro-ft'ounae& with rising rates of interest in the market,
which is continuously assuming that the next issue will
SO
be at a higher rate J^H*4> we will subscribe to this, sell
out when we can, and wait for the next one.
MR. BURGESS:
the outbreak of the war.
That really happened just after
That is, there had been plenty
of manipulating the market, but not a peg.
CHAIRMAN SFROUL:
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.
&hort
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
97
allow rates to drift within wide limits?
me we were in there.
It seemed to
There was a fluctuation of rates
at the outbreak of war abroad in
back from intervening.
f
39, in which they held
Finally, I was at the Treasury
then, the Federal Reserve Board went in to peg rates
before the Treasury was prepared to do it.
curious twist.
It was a
But I donTt 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 operations were that the System does not
undertake to determine what the level of rates should be,
b*.
but that the movement should b€ y' i4 not. 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:
I think that was an interpretation
of what had beendone for some months.
I donft think there
was a change in f 37.
DR. JAMES:
Isn!t the theme of this period
really developing out of what Walt Stewart said a minute
ago, that Government having decided to dominate monetary
policy, using the Treasury^ threatening these various things
this is the period in which monetary policy is temporarily
K
lost to the System and in which the System gradually becomes
98
the instrument for working it out again in collaboration
with Government, instead of seeming to be fighting with
Government•
CHAIRMAN SPROUL:
phrase.
I like Walter Stewart1s
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 £fee the emerging Treasury, but
A
by the fact that the gold inflow had created the monetary
policy for the period.
There it was.
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:
During this period, I remember
something Marriner Eccles once said.
consider me a controversial figure.
He said, "They
I am the only person
who is able to-ke-ep the Federal Reserve System1 s name to get. inte the newspapers."
CHAIRMAN SPROUL:
I think^carrying out this
idea that has just been mentioned, that your key should be
"
99
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(if you had not had this
preliminary.
Quite apart from that, the focus of attentioji
begins to be the government market.
So the Federal Reserv
is beginning to address itself tothat question, and this
continues until it reaches full drama and then it continue
to grow.
So that you want to catch it in transition, to
catch that as early as you can.
Then it lasts a good, Ion
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. RIEFLER:
Starting with the Thomas Amend-
ment and going through the Record,
is this gradual acceptance
everywhere oi* the idea that raising reserve requirements
/vs
monetization.
DR. STEWART:
That's right.
MR. RIEFLER:
In '48 and '49, when I came
back, everybody was talking about reserve requirements/as a
100
way of escaping from monetization.
CHAIRMAN SPROUL:
(Laughter)
xNot everybody.
•
MR.
That was general throughout
v*
the country,Vthe
t ^national community.
Australia, with
100 per cent reserves, had the biggest inflation of all,
DR. BOPP:
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.
DR. WOOD:
I wonder if anyone would help me
here again, by establishing 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.
point would be the summer of
f
My first
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:
I think it came very close on
Pearl Harbor.
I don't think it had been decided before
Pearl Harbor.
I remember a conversation about that time.
DR. BOPP:
Hadn!t there been earlier consid-
eration of possible announcements in the event of America*
entry into the war?
101
MR. BURGESS:
No, I don't think we talked
about that in '39.
MR. RIEFLER:
I don't remember it at all in
DR. STEWART:
Isn't there a memory of Govern-
39.
ments at par?
I think that is the date.
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 sets the
MR. RIEFLER:
Can't you date it from that _
period.
discussion with the insurance companiesi ^jtoat they would
offer them, tailoring securities, what they would offer
that they could live on.
MR.BURGESS:
The first 67-72's, the first
loan drive was May, '42, wasn't it?
MR.
I think I remember a discussion
earlier than that of paying a higher rate than necessary,
because you had to allow the insurance companies a living
rate.
Wasn't there a discussion along that line?
102
DR. CHANDLER:
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 of things that goes into the immediate postdepression period.
I think this period first is the
revolution which in effect takes over the Reserve System
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 neverthe-
less 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 Governmen
103
securities market coining to be the market through which
all elements of the short money market make their judgment
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:
"Federal Reserve policy during
World War II - 1941 to 1945
"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 th
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.
this period:
Some important changes arising out of
the tremendous increase in the national debt
104
the practice of pegging the price of Government securitiei
ft
the shift of policy-making to the Treasury, the proof that
a central bank can control interest rates, changes in the
law to facilitate Treasury financing.
"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 littl
to prevent the expansion."
—
DR. JAMES:
There should be emphasis there
also on the difference in financing Allies and Associated
fp
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 an 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 change is significant in this.
MR. BURGESS:
I think the shift in policy
making of the Treasury happened before that, and the Federal
105
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 TreasuryTs becoming more and more dominant in
international affairs.
This was the period when that was
institutionalized in the form of "'international Monetary
Fund'*', and the '""'World Bank*", with the Treasury having the
final say, and representatives abroad.
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.
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
o
how almost complete the shift was.
MR. BURGESS:
Of course the war lasted longer
106
this time and gave you a chance.
You take the actual
WouldnTt you find the direct controls in terms
timing.
of months come in as soon in World War I as in World War
II?
They had them in 1918,
It took a little while to
do it in this war,
MR. RItiFLER:
My feeling about this war is
that in this country we never did come to the theory of
direct control.
England did.
A
But this country in the enc
did not.accept inflation instead.
K
We had not started witl
allocation of manpower, and control of production.
We
had those machineries going along, but they weren't in
control.
MR. BURGESS:
We financed a larger percentage
through taxes than we did in World War I.
Second, we did
make a tremendous effort to do our war financing in as
non-inflationary a way as possible.
The banks and every-
body cooperated in a very great drive to do that.
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 did in World War I, and we did
finance by direct purchases of Government securities, and
this is an important point, rather than by borrowing.
Unwinding it afterwards was much more arduous, and much
107
less automatic.
Maybe that is one of the reasons why
we had a sharper deflation after World War I.
It wound
up ^fc^" 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 Jpsrt foreign aid, the major factor
in there was that after World War I we cut off foreign
aid within about six months, and this time we kept on in
one way or another.
CHAIRMAN SPROTJL:
Before we go on, I might
say*we ought to get 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 organo izations and policies - 1945 to 1954
"This should include a contrast between the
c
search which grew out of depression and the search which
grew out of inflation.
Very important background material
tfor a consideration of this period would include the
108
contined 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."
MR. RIEFLER:
institutional shifts.
It seems to again bring in your
You had the thing finally pointed
up Wl. h.4 very strong position in the System on one side,
but the White House hael expressed itself through the
Treasury, and through the Council of Economic Advisers.
The Council of Economic Advisers went through to complete
the theory of pegged rates, plus a bureaucrat sitting in
the bank governing every loan at the window.
The Treasury
109
rejecting that and insisting on this pegged rate; the
Government insisting on going back to 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.
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 re-emergence
of monetary policy.
MR. BURGESS:
The whole period f45-T54 was a
gradual regaining of the freedom and dignity of the central
banking system.
It started right in in f 45, in an effort
to get a little more freedom of rates in the market^
c
^radually# the first thing was the bill rate.
It was
pegged at three-eighths until it worked up to seven-eighth
110
and so on.
after inch.
Then a little more freedom was gained inch
All the time the Council of Economic Adviser
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.
DR. 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 logic*" intimates.
You can have a
Treasury pursuing a fiscal policy which is dependent upon
either the collaboration or the domination over central
o
banking, but it doesn!t cease to be monetary policy, it
doesn't cease to be a credit factor.
Even if it is known
Ill
as fiscal financing, it has to have credit conditions.
I 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 deficait
andithose who believed that you should have monetary
controls.
We have made it appear that the two are separat
to a greater extent than they are through experience.
So
af
I am not persuaded that history can make as much,a
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
X
between what the economists we're
debating about in their
meetings, in which the contrast- between fiscal and monetary policy was prominent, that the discount rate no longe
mattered, and you can!t have monetary policy, and so, and vhat
the Council of Economic Advisers was talking about.
But
as far as Treasury and Federal Reserve and actual action,
I donTt believe this was a real issue.
The Treasury under
Snyder was just as eager to get the budget balanced.
The fiscal -policy was never really used by any administration in this country as an instrument of policy.
I
it
say that with a little hesitation, but I don't think •
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.
MR. RIEFLER:
Marriner 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 t rying to make monetary policy work in a
limited way.
A
DR. CHANDLER:
I seem to remember Mr. Snyder
while saying that a rise of interest rates would do no
goodin 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 fin
113
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.
I donTt think they
are as inseparable as we like to make them appear.
Any-
way, all I am doing is to give a warning that words donTt
always convey the full meaning, .
DR. CHANDLER: I think^generally speaking^
the comments that have been made here about the academic
o
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 .built up a whole
religion, a whole theology, by the economists of fiscal
policy, so-called, which was far, far away from any active
not
practice.
U&4
It was/practicable.
Congress would have to
pass a bill.
DR. BOPP:
And even when it was,*we ran with
very large cash surpluses, inflation went merrily on its
way, because we simply shifted from an increase in public
114
debt to\increase in private debt.
Certainly the redis-
covery of monetary policy in its various aspects, and the
inadequacies of fiscal policy alone should be developed.
CHAIRMAN SPROUL:
Remembering Walt*1 s warning
that you can't separate the two.
Now we have completed the section of the outline memorandum prepared by our consultants.
now wish them to do?
What do we
In the light of this discussion,
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
J
project?
DR. JAMES:
I think that would be very useful
to bring together all the things that have been said here.
DR. WOOD:
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:
I think there is )&&** danger in
having a revision of this, £3& pie danger is that the
historian then weuld i-eoi 'thafc--t&iA™An^aH»^^
would feel more constrained by a document that
115
a
•• t
L
\
j
^
d
*ficial and definitive,
Whereas this
clearly is something just for discussion.
tK'sriTffgtTm would show that there are differences of
opinion.
MR. R'lEFLER:
You don't see much sense in
trying to winnow the discussion down and incorporating it?
DR. BOPP: No.
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 wouldn1
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:
I think it is probably unfair
to ask people to re-write this.
I think it has been
enormously useful and helpful and very interesting.
I think it might be useful if we
"to
could ail get a copy of the transcript .gw*^ stir our thinkijng
DR. JAMES:
116
I think that would help a lot.
DR. STEWART:
this^-*+ strikes me.
One rather odd thing about
ft 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 tha.t 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 con-
templated as a longer sequence of time, with things moving
in a slower arc, and not each one a series of separate
experiences.
I donTt 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 Resertr
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.
I beg it at the beginning.
feel that way about history.
I
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
andiprobably 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 letTs 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 letfs 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.
118
DR. WILLITS:
Mr. Chairman, may I express
a reflection on this task in which you are engaged?
I donTt know whether I stated when I was here at your
last meeting an incident that I often used.
I just men-
tioned it to Walter a bit ago.
Fred Keppplej 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.
said,"I find it in this.
He
Whenever a culture, whatever
degree of culture it acquires, has reached a point where
it has grown too comDlex for itself to comprehend, guide
t
and control, A*K1 it devolved out of the laws of its own
inner being, it winds up in a ditch.
A
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 isjtrue not merely in the
field in which you are concerned,it is true in so many
fields. The thing thai drives home to me more and more is
119
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.
It seems to me that this
A
attempt to go back and to re-appraise what was done, and
learn from that experience, you arenTt merely doing it
in this field, you are giving a demonstration of what
might be done, andhow 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 fiveyear 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 influence^KfW Seymour Harris.
(Laughter)
120
But I think those two things make the venture
enormously important and significant.
CHAIRMAN SPROUL:
At our last meeting' there
was something relating to what you said, Walter.
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 betwee(n
the historian and the separate monographs relating to
separate periods and times,
DR. STEWART:
That is exactly what I mean.
CHAIRMAN SPROTJL:
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:
We always may call them
121
back.
MR. BURGESS:
I think they have done some
extraordinarily useful work, and I think that we ought
to in some way and at some time reassociate themtytfL"&*4 p**
DR. STEWART:
I think the Committee ought to
write ^hi'fr^ and invite the consultants to come and critici ze
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 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
1393. Author: THE COMING AMERICAN BOOM (1934)$ THE PROBLEMS OF FOREIGN EXCHANGES (1935)$ IiWESTMENT FOR APPRECIATION (1936). Radio speaker and lecturer.
BECKHART,AHaggott (p. 15) - Professor of Banking, Columbia University. Born in
Colorado in 1397. Author: BANKING SYSTEMS (1954-)$ and numerous articles and
books on banking.
BLACK, Eugene R. (p. 54) - Banker. Born in Georgia. Governor, Federal Reserve
Bank of Atlanta, January 13, 1933 to May 19, 1933. Governor, Federal Reserve
Board, 1933 to August 15, 1934-• Reappointed Governor of Atlanta Federal
Reserve Bank until death. Died 1934-«
BJCKNER, 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.
COCHRAN, H. Merle (p. 53) - Deputy Managing Director, International Monetary Fund.
Born in Indiana in 1392.
COUZENS, James (pp. 39, 45) - Republican Senator from Michigan. Born in Ontario,
Canada in 1372. 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, 1933 to January 31, 194-3; Vice Chairman, January 31, 1943 to
July 14, 1951. Born in Utah in 1390.
FORGAN, James B. (p. 16; - President, First National Bank of Chicago, 1900 to 1916;
Chairman of the Board, 1916 to 1924* President, Federal Advisory Council,
Federal Reserve Board, 1914 to 1920. Born in Scotland in 1852. Died 1924.
GILBERT, 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 inflewJersey, 1392.
Died 1933.
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 (p. 74) - Senior member of Frederick Keppel & Company, dealers in
and importers of pictures. Born in Ireland in 184-5. Lecturer on art subjects,
Yale, Columbia, Johns Hopkins. Died 1912.
KEYNES, John Maynard (p. 57) - Economist. Born in Cambridge, England in 1883.
Author: THE uENERAi* THEORY OF EMPLOYMENT, INTEREST, AND MONEY (1936); MONETARY
REFORM (1924); and others. Died April 21, 1946.
KIDDER, Alfred V. (p. 74) - Archeologist. Born in Michigan in 1885. On faculty,
Peabody Museum, Harvard.
LOMBARDS (p. 5O) - Loans on Government securities.
LUTHER, Hans (p. 42) - Minister of Finance, Chancellor of Reich. Later succeeded Dr.
Schacht as Governor of Reichsbank, resigned in Marcn, 1933- German ambassador
to Washington, 1933 to 1937.
McDOUaAL, James Barton (p. 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 ¥• (p. 33) - Secretary of the United States Treasury, 1931 to 1932.
Born in Pittsburgh in 18$5. Died 1937.
MEYER, Eugene (p. 30) - Governor, Federal Reservetfoard,September 16, 1930 to
May 10, 1933. Born in California, 1875. Chairman of the Board, The Washington
Post.
5V
MILLER, Adolph Caspar (ppJ&O, 45J - Member, Federal Reserve Board, August 10, 1914
to February 3, 1936. Born in California in 1866. Author of papers on financer **
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 I856. Died 1929.
NATIONAL BUREAU OF ECONOMIC RESEARCH, INC. (p. 11) - 261 Madison Avenue, New York 16,
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. Author: STOCK
SPECULATION AND THE MONEY MARKET (1927); THE PROCESS OF INFLATION IN FRANCE,
1914 - 1927 (19291. Died 1939.
SNYDER, John Wesley (p. 70) - Secretary of the United States Treasury? 1946 - 1953.
"2
P
\
S
s
'° ^•<^'~
STRAKOSCH, Sir Henry (p. 9) - born 1371. Author: ROAD TO RECOVERY; WITH SPECIAL
REFERENCE TO THE PROBLEM OF EXCHANGE STABILITY AND THE RESTORATION OF THE INTERNATIONAL GOLD STANDARD (±935).
TRAYLOR, Melvin Alvah (p. 45) - Member and Vice President, Federal Advisory Council,
September 1930 to 1933; Member, 1933 to 1934. Born in Kentucky in 1878.
President, First Trust and Savings Bank, uhicago, 1919 to 1925. President,
First National Bank, Chicago, 1925 to death. Died 1934.
VIN'ER, 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, D. 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 Wollman, 1939);
THE SEARCH FOR FINANCIAL SECURITY (1940). Died c. 1951.
WOOD, Elmer (p. 7) - Consultant to this Committee.
I believe the real crevice between past and present pracjjjce —
the real break — comes when the United States Treasury establish^pirect
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 agerfc 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 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.
@FedFRASER