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COMMITTEE ON THE HISTORY OF THE FEDERAL RESERVE SYSTEM 33 LIBERTY STREET, N E W YORK 45, N E W YORK TELEPHONE: RECTOR 2-5700, EXTENSION 286 ALLAN SPROUL, Chairman With cooperation of W. RANDOLPH BURGESS ROBERT D. CALKINS F. CYRIL JAMES WILLIAM MCC. MARTIN, JR. WALTER W. STEWART JOSEPH H. WILLITS DONALD B. WOODWARD, Secretary MILDRED ADAMS, Executive Director THE BROOKINGS INSTITUTION 722 JACKSON PLACE, N. W. WASHINGTON 6, D. C. May I, 1956 Dear Mb% Rounds: It is good of you to go over this transcript and fill in the holes* Had we been more experienced with the recorder, and with the relationship between the recorder and certain types of voices, had we had a more sensitive microphone able to carry that nice soft voice of yours, we would have done better. If you can get this back to us with the spaces filled in before you go to Maine, we will be ever grateful* Most sincerely yours, /1 Mildred Adams~ Mr* Leslie Rounds 32 Washington Sauare West New York City, N. I. Enc« &Ci t~^Myi<9 Confidential Interview with Leslie Sofcxds - May 2, 1955 (Prfesent - !Dr. Lester Chandler, Mildred Adams) C* I wonder if we mi^ht try and carry through an important episode "beginning at the time of" Strong1 s death* As I Remember, immediately after Strong1s death, Mr* Mc&arrah became acting governor of the hank* &* Yes* that's right* C* And then Harrison was selected to succeed him* B* Yes* I think it was a .foregone conclusion from the very begin&ing that Har- rison would "be elected* He had quite obviously "been in training for this post for some time* hut Strong*s death came rather suddenly, and the directors have always felt that the post of governor or president, as it is now, should not he vacant for even one day, so that immediately when word caane that Governor Strong had died, Mr. Mc&arrah was elected at once* appointment was very brief. The interim before Mr* Harrison1s I don't recall now just what the period was, but 1 think it was onljr a week or two. A. He had been chairman? H. Mc&arrah had been chairman• A. Yes, and then was moved in as acting governor? B* Thatfs right, and he continued in that duty as chairman also. A* In both jobs? &• Yes, but that was simply so that there would be a president of the bank here. Incidentally,. I think that 1 told you the last time I was here in response to your question about Mc&arrah1 s having the by-laws changed, so that the chairman would be the executive head of the bank* When Mr. Jay resigned as chairman here to take the position as Deputy Separations Commissioner, Mr. Mc&arrah was asked to become chairman* Mr. Mc&arrah was a member of the old school of bankers» a man well on in years when he came into the bank* He was understood as a condition of his acceptance to have demanded that the by-laws be changed to make the chairman the chief executive officer. He never really exercised that office* Strong Sounds 5/2/55 - 2 was a very strong-minded Individual and Mr. McGarrah apparently felt tha position of chairman should not he subordinated to the governorship* But it was really more a change pro forma than in fact* C* Do you remember if Strong knew "before the change was made that it was going to he made? E* in tha by-laws? 1 cannot answer positivelyt hut I am reasonably certain that he did* I would put it 100 to 1 that he knew* hut I haven1t any positive information on the subject* I don't know* 1 guess that perhaps George Harrison would know* Herbert Case might possibly know* C* 1 was under the impression that the directors were not disapproving of Strong in any way? E* Qh not by no meansf and Ifm very sure that if Strong had objected to that change being made* it would not have been made* that change without his consent* She directors n®Y®r would have made I think I told you this the other day* why I say Vm quite sure Strong did know* fhat!s I!m very sure that nothing would have been done that he was not thoroughly informed about and to which he had not agreed* was far from a well man at that time? and nobody knew it better than he* He He had to be absent a great deal* and i donH think he would have ever anticipated being overruled by McGarrah* Actually, there was never any conflict at all. McGarrah was. a very mild administrator who had a faculty for getting along well with everybody* Of course* he was a strong man in many respects* and he could be very stubborn* but still., his natural bent was always towards harmony and getting along closely with his associates* E* I think that the reason for that change in the by-laws was simply that McGarrah foresaw the possible occasions when that might be a -necessary power to have* and even perhaps at times in the absence of Strong because the first deputy governor (there was no first deputy governor at th^t time, but there was a ranking deputy governor) - could have been very much embarrassed at times when Strong would be Sounds 5/2/55 - 3 absents as he was a great deal* and I think that that was a reason* just so that if McSarrah had the poorer he felt he needed* if he needed it, there wouldn't "be any argument about it. The Reserve Bank organisation is quite an unusual one and the position of the chairman is somewhat ambiguous* She position of federal Reserve Agent which is the other half of the job, is claarl^: defined in the law* ••• fhe "by-laws had "been pretty silent on any other authority that the chairman had* He was no more than a presiding officer* In actual practice, nobody noticed any change in procedure as a result of this change in the by-laws* R* You have doubtless already run into the fact that there witre some pretty serivna squabbles over those two jobs at some of the banks* In one bank, a isan took the position of chairman thinking in his own mind thqt he was going to be chief executive officer of the bank and then finding out he was not *•* He and the president then swapped jobs • .. At least three districts ran into that issue* San Franciscof Kansas City and Atlanta also* But here, Strong was the strong man from the beginning right through until the end as long as he lived* 0* It's often said that immediately after Strong1s death* after Harrison came into office, that the Federal Reserve Board set about to make sure that the leadership would not longer be taken by the lew York Bank* R* I think that is definitely so* 0* Can you think of any particular episodes that would indicate desire on the part of the Board to prevent the New York Bank from taking the initiative! after October of s28? R» Well, I don't know that I can exactly. itself more in many little things* I would say that it manifested Hie Board would hold up or block some of the Bank's recommendations, and it was quite obvious for a long time that the Board, or certain members of the Board, were just seeking opportunities to take control as far as relations with the lew York Bank were concerned* died - ? Let's see, Strong Rounds 5/2/55 k C* ©etcher 16, 1928* R* That was just about it* I couldn't date that exactly* "but 1 think we were already trying to change the discount rata "before he died* C. Well, 6he "big controversy came around March, 1929. &• Yes, a little hit later, and the discount rate was changed about every week. 0. There were those two letters that the Board wrote, remember, in January or February of !29? February 2, 1929 was the first of the letters where they asked you fellows to take direct action* E. Those letters I think were written urging what we call direct action as against certain hanks, and 1 think that one or two of those hanks, there may have been others, in the judgement of the Board* were borrowing too much at the time. This was flmoral suasion*11 They thought that those hanks should be definitely told to reduce their loans or get out entirely* She Bank had already been trying to accomplish the purpose "by raising the discount rate. Strong was & great believer in the theory that there was only one way to control credit, and that was by making it expensive* That was the traditional central bank policy the world over up to that time* A* It was an extension of the free market theory really*c R. Yes* But the kind of control the Board was talking ahout before Strong died had no relationship whatever with the controls exercised iy the free market. Miller of the Board Was the strong advocate of control by moral suasion* At that time most bankers were members of the old school. Rate control was the only control they knew. Applying hindsight on all that, I think it was unfortunate that there were those differences of opinion ... both sides trying to get the same result ... there was something to be said for compromising between both methods. Perhaps the Bank was a little stubborn sticking to the idea that price was the controlling factor and also that the Board was very stubborn in not permitting use of the discount ratfe which was the generally accepted method for Sounds 5/2/55 - 5controlling credit* Miller was a theory advocate completely* He was a man who had no practical experience in "banking* He_ had "been a college professort and hethought you could talk the hanks into taking desired action* that you can accomplish something ty that method* We have found out Soma hanks are very responsive to suggestion; others have a very thick skin on that and resist it* program of the Bank at that time had teen opposed to that method* The whole There is a place for the use of toth methods« 0* In the spring, of 1929 you fellows here at the Bank refused to send out a letter that.the Board had sent to you tote sent to the member tanks. E* My test recollection at the moment is that that letter was a slightly dif- ferent approach to the moral suasion idea* Just another way of getting at the thing, and the Bank took the position that it \fas not the right way to handle the thing* One of the great troubles is that if you try so-called selective controls to any considerable extent, you have to indicate to the individual hanker how to exercise those controls, in effect how to rvxi his tank* He doesnft like the medicine, he doesn't like what you're trying to tell him, and he is quite apt to, well 1 won't say retel, exactly, tut he is not at all adverse to pointing out to you where it didn't work. We didn't have Regulations I and U in 1929* When they came, they demonstrated quite effectively that the use of those regulations was one way of restricting the use of credit* Direct action and moral suasion were atout the same thing. The method was moral suasion* the application of it was direct action. In those days the System had to te very circumsjjpct in dealing with hanks in order to te sure that no one tank would have, or appear to have, an advantage over another, and of course it was recognised at times that a tank might get an advantage over another just ty its willingness to he less considerate of the interests of .all than some other tank* tut 1 think it would te fair to say that that was considered less objectionable than would have teen direct action ty the Sounds 5/^/55 - 6Bank to try to force obedience. Those were vary interesting days, and since central hanking was a totally new experience in this countryf many of these problems had never come up before, and there was some slowness in getting oriented to the effect of any rtal changes. Since then, of coursef we1re had, veil, ahout the first attempts we have at selective control were Regulations T and IT which attempted to control "brokers1 loans, loans to brokers and "brokers1 loans to their- customers* That was the sort of thing that might hare "been more effective in 1928, if anyone had thought of it. A* They didn't have any thought of it! R* _ So. Well,. 1,think frankly there was at that time great reluctance to think of such detailed control* 1 think that's not an overstatement of the case* The hank was committed to a different sort of policy, and nobody in the Board had thought of those things either, as far as that .goes* questions, they never came up* There was no issue on those The Board had not gotten heyond the point of moral suasion and there were differences of opinion in the Board ahout that. Miller was the strong advocate for what he called direct action, which was putting moral suasion to work* A. Miller? R® Dr. Adolph Miller, yes, he certainly was a leader of that faction, and 1 doubt that without Miller there would ever have been any great difference of opinion, I don't think anybody else down there would ha*ve perhaps ever gotten to the point where they trusted their own judgement enough to take such a stand* 0* Would this he an accurate description of the attitude of lew York Bank people at that time, that they thought they were doing all that was feasible in the way of direct action, hut that that could not be effective by itself? It needed a rate increase in addition? R* Yes, that is true. 2 think the attitude of the bank can perhaps best he expressed by saying there was a total unbelief in the theory of direct action or Hounds -7 Sl^jSS - attempts to control credit in the qualitative manner* although that again is a term that I donft think had ever come up at that time. Itfs a little difficult in talking about whatfs happened over a period of time to avoid using terms that came into "being sometime later. There was no "belief in moral suasion on the one hand, and there was a strong "belief on the other that the Federal Heserve Banks Mist "be impartial, that they couldnU spot out "bad hoys and spank them* Then of course all of this was colored hy the very strong conventional "belief "based on long experience in other countries» that the only effective way to control credit was to control volume in total hy controlling rates or cost. I heard Strong say IUBHJ times that you just canft control the use of credit. Suppose we let a hundred million dollars of credit get out into the market. It starts in a half do^en "banks that take the initial credit, hut within 2k hours itfs heen transferred to a lot of other hanks hy normal hanking transactions that would have taken place in a day, and you gust canft control that at all. Itfs the way it goes. The "bucket will only hold so much water, and when itfs full it runs over and it goes in all directions. It goes in somehody elsefs "bucket, and those are the arguments that were used at that time. Strong was a very firm "believer in that. Char Economist here in the hank at that time was Carl Snyder, and nohody in the world ever believed in rate control on the volume of credit any more than Carl Snyder did. In fact I expect- tha great disappointment of his life was to have the very definite proof that this would not work when the tide was reversed in 19311 and we were trying our "best to get 'credit into use \r making it revj cheap. Itm no economist, and I seldom presumed to match'my wits against his in that area. But I came to have a rather definite theory of my own ahout all that, and I talked with Carl ahout it on many occasions, hut I never could get him to admit it. I donH know whether "before he died he ever changed his mind or not. Ify theory was that you could conjrrol the volume of credit l)j controlling the cost of it, hut that to he successful hy that method you had to maintain the variations Bounds 5/2/55 - 8 - "between two median points starting at a level that might he called normal* In other words, you can keep the "boat on a level keel provided that you were level when you started and n®r®v permitted it to he very far off* If you never let the rate get .above9 well I used to say then $$% i& the light of what's happened since then, one might he tempted to put it lower9 hut 5^ W M considered a good rate at that time* Well, to use that illustrations to get over $$ and not to get undir 3». you might he ahle to control the economy pretty well and have a fairly level picture operating on rates "between those figures* But we certainly proved here in the hank in the depression years that you cannot induce the use of money hy making it cheap* It is not a two-way road except as you can operate without creating any scare either way* credit* A normal market is very sensitive to the cost of She amount of credit that is being used can very substantially he in- fluenced on the up side hy the cost of it* One of the major prohlems of a con- trolled economy is that if everybody knows it!s controlled* they also know any condition can he quickly reversed and therefore do not trust the existing condition* I BM willing to say that the experience in the last 25 years has pretty well demonstrated that there is a place for other controls as well as the discount rate* The most effective control today is open market operations* One reason why it is successful is "because the thing is done "before anybody knows it* it is already in and there is no resistance to it* In effect, There1 s no scare about it* It is a far more effective instrument than any of the others, hut I would not say for. a moment that it should he used exclusively* The othex* two principal instru- ments - the discount rate and reserve requirements - hoth have their place* Changing reserve requirements is a very drastic method of controlling credit* Some hanks are in a muchtetterposition to handle it than others* I think the reserve requirements changes should only he made when the other methods have "been used up to the point where you have gone as far as you can and you really need a major change in order to give a new start* It should he noted that all three of Bounds 5/2/55 - 9 these methods really depend upon the same end result for their effectivenetss, namely, their effect upon the cost of credit* C* Could I ask you about the policy there in the fall of 1929» starting around August? Although there was an increase in the discount rates there, you also bought quite a lot of acceptances, and so m, as 1 remember* Did you have the feeling that you were actually looseni ng credit at that time rather than tightening it? &• Well, I would say that was the lery rough first beginnings of what latter became known as selective credit control* A. fhat was the fall of f31? C. No, »29. R* We were trying to exert pressure against the stock market, and its absorption of credit, but we were also trying to make credit available for legitimate busi** ness, and of course the acceptance market than was regarded as prime business* nothing better known to exist* Shat was a direct use of credit to commerce9 znd there was much more certain application of it than you could get through commercial loans made by banks to their customers• They never did know whether the customer was manufacturing goods or buying stocks* Many, business men, thousands of them, were borrowing money at their banks, but not for manufacturing or trade purposes. It was being used to buy stocks. Many business men were head over heels in the stock market, and there were many cases where nobody could possibly tell whether the borrowing was to buy stocks or not* be covered up fairly well* It could be Also, of co rse, there were many cases where the fellow really got himself way out on a limb and was borrowing not for legitimate business reasons but to protect his position on margin* He was trying to hang onto what he had* In other cases he may have been borrowing money for legitimate business purposes but what he should have been doing was liquidating his already excessive stock position and financing his business that way* buckets instmad of one* He was trying to carry two Hounds 5/2/55 10 A* Was that judgement a thing which the hank considered as a part of its responsi- bility? B* lou mean was it part of its function to try to make a distinction "between the usee of credit? Is that what you have in mind? <J&® X€sfb * B# Well* the hank was* I think it fair to say* very slow in coming to the conclusion that it had to exercise that judgementf or perhaps that it had the power, to make those distinctions* I think there1s probably a considerably greater realisation of the possibilities of that today than there was at that time. was an entirely new idea which was being tried out rerj C* In 1929 and 1930 that modestly for the first time* Did this idea of raising the discount rate and. at the same time encouraging purchase of acceptances by the Eeserve Banks originate with the Hew York Bank or with the Federal Eeserve Board? As you say* it was in fact selective control in a sense, but did it originate here or in Washington? B* Well, 1*21 not sure that 1 can answer that question* I think it originated here probably as a compromise measure, but 1 donft know what the record would show on that, if it shows anything* C* You better check up on that* I made an attempt to check up on it, but apparently negotiations were mostly off the record* B* Yes, of course the telephone has always been a major instrument of negotiation between here and Washington* A* And no recorder was put on the telephone. B* lo* In many cases memoranda were written following conversations* stances also, it was not done* In mmj in- fhe idea seemed important at the time, and 1 would guess that it originated here, but it could easily have resulted from arguments back and forth with the Board, or discussions as to what would happen if you put up the rate and refused to make loans generally, who was going to be hurt, and so on* the Board has always 1>emi very sensitive to cridit dainage to any business* Of course, I wouldn't Sounds 5/2/55 - 11 - he at all surprised if you might find it utterly impossible to be able to make a clear statement as to where that idea did originate. The man who handled the open market operations and bankers1 acceptances at that time was lenzel* think* G* He died in 1933> I It used to be said that when Kenzel went to lunch the bill market closed* After the market break and it came time to loosen up on whatever restriction was there, where did the movement toward easier money come from first, the lew York Bank or the Board? R* Or were they pretty much in agreement? Oh, 1 donft believe there was any great disagreement at that point• fhe havoc of a rapidly falling stock market "became so great that nearly everybody had experiences of people, in great distress* I remember one day 1 had a woman on the phone, I donH know how_ she happened to get to me, except that the telephone operator didnH know what else to do with her a and she was just about, half crazy and asked, slWhy didnH the Federal Reserve Bank do something about this condition?11 1 tried to quiet her* and she said, wWell, if you donH do something about it, Vm gohng right over and jump out the window*tt A* That sort of thing was not unusual at that time. Mr* Hounds, .may we ask specifically what you remember of happenings here within the "bank after, it was the 29th of October, wasn't it? WasnH that the fatal day? E* There were no bank failures of any consequence as an immediate result of all this* fhat came much later, and the first impressions were that this was entirely a stock market crash^ nearly everybody believed prices were too high and they ought to come doxvn* and this was it* 1 donH think it was realized then how many people were involved in the market, or what it would look like after the pieces were picked up* How many people were going to be wiped out, that sort of thing* A» Well, it must have been a great shock to the whole credit mechanism* E* ©h, yes, it was tremendous* fhe margin clerks in brokers1 offices were working overtime, and of co rse by and large they are a pretty astute crowd* When prices are high they watch margins mach more closely than they do when prices are low, and most people had been required to keep pretty well margined up during that period* but even Eounds 5/2/55 - 12 ~ so* of course, when the "break came, the losses ware so much greater than anything they'd ever seen before that margins were wiped out very quickly* A« How was this felt here in the hank? £• In the Eeserve Bank this was regarded entirely as a stock market crash; and while there were many* many more people in the stock market than had been customary in the past or have 'been since for that matter, in terms of percentage of population* it was 4111 pretty small* I think most people didnH realize that it was a more than average reversal* A* Well now then, how about the hanking reaction* B* Well, the hanking reaction was this* There had "been a tremendous increase in stock market operations, both in volume and in prices, and it involved more people than a,nj similar operation had "before, and it involved more hanks* I would say there were not a large number of hanks that were importantly involved from the solvency point of view, "but here and there around the country there were quite a few hanks that had loaned more on stocks than they should have and faced the possibility of substantial losses as a resulfi* Quite a few officers of commercial hanks were themselves involved in the stock market and faced serious personal losses, in some cases so great as to almost, if not completely, destroy their prospective and their ability to sake loans9 a sort of shell shock, temporarily at least* 2h not a few instances this contributed greatly to the difficulty smaller 'business men had in securing credit* Another area seriously affected was the "building industry. There were a good many "building projects that were still uncompleted, and very often the money was not available to complete them, partly "because the people who might provide that money bad been caught in the stock market, partly because credit had suddenly dried up* A* I haMe heard it argued that if Governor Strong had lived there would have been no stock market crash* £• Do you think there is anything in that idea? Well, it is an interesting speculation* I do know this — Mr# McGarrah was not a Rounds 5/2/55 - 13 fighter* A man of very strong principle and very strong ideas and generally rights hut altogether conventional. He would insist on keeping the record straight, and it was partly at his insistence that this "bank's hoard week after week voted an increase in the discount rate* all of which appear in the minutes. He wanted the record to show the hank had "been on the jot) and had done what it could, hut perhaps he did not sense how great a calamity was huilding up. Strong was a pretty farseeing gentleman and somewhere aldng the line "between 1927 and 1929* the chances are that at some point Strong would have said that this thing had gone far enough and would have tried to settle it. I suspect that he would have presented arguments that would have resulted in something being done. He could compromise when he had to and very, effectively too, hut he was % very powerful advocate ... and knew what he wanted* It could have made a powerful lot of difference. McO&rrah could present a case quite effectively, hut when it got to the arguments, he was through. He had no patience to argue* Strong did not have much patience eithers hut he would keep at it nevertheless. McGarrah just wasnH huilt on a plan to permit him to argue and win. Strong loved it. He thoroughly enjoyed getting into a fight and coming out on top, as he always did. Strong sensed the importance of things that were goong on, and he also always felt a keen responsibility to solve these problems. Mc&arrah never went that far. Mc&arrah took the position that final responsibility rested with the Board of Governors, perhaps partly because he thought they wanted it that way. C. E. There were no important bank failures as a result of the crash? Not immediately. You remember the Bank of United States closed. I think it was in December of f 31. How the main reason why that bank closed was because almost nobody had any confidence in the management that was running it. Actually, when the pieces were cleared away, it was found that most of the loans in that bank were generally sound, and particularly the loans in which the bank was primarily engaged, that's the needle trade, cloak and suit business. iEhey had relatively small losses Hounds 5/2/55 - 14 on those loanst hut they had gotten involved in quite a number of large and speculative real estate operations, and the hulk of the losses that were finally taken were from those real estate loans and not loans in their regular "business*. A* Did 1 understand that Mr* Harrison was leading a group that tried hard to effect a merger with the Bank of the United States and other banks that would have saved it? 2L Where did you get that opinion? A* i think from Mr. Cave* K* I would hesitate to contradict anything Mr* Case said about it, but it is my impression that George Harrison had gone on a trip to Europe that fall and was away when the situation came to a head. Case was here in the Bank and realized very quickly that the top man in the hank had to take hold* We had in the city at that time several definitely Jewish hanks, and every one of them was on the hot coals* and Manufacturers9 were the three largest Jewish hanks in town* rnry fhe U.S*f Public They all three had definitely Jewish top management, and the general public just put them all in one hasket, and that*s all there wax to it* And they were beginning to experience a great many runs* fhe chief counsel for the Bank of XL S», and Marcus who was the son of the old man Marcus who founded the hank, and Saul Singer were the top officers in that bank* Everybody thought the bank was much too M g for the management, and it probably was, but at the same time, as I said a minute ago, when the chips were all gathered up, 1 think there was general agreement that they had done not too had a joh (except for their real estate operations)* Joe Broderick was superintendent of banks in lew York State, and the Manufacturers1 and the Bank of. the -United States were state institutions, not national hanks* We were holding sessions here every night, and a good part of the night during the last two weeks before the hank closed in trying to work out a solution of the thing* fhe Clearing Ho se hanks were very much concerned; they were right in the middle of it, hut 1 think it would he fair to say they were more concerned with figuring out how they could stay out of it than figuring out a ny way they could he helpful hy stayingin* Bounds 5^2/55 - 15 fhey were pretty badly shell shocked crowd* Mortimer Buckner, who was head of the lew York frust Company was chairman of the Clearing House committee*. Hefs dead now, but he was head of the Hew York frust Company for quite a few years and a pretty able fallow* Ha wasi quite a friend of George Harrison. The top man in the Hew York Clearing House' is the chairmen of the clearing committee* and the incumbent changes every year* Hie job is passed around among the banksf so a man may hold that office several times* but not continuously* George Harrison was away* and Case was in effect tqking his place* And these meetings went on svery night, discussing what to do about the Bank of the United States, and finally somebody came up with the idea, why not solve this whole problem in one fell swoop, and merge the Bank of the United States and the Public into the Manufacturers1 frust Company? fhat program was finally agreed to, including even the basis upon which it could be done* fhe Public was in fine shape, the Manufacturers1 was in good shape, and the Bank of the United States was generally supposed to be in pretty poor shape, although nobody trusted the figures* fhey finally got to the point of deciding who was goong to head this merger and make a real success out of it* fhe bankers agreed to back the plan provided Herbert Case would take the job as chairman of the board of the combined bank* He wasnH eager to do it, but finally agreed, and.it was just a question of working out the details. As I told you, George Harrison was in furope and came back at just about this point* He came back very late in the discussions* A. He wasn't informed? B* He wasnft informed, and of course, his whole attitude was very cautious* we^e a lot of unwilling participants in this program* There fhe Manufacturers1 insisted that the Clearing House banks put up a certain amount to guarantee the goodness of the Bank of the United States. We had worked day and night on this merger* As a matter of fact, the particular night I'm talking about we had a team of people in the larger branch of the Bank of the United States* Along about midnight we had gone over Bounds 5/2/55 - 16 - the records and sized it up and decided that they were good enough to justify us in keeping the "bank open, provided this agreement would go through* Hobody could foresee that it wouldn't. We were prepared to make any amount of money available to see them through. And we*d have done that, hut then there began to he "bickerings over details of the program 2nd specially over the guarantee that the Clearing House banks should assume. They had been badly stung when the Harriman Bank got in trouble earlier* And quite a few of those representing the Clearing House banks cooled off and George was not disposed to warm them up any, so it all fell through; at about 5*30 that morning it was decided to close the bank, (Actual closing was of course decided by the Stq/te Superintendent of Banking, and he was unwilling to permit the bank to remain open without some guarantee of its ability to continue.) A. In other words, there was no positive move that could keep it open? E. The superintendent of banks at that time had reached the point where he said that something would have to be done or he would close the bank. He would not permit them to keep on doing husiness with depositors continually withdrawing their funds. The withdrawals had hecome very heavy1 and of course every depositor who was taking his money out was weakening the bank that much. I remember one very interesting incident of that night* We had been watching the whole situation pretty closely; we knew that in the clearings that day were something over $100,000 in checks on the Bank of the United States signed hy Max Stauer. A. ©h-h-hJIi J E* Does that name mean anything to you? A. He was the attorney that prosecuted. E. That*s the reason he prosecuted, because those checks were never paid* A* Qh-h-h, I see. They stopped payment? B. They were not cleared, and Stauer was ©ad ahout it. There was nothing irregular about their not being paid, quite the other way around. But even so, / Stauer thought he had influence enough so those checks sho Id have heen paid, and he was so worked up Hounds 5/2/55 - 1? about it that he went after Joe and got him indicted* C. Was you estimate that the Bank of the United States was insolvent as of the tifte of closing? E* No, we thought they were solvent* We had heen over their records with a fine- toothed comb, and we had discounted the doubtful items very heavily* pretty good hond account, they had$35 or They had a $ ^ million of capital to he exhausted "before they "became insolvent* 0* Well$ it strikes me than that Broderick was not showing great courage in closing them so soon. !« Oh, wellf yes, I think he was* where decision was difficult. We were at a 'point in that particular situation The Clearing House would not support this merger* and it left Joe in a position where I don't think he could have done anything else, and we (at the Federal Reserve Bank) were in somewhat the same "boat "because while we were prepared to make available any anount of money necessary to pay off depositors, wa had to have some limit in mind, "because if you're going to pay off say 75$ of ..the depositors and then finally have to close, the other 25$ are going to have a pretty crummy prospect. There wouldn't he much left of the assets for them to work on to get their money out* We took the position that the hank was solvent and that we could see it through provided it had Clearing House support and those mergers would ha permitted to go through, or even without the merger if it had Clearing House support, hut the Clearing House couldn't see it that way, and the hank closed. 0* Well, may I ask you & hypothetical question here. Suppose that you had gone ahead, left them open and made loans to them so that they paid off say 75$ of their depositors, and then finally had to he closed with only 25$ of deposits unpaid* you think it would have heen likely that the 25$ of deposits would not have Do hmn covered eventually in•the liquidation? B* I think they paid out either 99 or 98 and a fraction $ of the deposits, showing that the degree of insolvency was less than 2$, say* low 2nj hank that could do that Hounds 5/Z/55 - 18 in liquidation is worth a good margin over its liabilities as a going concern, *be cause the sacrifices that were taken in that liquidation were terrific* There were many very large losses • However, I think if we had kept them open, shall 1 say a month or even two months longer, and they had paid out 75^* I think the effect of liquidation would have heen substantially the same, "because the people who withdrew would have gotten 100^, and as for the 25^ who were left, the loss on that would have heen 4$S or 5 i®% instead of 1$% hut in dollars BUCI cents the result would have "bB&n just about the same* A. Is it the joh of the Superintendent of Banks to see that everybody gets his fair share! 2L That is certainly part of his joh* He can he very severely criticised, in fact he was criticised very severely for letting it stay open as long as it did, hut there*s always the hope that something could or would he done, and we were giving him every possible support* C* Well, did. the other clearing house "banks indicate any fear that the closing of the Bank of the United States would have an adverse effect on them hy weakening confidence in the rest of the hanks? B* Well, yes, I think that everyone of them was thinking of himself and his own situation, and of course hy that time liquidation had reached the point where lots of people who shouldn't have heen scared were. The gr&at trouble was that the management of the Bank of U.S* was so poorly regarded hy almost everybody there was a complete lack of confidence* Therefore, the feeling was that the situation Z E E S was prohahly very much worse than it appeared* I am convinced that the whole situation dealt with wisely and with courage at that time could have heen prevented* recently merged into the Bankers, was always a very had any idea of taking any losses and never Manufacturers1 was sort of in "between* The old Public Bank, conservative outfit . .* They never took anj* relatively speaking* The They had heen a pretty shrewd hunch hut werenH thought too well of at that time* Actually the management of that hank was good* Hounds 5/2/55 - 19 I donH think the merger program would have resulted in a dollar loss to anybody, but you could not convince anybody of that at that time* The fellow then really running the Manufacturers1 Trust Company (Von 11m) was a very able banker. Manufacturers1 reallyf upon analysis* made* in my judgement, the best record of any of the large banks in Hew York City between say 193^ and 1950 ®-n& were often right in their policies. Almost 100^ scare psychology toofe: hold* idea of backing the merger* The clearing house banks did not like the 1 donH think the anti-Jewish feeling was too important so far as the clearing house banks were concerned* ©f course, it contributed to the feeling that they all had of doubt about how bad the situation was* There had been a lot of Jewish banks that had been started during the f20fs and quite a number of them had been merged to save them, and a number of them had been taken over* some under distress conditions. There was a definite feeling in the minds of the public regarding banks that was anti-Eewish. As far as the clearing house banks were concerned, 1 donft think they thought in terms of race. The first consideration is self-preservation and Buy line that will work in that direction is good - Jewish or otherwise. There was a certain amount of feeling about the Hewish banks btit 1 don't think it was based on race. I do think that in the public mind there was a strong aversion to Jewish banks and that many of the Jewish bankers felt that the public had made that decision. When the break started in f29» for about a year nobody heard about much of anything except the stock market. Then suddenly it became apparent that the bond market was weakening a great deal* Actually there had been sold during the ^O's a tremen- dous volume of bonds, particularly the bonds of public utility holding companies; alii large amounts of foreign bonds, and the losses that were taken on. many of those bonds were simply terrific* Second grade railroad bonds were also very weak, and very frankly, almost all railroad bonds-came to be regarded as undesirable, even those of good grade* If a bank had 10,000 that they wanted to sell and they offered them, there wouldn't be a single taker for 10,000. Even small sales would drop the Bounds 5/2/55 - 20 market so much that it "became almost impossible to dispose of these poorer quality "bonds except at great loss* There were just no buyers for that sort of "bond* And that sort, of thing was pretty deadly to hanks* In this district the banks r particularly the country banks, most of which are also savings banks, that is they have a savings department, and the rule used to be and still is that the funds representing the savings deposits ought to be invested in "bonds* A great many small banks in the country area just don't have enough demand for loans; they can't even land out their commercial deposits locally to take.up the money they have on hand to lend, and therefore there was a great disposition to go into bonds* The first two.national "banks that closed in the Second Federal Reserve District were the First national Bank of Houses Point* and the First national Bank of Ohamplain, New York. banks* She president of one was the cashier of the other* They were both small She national bank examiner always made it a practice to examine the two banks simultaneously* The assets of these banks were largely in bonds* It was something of a. shock when news came through that the banks had been closed for depreciation of the bond account* lot long before that we had been working on a rating system for getting a quick judgement of the bond list of a bank* Briefly, the system was this? Based on ratings, triple A and double A "bonds were rated 100; single A bonds were rated 90, triple B bonds were rated 80, bonds below B or certainly below three C!s had no value at all in the rating* These ratings were averaged on a dollar value basis* If..1 recall correctly, the bond lists of these two banks when subjected to the rating scale (after the closing) showed quality ratings of 18 and either 21 or 23 on a scale where anything under 80 was regarded as definitely unsatisfactory* low, as a matter of fact, a.bank officer has no business buying bonds for a bank when he doesnft know a thing about honds* The average -small banker knows his customers and can generally make sound loans, but unless he is the exception and really knows something about it, or gets very competent advice, he is lost in the hond market • Sounds 5/^/55 - 21 C* Vell9 may I ask you two questions about the Bank of the United States* The first one* you have indicated that rumors flew all around about these three hanks, at least two or which were really quite sound in your thinking, hut what they had in common was that they were all Jewish* Is there any indication of any sort of concerted rumor mongering about them? £» 0hf 1 don't think so« 0* Because at that time* you know* there were charges of Communist inspired rumors and that kind of thing* £* 1 wonder if there was any ••• Well, 1 would doubt thg/t* Of course, we had in the late twenties a tremendous number of bank mergers, quite a few of which had been forced by poor banking, not all, but quite a few, and the Manufacturers1 Trust Company was a bank which had taken over a large number of these smaller banks, some of which were in trouble or likely to be* And the Manufacturers1 had been growing at a very rapid rate* fhe thing that I didn't mention, 1 should have 1 think, to complete the story, before the night closed when the decision to close the Bank of the United States ifas made, the Clearing House also agreed to admit the Bfenufacturersf Trust Company and the Public Bank to the Clearing House* A* So they had not been clearing house members? B* Heither one of them had been members of the clearing house, and the announcement was made that these two banks were being admitted into the clearing house at the same time that the announcement wa.s made that the Bank of the United States was closing. At the same time there was a change in control of the Manufacturers1 Trust Company* Harvey Gibson became presidents and he acquired a large block of stock from the Jonas family* There were two Jonases* Nathan Jonas was the banker* his brother, a lawyer, was a big stockholder and generally understood to be quite a figure in the bank* By and large people thought more of Nathan than they did of his brother,, Nathan was a typical east side Jew* He happened to be from Brooklyn, he was really a pretty good fellow* Hounds 5/2/55 - 22 He was a man of sound principles and always ran a good "bank,, But the feeling of the Clearing House was that the hank could not survive as a Jewish "bank and that Harvey Gibson was a leading citizen* He was Bed Cross Commissioner in Europe during, the war, both wars in fact, and was regarded very highly; Mr. Gibson's election as president evidenced a complete and definite change in management. As far as 1 know, however, Harvey Gibson was the only important change in the management. The men who really ran the hank xoany years before that and after up to about a year ago was a man that Harvey Gibson later said was the ahlest banker he ever saw* Urn. His name was Henry von He had a nervous breakdown a year or two ago, but he was the man that really managed the Manufacturers1 Trust Company for the last 25 years or more, a very able fellow. C* The other question was this* A great number of people, at least implied if they didn't state it specifically, that if the Bank of the United States had not been closed, the whole history of the thirties with regard to hank failures and even credit conditions might have been quite different. Do you agree with that? B. Well, thatfs an easy statement to make, itfs pretty difficult to prove it. I111 go this far. I111 say I think it might have been* I don*t know any way to prove it. But 1 think it might well have ^oeen a totally different situation, ©f course, the closing of the Bank of the United States was followed very quickly by bank closures pretty much all over the country, and coming to a climax in Detroit where three large hanks all closed, probakly no one of which should have closed. There was no reason to close those banks out there._ At that point the fear complex had taken over. Everyone of them paid off its depositors in full. A* What about the Bank of Kentucky? B. Yes, but that was a relatively small outfit. Oh, there were various hanks all over the country. Wasn't that another one in that same category? Of course, there was a tremendous amount of talk about the Bank of America in California at that same time. But they weathered pretty much on their own, getting little help from anybody. Hounds 5/^55 - 23 - C. Did there seem to be* following the talk about the Bank of Americaf a definite change in attitude toward "banks and confidence in -them! B. Well, some change unguestionably. 1 think it fair to say, in the minds of, shall I say, of the uninformed* the man on the street, there was certainly a conviction that there was something rotten in Denmark in the hanking system, ©f course, every hank that closed.added to his conviction on that subject and made him more anxious to .get his money out* l%m amazed even now every once in a while when I hear of a case where somebodyss safe deposit hex is opened and $100,000 or $200,000 is found* Of course, that thing was very common in the early thirties, hut it shouldnH still continue, BJX^ I know it does* A* Can we go hack to open market operations for a minute? I think they "began in the individual hanks about 1922. R. My recollection is this. In this hank "before the time of any ©pen Market Comr» raittee *** this hank began open market operations* Some of the other hanks also "bought securities for the purpose of increasing their earnings* were not making their expenses* Some of the hanks fhe ohvious answer was to go out and huy some government bonds and get the income from those bonds. A situation developed where some of the hanks would he out in the market buying governments solely for the earnings at a time when it was considered to he very undesirable to he putting money into the market. The msult was that different parts of the System were not only competing against each other, but actually working at cross purposes* A. Who was it that realised that this purchasing was influencing the market in quite a different way? B. Benjamin Strong* He could not get the Board in Washington to support his on it* fhe Presidents^ Conference of the System finally took hold of the thing upon Strong1s insistence and adopted rules and got the Board to support them in their contention that no bank l)j itself should buy government bonds* For some time the Presidents1 Conference handled the whole thing with little or no help or guidance from the Board. Bounds - 2k- 5/2f55 It did stop the buying of government bonds for revenue only, fhe next step from there on was that when the changes came in the Board and new faces appeared down there, there developed a strong feeling that the Board should take that all over* We then got the ©pen Market Committee* hut it all Parted with the Presidents1 Conference committee which, was initially designed to prevent competing and cross purpose activities on the part of the hanks* At that time (1921-22) we were running into a mildly inflationary situation* from 1921-29 there was an increasing use of credit almost continuously* trend was so marked that it needed some checking* through the hankers1 acceptance market* At times that The initial favorite method was The hankers1 acceptance market was then heing huilt up and this Bank did a greaA deal to foster that development. The hankers1 acceptance w&s a very popular secondary reserve instrument •••up until the time that interest rates began to get terribly cheap (l93l)» Less than a jfs rate prior to 1931 ^as almost unheard of in this market and in rates above that there was a good field for hankers1 acceptances* A hankerfs acceptance is prohahly the nearest thing there is to a riskless credit instrument* A "banker's acceptance relies on the acceptance of a bank to make the credit absolutely good or as nearly riskless as you can get• The customary fee for accepting is \$ per annum on the face of the obligation. When the going interest rate gets down to 2^, there is 1$ or less left for the use of the money and under that the business dies. It died in the early ! 30 s s* This hank at times has held close to $1 billion in hankers1 acceptances••• Nearly all purchases were,made in Hew York* after which holdings were distributed to all Sdserve Banks in proportion to the indicated deficit% i.e. the difference "between the total of all other earnings and the expense account. Strong insisted that they whould never buy for income but he was perfectly willing to concede that if they were, going to buy* the holdings should be in proportion to each bank!s need for earnings. The hanks were not too satisfied with it. It Hounds 5/2/55 - 25 did not give all of than what thay thought they needed* It took into account normal loans to member "banks* Whatever the holdings were in bankers acceptances and government honds was distributed pro rata* Soma banks would have liked to have gone out and "bought much more*,* At that time the other banks were somewhat provincialt knowing 1 ttle about the money market as such* fflieywre not required to know much about *JbAt» Most of the directors who understood tanking were the product of commercial "banking* Ikcept for Strong at that time, there was no such thing as a real "central hanker*11 2ND
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