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X-6873 CQBlDEmriAL. 432 A p r i l 37, 1931. C. S. MITCHELL Review* (By C. S. Hamlin). -I- Banking C o n d i t i o n s a t Time of S t a t e m e n t , March 36, 1939. There was a n e a r approach to a p a n i c on t h e New York S t o c k Exchange on Tuesday, March 36, 1939. exchange h i s t o r y . The b r e a k was one of t h e s h a r p e s t i n s t o c k C a l l l o a n r a t e s r e a c h e d 30$, t h e h i g h e s t f i g u r e s i n c e 1930. The s o - c a l l e d d i r e c t p r e s s u r e t o r e d u c e t o t a l b o r r o w i n g s of t h e banks had been i n f o r c e s i n c e February 7, 1939, t h e d a t e of t h e B o a r d ' s warning. There was a f e e l i n g abroad, t h a t t h e banks had f i n a l l y d e t e r m i n e d t o adopt t h e most d r a s t i c methods, and would r e f u s e even to e x t e n d c r e d i t f a c i l i t i e s which, under o r d i n a r y circumstances» t h e y would have g r a n t e d a s a m a t t e r of c o u r s e , such a s to meet temporary withdrawal of f u n d s by c o r p o r a t i o n s f o r q u a r t e r l y i n t e r e s t and d i v i d e n d payments, o r w i t h d r a w a l s from New York to i n t e r i o r p a r t s of t h e c o u n t r y . B r o k e r s l o a n s b o t h f o r t h e New York b a n k s ' own a c c o u n t , and " f o r o t h e r s " had been d e c l i n i n g d u r i n g t h e week ending March 87, 1939. The c a l l l o a n renewal r a t e s were a s f o l l o w s : March 25 « 26 " 28 « 27 3 12$ 15$ 15$ Undoubtedly one cause of t h e c r i s i s which a r o s e on t h a t day, March 2 6 t h , X-6873 - 2 - was t h e a c u t e c r e d i t s t r i n g e n c y ' i n Chicago, W i s i n g from t h e heavy l i q u i d a t i o n on t h e Chicago Stock Exchange "beginning on March 2 1 s t , which r e s u l t e d i n l a r g e w i t h d r a w a l s of f u n d s from New York. F r i g h t e n e d t r a d e r s a l l o v e r t h e c o u n t r y were s e l l i n g s t o c k s b l i n d l y on t h a t day* By 1 : 3 0 p.m. t h e volume of t r a d i n g on t h e New York Stock Exchange had r e a c h e d over 5^ m i l l i o n s h a r e s , and t h e t i c k e r t a p e was 58 minutes b e h i n d t h e m a r k e t . Under t h e s e c i r c u m s t a n c e s , Mr. M i t c h e l l , on Tuesday, March 2 6 t h , came to t h e r e l i e f of t h e money market, advancing s i x m i l l i o n s of d o l l a r s on c a l l l o a n s . -IIMr. M i t c h e l l ' s S t a t e m e n t . In t h e a f t e r n o o n of Tuesday, March 2 6 t h , Mr. M i t c h e l l gave o u t t h e f o l l o w i n g i n t e r v i e w , a s t a k e n from t h e New York H e r a l d - T r i b u n e of Wednesday, March 2 7 t h : "So f a r a s t h i s i n s t i t u t i o n i s concerned, we f e e l t h a t we have an o b l i g a t i o n which i s paramount t o any F e d e r a l r e s e r v e warning, o r a n y t h i n g e l s e , t o a v e r t , so f a r a s l i e s w i t h i n our power, any dangerous c r i s i s i n t h e money m a r k e t . "While we a r e f o r t h e p u r p o s e of we c e r t a i n l y would where money became a v e r s e t o r e s o r t i n g to r e d i s c o u n t i n g making a p r o f i t i n t h e c a l l m a r k e t , n o t s t a n d by and see a s i t u a t i o n a r i s e i m p o s s i b l e to s e c u r e a t any - o r i c e . " Mr. M i t c h e l l i s quoted by t h e New York Times of March 29, 1929, F r i d a y , a s s a y i n g t h a t h i s Bank was p r e p a r e d t o make a v a i l a b l e 5 m i l l i o n s f o r t h e c a l l l o a n market a t 16$, and a l i k e amount f o r each g a i n of 1$ up t o 20$. 434 X-6873 — 3 — He a l s o made i t c l e a r t h a t hiA a c t i o n Was baaed not so much on c o n c e r n over t h e movement of t h e r a t e s , h u t to k i l l t h e i d e a t h a t money c o u l d n o t be had no m a t t e r what was o f f e r e d f o r i t . From t h e time t h e o f f e r was made, t h e c a l l money r a t e s d i d n o t go above t h e minimum r a t e , b u t d i d go down, c l o s i n g a t 8%. (190-1) The New York World of March 30, 1929, quotes Mr. M i t c h e l l a s follows; "Should a n o t h e r c r i s i s develop, w i l l you s t a n d by a g a i n ? " was t h e n e x t q u e s t i o n . Mr. M i t c h e l l answered, " I t can b e s a f e l y assumed t h a t we w i l l endeavor a t a l l times t o p r e v e n t a c r i t i c a l s i t u a t i o n going out of bounds. We w o n ' t be a l o n e . Other banks w i l l s u b s c r i b e a s s t r o n g l y a s we t o t h a t d o c t r i n e . " -IllS e n a t o r Glass on Mr. M i t c h e l l . The Few York Times e d i t i o n of F r i d a y , March 2 9 , p u b l i s h e s an a t t a c k on Mr. M i t c h e l l by S e n a t o r G l a s s , who was quoted a s f o l l o w s : "The F e d e r a l 3 e s e r v e Board h a s adopted t h e a d m i n i s t r a t i v e p o l i c y of h a v i n g F e d e r a l r e s e r v e banks r e m o n s t r a t e w i t h member banks a g a i n s t p e r m i t t i n g t h e f a c i l i t i e s of t h e F e d e r a l R e s e r v e System to be u s e d f o r s t o c k s p e c u l a t i v e purposes. " T h i s should have been done l o n g ago, b e f o r e t h e s i t u a t i o n got out of hand. Fow t h a t i t h a s been done, a Class A d i r e c t o r of a F e d e r a l Reserve Bank, h i m s e l f P r e s i d e n t of a g r e a t banking i n s t i t u t i o n , v i g o r o u s l y s l a p s t h e Board, s q u a r e l y i n t h e f a c e and t r e a t s i t s p o l i c y w i t h contempt and contumely. He avows h i s s u p e r i o r o b l i g a t i o n to a f r a n t i c s t o c k market over a g a i n s t t h e o b l i g a t i o n of h i s o a t h a s a d i r e c t o r of t h e New York F e d e r a l E e s e r v e Bank, under t h e s u p e r v i s o r y a u t h o r i t y of t h e F e d e r a l Reserve Board. "Mr, M i t c h e l l ' s p r o c l a m a t i o n i s a c h a l l e n g e t o t h e a u t h o r i t y and t h e announced p o l i c y of t h e F e d e r a l R e s e r v e X-6873 r 4 - "Board. The c h a l l e n g e l y dealt with. M be promptly met and courageous- "The Board should a s k f o r t h e i m m e d i a t e . r e s i g n a t i o n of Mr. M i t c h e l l a s a Class A D i r e c t o r of t h e Hew York Fede r a l He s e r v e Bank. " I f t h e N a t i o n a l C i t y Bank i n Few York, o r any o t h e r member bank of t h e System anywhere, imagines i t i s g r e a t e r t h a n t h e F e d e r a l Reserve System and may d e f y and r e j e c t t h e c o n s i d e r e d p o l i c y of t h e f e d e r a l Reserve Board, i t s h o u l d a t l e a s t be given t o u n d e r s t a n d t h a t t h e P r e s i d e n t of such a bank w i l l n o t be p e r m i t t e d to have an o f f i c i a l i p a r t i n t h e management of t h e F e d e r a l Reserve System. " I do n o t know what t h e F e d e r a l "Reserve Board w i l l do about i t , b u t I have a very d e c i d e d c o n v i c t i o n a s t o what i t should do, and t h a t s w i f t l y . "The whole c o u n t r y h a s been a g h a s t f o r months and months a t t h e menacing s p e c t a c l e of e x c e s s i v e s t o c k gambli n g , and when t h e F e d e r a l Reserve Board m i l d l y s e e k s to a b a t e t h e danger by an a d m i n i s t r a t i v e p o l i c y , f u l l y s a n c t i o n e d by law, r a t h e r than by a p r o h i b i t i v e advance i n r e d i s c o u n t r a t e s , which might p e n a l i z e t h e l e g i t i m a t e b u s i n e s s of t h e e n t i r e c o u n t r y , an o f f i c e r of t h e System i s s u e s a d e f i a n c e and engages i n an a t t e m p t to v i t i a t e t h e p o l i c y of t h e F e d e r a l Reserve Board. "Whatever h i s a b i l i t i e s a s a banker may b e , o r howe v e r h i g h h i s c h a r a c t e r , the s p i r i t m a n i f e s t e d by Mr. M i t c h e l l t o t a l l y u n f i t s him f o r t h e o o s i t i o n of d i r e c t o r of a g r e a t F e d e r a l Reserve Bank. This i s not an age f o r t h e m a n i f e s t a t i o n s of a N i c h o l a s B i d d l e . " S e n a t o r G l a s s , i n t h e New York Times of A p r i l 2, 1929, i n replyt o t h e a t t a c k of Ex-Senator Owen who had defended Mr. M i t c h e l l , dec l a r e d t h a t t h e Reserve Board had t h e power t o remove Mr. M i t c h e l l and to compel r e s e r v e banks to r e f u s e t h e r e d i s c o u n t p r i v i l e g e to t h o s e engaged i n s p e c u l a t i o n . Senator Glass f u r t h e r s t a t e d : "Whether o r n o t t h e F e d e r a l Reserve Board should have removed Charles E. M i t c h e l l f o r h i s open d e f i a n c e of t h e B o a r d ' s a u t h o r i t y and h i s avowed a t t e m p t to f r u s t r a t e i t s a d m i n i s t r a t i v e p o l i c y , i s , of c o u r s e , a m a t t e r of o p i n i o n . I t was my c o n v i c t i o n , and s t i l l i s , X-6873 4 3 6 - 5 - " that the Soaird should hat# taken exactly that d-btidtit " T h i s should have been done p r o m p t l y , not so much, p e r h a p s , f o r t h e o f f e r by Mr. M i t c h e l l ' s Bank of 25 m i l l i o n s t o a dangerously extended s p e c u l a t i v e s t o c k market which t h e Board was c o n s e r v a t i v e l y t r y i n g to c u r b , a s f o r h i s d r a m a t i c a s s e r t i o n of a s u p e r i o r o b l i g a t i o n to t h e s t o c k s p e c u l a t o r s over a g a i n s t h i s o b l i g a t i o n t o t h e F e d e r a l Reserve System, of which Mr. M i t c h e l l i s a sworn d i r e c t o r . ' "He was well aware of t h e p o l i c y b e i n g p u r s u e d by t h e F e d e r a l Reserve Board; n e v e r t h e l e s s he s e t out w i t h a p p a r e n t d e l i b e r a t i o n to t h w a r t i t and t o b r i n g t h e a u t h o r i t y of t h e Board i n t o contempt. In t h i s he s u c c e e d ed. "The a u t h o r i t y of t h e Board to suspend o r remove Mr. M i t c h e l l or any o t h e r o f f i c e r or d i r e c t o r of t h e Hew York F e d e r a l Reserve Bank i s n o t a m a t t e r of o p i n i o n . I t i s so p l a i n t h a t d e n i a l of i t "betrays i g n o r a n c e of t h e law. "There i s no implied l i m i t a t i o n on t h e p r o c e d u r e t h u s s a n c t i o n e d . I f t h e r e were any, i t i s i n c o n c e i v a b l e t h a t i t would r e l a t e t o an o f f e n s e i n v o l v i n g a v i t i a t i o n of t h e B o a r d ' s v i t a l a d m i n i s t r a t i v e p o l i c i e s . "V j " I n s c o r e s of ways t h e Act l o d g e s w i t h t h e c e n t r a l Board a t Washington supremacy of c o n t r o l . I f t h e P r e s i dent of t h e N a t i o n a l C i t y Bank, who i s a l s o a Class A D i r e c t o r of t h e Hew York F e d e r a l Reserve Bank, can be p e r s u a d e d to b e l i e v e t h a t t h e F e d e r a l Reserve Act a u t h o r i z e s , r e s e r v e banks to r e d i s c o u n t p a p e r f o r s t o c k s p e c u l a t i v e p u r p o s e s he i s too simple to h o l d e i t h e r p o s i t i o n . Of c o u r s e , Mr. M i t c h e l l knows b e t t e r ; o t h e r w i s e t h e r e Was no p o i n t i n h i s p u b l i c d e f i a n c e of t h e F e d e r a l Reserve Board. He would have thrown h i s B a n k ' s $25,000,000 i n t h e s p e c u l a t i v e s w i r l a s a customary transaction. " T h i s s t o c k s p e c u l a t i n g w i t h f u n d s of F e d e r a l r e s e r v e banks i s by law p r e c l u d e d , a s i t was d i s t i n c t l y i n t e n d e d to b e . To say F e d e r a l r e s e r v e banks a r e n o t s u b j e c t to t h e a u t h o r i t y of t h e F e d e r a l Reserve Board i n making l o a n s i s t o b e t r a y ignorance of t h e l a w . " The Hew York Times of October 25, 1929, a l s o c o n t a i n s t h e f o l l o w i n g i n t e r v i e w by S e n a t o r G l a s s : "The p r e s e n t t r o u b l e i s due l a r g e l y to C h a r l e s Bi M i t c h e l l ' s a c t i v i t i e s , t h a t man more than 40 o t h e r s i s more r e s p o n s i b l e f o r t h e ^ r e s e n t s i t u a t i o n . Had t h e F e d e r a l r e s e r v e a c t e d and d i s m i s s e d him, t h e t r o u b l e might be l o s s . The c r a s h has shown t h a t s t o c k gambling has reached i t s l i m i t ; " (196-151) -IVComment, - E d i t o r i a l and O t h e r w i s e . R e p r e s e n t a t i v e Hamilton F i s h i n t h e Hew York Times of A p r i l 2, 1929, a t t a c k e d Senator Glass and defended Mr. M i t c h e l l , s t a t i n g t h a t he had a v e r t e d a p a n i c . He a l s o endorsed t h e recommendation of Mr. M i t c h e l l ' s Bank f o r an i n c r e a s e in r e d i s c o u n t r a t e s to 6$, e x p r e s s i n g t h e b e l i e f t h a t such a s t e p would be s u f f i c i e n t to end e x c e s s e s i n the stock market. He f u r t h e r s t a t e d t h a t Mr. M i t c h e l l ' s q u i c k t h i n k - i n g and a c t i n g s h o u l d have been commended i n s t e a d of condemned by Senator Glass. The New York J o u r n a l of Commerce, March 28, 1929, speaks of Mr. M i t c h e l l ' s announcement: "Reserve o f f i c i a l s c l a i m t h a t every a t t e m p t h a s been made by t h e F e d e r a l Reserve Bank of Eew York, w i t h t h e h e a r t y s u p p o r t of i t s d i r e c t o r s , to c u t down t h e p r a c t i c e of r e s o r t i n g to r e s e r v e banks f o r r e d i s c o u n t s . " I t p o i n t s out t h a t : "At t h e end of 1928 l o c a l b a n k e r s r e d i s c o u n t e d h e a v i e r i n o r d e r to ease the s t r a i n in t h e money market, and now t h e y p r o p o s e to do so a g a i n . On t h e b a s i s of such f a c t s a s t h e s e , t h e market and t h e p u b l i c a t l a r g e h a s g r a d u a l l y come to t h e c o n c l u s i o n t h a t t h e a p p e a l s of r e s e r v e banks and t h e i r d i r e c t o r s a r e n o t i n t e n d e d to be t a k e n v e r y l i t e r a l l y , and t h a t t h e y a r e r e a l l y i n t h e n a t u r e of exh o r t a t i o n s r a t h e r t h a n i n t h e n a t u r e of f i n a n c i a l p r e c e p t o r a d v i c e . There h a s been a g r e a t d e a l in t h e whole conduct of t h e Reserve System to s u s t a i n t h i s p o i n t of view, " i n c l u d i n g , of dduTse, t h e W^lt«kriown s t a t e m e n t of Governor Young to a d o n g r e s s i o n a l Committee to thd e f f e c t t h a t a l l was w e l l , f o l l o w e d "by speeches of "bankers to t h e same p u r p o r t , and then f i n a l l y by h i s u r g e n t r e q u e s t of l a s t February n o t to l o a n f o r s p e c u l a t i o n and not t o encourage s p e c u l a t i v e a c t i v i t i e s . " I t a l s o speaks of t h e l a c k of c o n f i d e n c e which h a s been g r a d u a l l y engendered through t h e b e l i e f t h a t l e a d e r s of f i n a n c i a l o p i n i o n do n o t mean e x a c t l y what t h e y s a y . S t a t e s t h a t i t would h e l p immensely i f we c o u l d g e t to some d e f i n i t e a c c e p t e d b a s i s of u n d e r s t a n d i n g on t h e whole q u e s t i o n which would b e j u s t a s sound and f o r c e f u l when one man's s t o c k s a r e going down a s when t h o s e of a n o t h e r have been s u b j e c t e d t o p r e s s u r e . Mr. David Lawrence in t h e Washington S t a r of F r i d a y , March 29, 1929, s t a t e s t h a t t h e Board h a s been d i s t u r b e d n o t so much b y t h e a c t i o n t a k e n by Mr. M i t c h e l l a s by h i s s t a t e m e n t , which Mr. Lawrence q u o t e s . Mr. Lawrence adds t h a t : , " H a t u r a l l y Mr. M i t c h e l l had t o borrow t h e 25 m i l l i o n d o l l a r s a t t h e F e d e r a l Heserve Bank of Few York, and by a g r e e i n g to l o a n t h i s money t h e Few York i n s t i t u t i o n , by i n f e r e n c e , a c q u i e s c e d i n h i s a c t i o n , f o r t h e F e d e r a l Reserve Board was o n l y i n t e r e s t e d i n b r e a k i n g down s p e c u l a t i o n and n o t i n f o r c i n g a s i t u a t i o n i n which money could n o t be had by anybody a t any p r i c e . To t h e e x t e n t t h a t t h e New York Board of d i r e c t o r s a r e presumed to have been a c t i n g i n harmony w i t h t h e F e d e r a l "Reserve Board, t h e s t a t e m e n t of Mr. M i t c h e l l i s r e c o r d e d a s u n f o r t u n a t e , i n t h a t i t may be c o n s t r u e d by t h e b a n k i n g world a s a c r i t i c i s m on h i s p a r t of t h e famous F e d e r a l R e s e r v e Board warning of February 1 4 t h . " " I t was not what Mr. M i t c h e l l d i d , b u t what he s a i d , t h a t caused d i s c u s s i o n i n o f f i c i a l q u a r t e r s h e r e , and f o r t h a t r e a s o n t h e Board i t s e l f i s not l i k e l y to r a i s e an i s s u e a t t h i s time; i n f a c t , Mr. M i t c h e l l ' s p o i n t of view was o u t l i n e d a t T h u r s d a y ' s m e e t i n g of t h e d i r e c t o r s of t h e F e d e r a l Reserve Bank of Hew York which was a t t e n d e d by r e p r e s e n t a t i v e s o f t h e F e d e r a l "Res e r v e Board a t Washington." , "The F e d e r a l Reserve Board i s determined to go to t h e l i m i t of i t s powers." . Ho f i n s t l l y added t h a t ! "The r a i s i n g of t h o r e d i s c o u n t r a t e i s t h e normal weapdn u s e d , b u t i n a s i t u a t i o n l i k e t h e p r e s e n t , which i s abnormal, something more d r a s t i c t h a n a mere r a i s i n g of t h e r e d i s c o u n t r a t e i s t a l k e d a b o u t . I t i s , i n a n u t s h e l l , t h e o r d e r i n g of t h e F e d e r a l r e s e r v e banks and b r a n c h e s to r e f u s e to r e d i s c o u n t a t a l l t h e p a p e r of member banks when p r e s e n t e d to g e t f u n d s t o a i d s p e c u l a t i o n * i t i s d i f f i c u l t to draw t h e l i n e between a s p e c u l a t i v e and a commercial c r e d i t , b u t t h e b u r d e n of p r o o f would b e on t h e b a n k i n g i n s t i t u t i o n , and t h e mere announcement of t h e o r d e r or r e g u l a t i o n , i t i s f e l t h e r e , would b e s u f f i c i e n t to t e l l t h e s p e c u l a t i v e element t h a t t h e F e d e r a l Reserve Board i s i n e a r n e s t , and w i l l n o t be defied." The Hew York Times, in an e d i t o r i a l in t h e e d i t i o n of March 30, 1929, s t a t e d i n p a r t a s f o l l o w s : "Yet i t a p p e a r s t h a t t h e g r e a t emphasis and p o s i t i v e n e s s w i t h which he ( S e n a t o r G l a s s ) h a s denounced t h e a c t i o n of t h e N a t i o n a l C i t y Bank, and some o t h e r banks i n ITew York, i n s t r i v i n g to a v e r t a money p a n i c t h i s p a s t week were some-' what m i s p l a c e d . " S e n a t o r Glass seems to have c o n f u s e d a temporary emergency w i t h a permanent p o l i c y . HThe banks d i d n o t come f o r w a r d w i t h f u n d s t o promote s p e c u l a t i o n b u t t o p r e v e n t what t h r e a t e n e d t o b e a s e r i o u s c r i s i s i n t h e money market "The endeavor was t o surmount a t h r e a t e n i n g c r i s i s . I t was o b v i o u s l y s u c c e s s f u l , and t h e p r e s u m p t i o n was t h a t t h e s e p a r t i c u l a r bank f u n d s were t h e r e u p o n withdrawn from t h e money m a r k e t . "There h a s been some i d l e t a l k t h a t t h e r e was an a g r e e ment to "peg" t h e c a l l money r a t e a t 15$. The mere s t a t e ment of t h i s shows how r i d i c u l o u s i t i s to suppose t h a t t h e movement was one to b o l s t e r w i l d s p e c u l a t i o n " P a y i n g 15$ f o r money to s p e c u l a t e w i t h c e a s e s to b e s p e c u l a t i o n and becomes i n s a n i t y . " S e n a t o r Glass does w e l l to h o l d up t h e hands of t h e F e d e r a l R e s e r v e Board i n t h e e f f o r t s which i t h a s made to keep t h e v.'hole c r e d i t system of t h e n a t i o n from b e i n g u p e e t . X-6873 "In t h i s n o s i t i o n i t i s probable that the great majority of c a u t i o u s and r e s p o n s i b l e bankers a g r e e w i t h him." (190-2) -Vffurther Comment. Approval of Mr, M i t c h e l l ' s c o u r s e . Annalist D. W. E l l s w o r t h . Mar. 29, 1929. 190 - 17. "Brooklyn D a i l y Eagle. 190 - 58. B a l t i m o r e Sun A p p a r e n t l y aooroves what he d i d b u t c r i t i c i s e s what h e s a i d . 190 - 58. F i n a n c i a l News. A p r i l 2, 1929. 190 - 145 (2) F i s h , Hamilton, Gong. A p r i l 3, 1929, 190 - 33. Fisher, Prof. Irving. A p r i l 1, 1929. 190 - 24. H a r t f o r d Courant. 190 - 58. New York Evening P o s t . 190 - 58. Hew York H e r a l d - T r i b u n e . March 29, 1929. 1 9 0 - 3. How York Times. March 30, 1929. 190 - 2 New York ^ o r l d . Mar. 28, 1929. 1 8 9 - 1 4 2 . Mar. 30, 1929. 190 - 16. Owen, Ex-Senator Mar. 31, 1929. 190 - 14. Spokane Sookesman-Beview. A p p a r e n t l y approves what ho d i d b u t c r i t i c i e o s what he s a i d . 190 - 58. X-6873 - : 10 - S p r i n g f i e l d Sejmblicaiu Approves what he d i d . C r i t i c i s e s what he s a i d , 441 190 - 58. Approval of Senator g l a s s ' s c r i t i c i s m of Mr. M i t c h e l l . San F r a n c i s c o C h r o n i c a l . 190 - 58. Lawrence, David. 190 - 5, R a l e i g h Hews and Observer. 190 - 58. Neutral Chicago D a i l y Brews. 190 - 58. Kansas C i t y J o u r n a l - P o s t . 190 - 58. Ambiguous Hew York J o u r n a l of Commerce. 189 - 138. He sumo The above q u o t a t i o n s seem t o show t h a t a s a r u l e t h e p r e s s of t h e c o u n t r y approved, o r a t l e a s t d i d n o t o b j e c t t o , what Mr. M i t c h e l l d i d t o r e l i e v e t h e money market and to a v e r t a t h r e a t e n e d p a n i c . Many of t h e p a p e r s , however, w h i l e a p p r o v i n g what he d i d , c r i t i c i s e d him s e v e r e l y f o r what he s a i d . —VI— P r o c e e d i n g s i n t h e F e d e r a l Reserve Board. March 28, 1929; Dr. M i l l e r t e l e p h o n e d from New York t h a t t h e b a n k e r s a r e v e r y angry b e c a u s e of Mr. M i t c h e l l 1 s i n t e r v i e w ; t h a t t h e y d i d n o t o b j e c t to h i s r e l i e v i n g t h e market to a v o i d p a n i c k y c o n d i t i o n s , b u t t h a t h i s i n t e r v i e w o v e r t h r e w b a n k i n g c o n t r o l of t h e s i t u a t i o n and s t a r t e d up s p e c u l a t i v e a c t i v i t y anew. X-6873 ,n. 442 Goverhdf touAg was asked by t h e Board t o c a l l up Mr. M i t c h e l l and a s k him t o inform t h e Board i n w r i t i n g j u s t what he s a i d i n h i s i n t e r v i e w . March 29, 1929s Dr. M i l l e r s t a t e d t h a t he met Mr. M i t c h e l l a t a m e e t i n g of t h e New York d i r e c t o r s ; t h a t Mr; M i t c h e l l was v e r y i r r i t a b l e and p e t u l a n t ; t h a t he ( M i t c h e l l ) t o l d him he was i n a b e l l i g e r e n t mood, and t h a t t h e F e d e r a l Reserve Act mast be changed to t a k e away t h e power of t h e Board, Dr. M i l l e r s t a t e d t h a t t h e sentiment i n New York was a g a i n s t Mr. M i t c h e l l a s h a v i n g g i v e n h i s i n t e r v i e w f o r t h e s e l f i s h p r e s t i g e of h i s Bank a t t h e expense of h i s b a n k i n g c o m p e t i t o r s ; t h a t o t h e r New York banks had done a s much a s , o r more t h a n , Mr. M i t c h e l l to r e l i e v e f i n a n c i a l stress. Dr. M i l l e r s a i d a l l was going well u n t i l Mr. M i t c h e l l gave out h i s i n t e r v i e w ; t h a t we could not y e t say whether t h a t i n t e r v i e w had blocked d i r e c t p r e s s u r e o r n o t ( p r e v i o u s l y h e had t o l d C. S. H. he f e a r e d i t h a d . ) The Board f i n a l l y a g r e e d on a l e t t e r to Mr. M i t c h e l l , and o r d e r e d i t sent. Governor Young a t f i r s t o b j e c t e d , s a y i n g t h a t Mr. M i t c h e l l might p u t t h e .Board i n a h o l e , l a t e r , however, he d i c t a t e d a l e t t e r couched more m o d e r a t e l y , and a l l a g r e e d to i t , Mr. James s a i d t h a t t h e Board should remove Mr. M i t c h e l l , a s demanded by S e n a t o r Glass in y e s t e r d a y ' s p a p e r s . Most of t h e Board f e l t t h a t we should send the l e t t e r and l a t e r d e c i d e what f u r t h e r to do. There was l i t t l e , i f a n y , c r i t i c i s m made i n t h e Board a s to what Mr. M i t c h e l l d i d , b u t s e v e r e c r i t i c i s m a s to what he s a i d . #6873 .12. ; 443 Ho a c t i o n was taken by t h e Board and t h e m a t t e r s t i l l remains on t h e docket as " u n f i n i s h e d "business"! -VIICorrespondence Between Federal Reserve Board and Mr. M i t c h e l l , On March 29, 1929, Governor Young sent t h e f o l l o w i n g l e t t e r : "The New York Herald-Tribune of Wednesday, March 27, p u b l i s h e d t h e f o l l o w i n g statement a t t r i b u t e d to you: 'So f a r as t h i s i n s t i t u t i o n i s concerned, we f e e l t h a t we have an o b l i g a t i o n which i s paramount to any F e d e r a l r e s e r v e warning, or a n y t h i n g e l s e , to a v e r t , so f a r a s l i e s w i t h i n our power, any dangerous c r i s i s in t h e money market. •While we a r e a v e r s e to r e s o r t i n g to r e d i s c o u n t i n g f o r t h e purpose of making a p r o f i t i n t h e c a l l market, we c e r t a i n l y would not s t a n d by and see a s i t u a t i o n a r i s e where money became impossible to s e c u r e a t any p r i c e . ' "At t h e r e q u e s t of t h e Federal Reserve Board anf f o r i t s i n f o r m a t i o n , I would a p p r e c i a t e i t v e r y much i f you would l e t me know whether you were c o r r e c t l y quoted." On A p r i l 1, 1929, Mr. M i t c h e l l r e p l i d d a s f o l l o w s ; " I acknowledge r e c e i p t of your l e t t e r of March 2 9 t h a s k i n g on t h e 7)art of t h e F e d e r a l Eeserve Board, i f , i n a s t a t e m e n t a c c r e d i t e d to me in t h e Hew York Herald Tribune of Wednesday, March 2 7 t h , I was c o r r e c t l y quoted. You w i l l r e a l i z e t h a t I d i d n o t w r i t e or give out any s t a t e m e n t , but a s t h e r e s u l t of t a l k i n g w i t h a r e p o r t e r f o r perhaps two or t h r e e minutes I was quoted in t h e a r t i c l e in q u e s t i o n . G e n e r a l l y speaking, I t h i n k t h e r e p o r t e r c o r r e c t l y expressed my view. "That a c r e d i t c r i s i s was not only t h r e a t e n e d b u t . d i d e x i s t on Tuesday, March 2 6 t h , i s a f a c t t h a t h a s g e n e r a l acknowledgment. " I f t h e r e can be o b j e c t i o n on t h e p a r t of your Board to t h e s t a t e m e n t , I assume i t must have r e f e r e n c e to t h e f o l l o w i n g words, ' s o f a r a s t h i s i n s t i t u t i o n i s concerned we f e e l t h a t we have an o b l i g a t i o n which i s paramount to any F e d e r a l r e s e r v e warning, or a n y t h i n g e l s e . 1 X-6873 4: — 13 — "One of t h e a c t u a t i n g r e a s o n s f o r t h e f o r m a t i o n of t h e F e d e r a l Reserve System was to avoid c r e d i t and c u r r e n c y c r i s e s and though in t h e f o r m a t i o n of t h e System t h a t "became a F e d e r a l r e s e r v e r e s p o n s i b i l i t y , n e v e r t h e l e s s I do n o t b e l i e v e , and I do n o t conceive t h e p u b l i c a s b e l i e v i n g , t h a t such banks a s o u r s were t h e r e b y r e l i e v e d of a l i k e r e s p o n s i b i l i t y , and I conclude t h a t t h e o b l i g a t i o n f o r t h e f u l f i l l m e n t of t h a t i n s t i t u t i o n a l r e s p o n s i b i l i t y a t any c r i t i c a l moment i s paramount to the maintenance of a Fede r a l R e s e r v e Board g e n e r a l p o l i c y . I t was our assumed o b l i g a t i o n i n t h a t c r i t i c a l moment t h a t i s r e f e r r e d to i n the a r t i c l e i n q u e s t i o n . "Our p o s i t i o n r e g a r d i n g t h e n e c e s s i t y of c u r b i n g s p e c u l a t i o n and of r e s t r a i n i n g t h e u n h e a l t h y growth of t h e c r e d i t s t r u c t u r e h a s so o f t e n b e e n p u b l i c l y s t a t e d and so w e l l known everywhere t h a t I assume t h e r e i s no need f o r e l a b o r a t i o n t h e r e o n to your Board." VIIIWhat Mr. M i t c h e l l Did, a s d i s t i n g u i s h e d from what h e S a i d . The f o l l o w i n g t a b l e shows borrowings f r o n t h e F e d e r a l r e s e r v e banks and c a l l l o a n s made (1) 3y t h e N a t i o n a l C i t y Bank, (2) By 22 banks i n Hew York C i t y , from F r i d a y , March 22nd, through S a t u r d a y , March 3 0 t h : Date F r i . Mar.22 S a t . * 23 Won. " 25 Tues. " 26 Wed. " 27 Thur s . " 28 F r i d . » 29 S a t . " 30 ( I n m i l l i o n s of d o l l a r s ) 22 banks in Few York City : NATIONAL CITY BANK Borrowings from : Borrowings : Call l o a n s Federal • from F e d e r a l : C a l l l o a n s r e s e r v e banks : r e s e r v e bank: _____ 14 0 25 24 35 - 137 138 144 150 141 135 135 135 114 157 191 177 190 154 137 154 812 833 842 809 802 785 826 848 (208 - 116.) X-6873 I t i s i n t e r e s t i n g a l s o t o n o t e t h a t t h e N a t i o n a l City Bank i n t h e f o l l o w i n g 12 weeks, borrowed o n l y on 11 days. I t seems t o me t h a t t h e above f i g u r e s could h a r d l y s e r v e a s a conc l u s i v e d e m o n s t r a t i o n of borrowing from t h e F e d e r a l r e s e r v e bank i n o r d e r to i n c r e a s e c a l l l o a n s . Between F r i d a y , March 22nd, and S a t u r d a y , March 2 3 r d , b o r r o w i n g s d e c r e a s e d to n o t h i n g , w h i l e c a l l l o a n s i n c r e a s e d s l i g h t l y . From Monday, March 2 5 t h , to Tuesday, March 2 6 t h , borrowings decreased 1 m i l l i o n , while c a l l loans increased 6 m i l l i o n s . From Tuesday, March 2 6 t h , to Wednesday, March 2 7 t h , b o r r o w i n g s i n c r e a s e d 11 m i l l i o n s , w h i l e c a l l l o a n s d e c r e a s e d 9 m i l l i o n s . From Wednesday, March 2 7 t h , through t h e r e s t of t h e week, t h e borrowings were a l l p a i d o f f , w h i l e t h e c a l l l o a n s were r e d u c e d on Thursday to 135 m i l l i o n s and remained a t t h a t f i g u r e through Thursday, F r i d a y , and S a t u r d a y . Such a r e c o r d would of i t s e l f h a r d l y have j u s t i f i e d t h e Board i n removing Mr. M i t c h e l l on t h e ground of having borrowed s p e c i f i c a l l y i n o r d e r t o o b t a i n F e d e r a l r e s e r v e c r e d i t f o r s p e c u l a t i v e u s e s , even though such u s e s , i n u n r e a s o n a b l e amounts, would undoubtedly have been in v i o l a t i o n of t h e F e d e r a l Reserve Act and of t h e p o l i c i e s of t h e Board a s announced, by R e g u l a t i o n s or o t h e r w i s e , t h e r e u n d e r . -IXD i s c u s s i o n a s to what Mr. M i t c h e l l a c t u a l l y s a i d i n h i s I n t e r v i e w s . The q u e s t i o n l e f t f o r c o n s i d e r a t i o n would seem to be whether t h e Board would have been j u s t i f i e d i n removing Mr. M i t c h e l l f r o m o f f i c e - X-6873 -15 - 446 a s a Glass A D i r e c t o r , b e c a u s e of what he s a i d in t h e above quoted i n t e r views. The p u r p o r t of what he s a i d was t h a t he c o n s i d e r e d t h a t h i s Bank had an o b l i g a t i o n * paramount to any F e d e r a l r e s e r v e warning o r a n y t h i n g e l s e , to a v e r t , a s f a r a s i t l a y in h i s power, any dangerous c r i s e s i n t h e money m a r k e t , w i t h an i n t i m a t i o n , v e r y C l e a r l y e x p r e s s e d , t h a t he would n o t h e s i t a t e to r e d i s c o u n t a t t h e F e d e r a l r e s e r v e bank f o r t h i s purpose. T h i s was c l e a r l y , and was i n t e n d e d to b e , a d e l i b e r a t e d e f i a n c e of t h e a u t h o r i t y of t h e F e d e r a l Reserve Board, and an a t t a c k on i t s p o l i c i e s a s he a p p a r e n t l y conceived them. T h i s d e f i a n c e and a t t a c k was made by a Class A D i r e c t o r of t h e F e d e r a l Reserve Bank of Few York who had t a k e n o a t h t h a t he would n o t knowingly v i o l a t e , o r w i l l i n g l y p e r m i t to be v i o l a t e d , any of t h e p r o v i s i o n s of t h e F e d e r a l Reserve Act. This i n t e r v i e w , moreover, c o n s t i t u t e d a d i r e c t i n c e n t i v e to specul a t o r s to p r o c e e d i n t h e i r orgy under t h e b e l i e f t h a t t h e s p e c u l a t i v e market would be s u p p o r t e d by t h e banks by t h e u s e of F e d e r a l r e s e r v e credit. In my o p i n i o n , t h i s s t a t e m e n t of Mr. M i t c h e l l would have j u s t i f i e d t h e Board i n removing him, even on t h e assumption, a s to which I express no o p i n i o n , t h a t h i s a c t i o n in r e l i e v i n g t h e money market may have been j u s t i f i a b l e , and even though, i n f a c t , he d i d n o t s e c u r e any a d d i t i o n a l r e d i s c o u n t s to p r o v i d e t h e f u n d s he p l a c e d , o r p r o p o s e d to p l a c e , on t h e c a l l loan market. X-6873 — 16 ~ 447 -xF i n a l Conclusion. Assuming a l l of t h e above to be t r u e , however, i t was n e c e s s a r y f o r t h e Board to c o n s i d e r p o s s i b l e consequences which might a r i s e fro® t h e e x e r c i s e of i t s power of removal i n t h i s c a s e . I t s h o u l d be remembered t h a t t h e banking s i t u a t i o n a t t h a t time was i n a s t a t e of h i g h t e n s i o n , and t h a t t h e b r e a k was one of t h e s h a r p e s t i n Stock Exchange h i s t o r y . I t should be f u r t h e r remembered, t h a t even a t t h e l o w e s t p r i c e s of Tuesday, March 26, 1929, t h e i n d u s t r i a l a v e r a g e s were l e f t h i g h e r t h a n a t t h e p e a k of t h e boom i n November, 1928, so t h a t t h e r e was ample room f o r a f u r t h e r d i s a s t r o u s b r e a k should t h e tension c o n t i n u e , o r should some new s o u r c e of ap p reh en s i o n a r i s e . Looking backward, I f e a r t h a t t h e removal o f Mr. M i t c h e l l a t t h a t time might have brought about t h e v e r y c o l l a p s e which f i n a l l y came i n October - s i x months l a t e r . I f such had been t h e r e s u l t of t h e B o a r d ' s a c t i o n , I am s u r e i t would have f e l t t h a t t h e p r i c e p a i d was too h i g h f o r e x p e l l i n g Mr. M i t c h e l l . The F e d e r a l Reserve Board, a s i t s t a t e d i n i t s warning of Febr u a r y 7 , 1929, n e i t h e r p l a n n e d nor d e s i r e d a c r a s h i n t h e New York stock market. On t h e c o n t r a r y , I b e l i e v e i t saved t h e c o u n t r y from such a c r a s h by i t s r e f u s a l to adopt t h e a f f i r m a t i v e r a t e i n c r e a s e p o l i c y of t h e F e d e r a l Reserve Bank of Hew York. The Board, by i t s p o l i c y of d i r e c t p r e s s u r e under t h e 5$ r a t e , X-6873 - 1? - "• 448 simply sought to p r o t e c t k ^ l d u l t u r e and commerce by g r a d u a l l y w i t h drawing F e d e r a l r e s e r v e c r e d i t from t h e s p e c u l a t i v e c h a n n e l s i n t o which i t had seeped, and I f e l t a t t h e time t h e r e was a t l e a s t some hope t h a t t h i s could "be done w i t h o u t b r i n g i n g on a c r i s i s in t h e s t o c k market. The f i n a l c r a s h of October, 1929, in my o p i n i o n , came n o t from t h e withdrawal of F e d e r a l r e s e r v e c r e d i t from s p e c u l a t i v e c h a n n e l s , b u t from t h e i n c r e a s e of s p e c u l a t i v e c r e d i t i n t h o s e c h a n n e l s b r o u g h t about by t h e a v a l a n c h e of " b o o t l e g g i n g " c r e d i t c o n s i s t i n g of l o a n s 11 f o r o t h e r s " over which t h e F e d e r a l Reserve System had no c o n t r o l , - , which a v a l a n c h e made t h e s p e c u l a t i v e c r e d i t s t r u c t u r e so t o p - h e a v y t h a t i t f i n a l l y b r o k e of i t s own w e i g h t . I t would c e r t a i n l y have been most u n f o r t u n a t e i f t h e Board, h a v i n g saved t h e c o u n t r y from a c o l l a p s e i n t h e s t o c k market by b l o c k i n g t h e p o l i c y of t h e F e d e r a l Heserve Bank of New York i n e n t e r i n g upon i n c i s i v e , r e p e a t e d i n c r e a s e s i n d i s c o u n t r a t e s , had f o u n d t h a t by t h e e x p u l s i o n of Mr. M i t c h e l l , under t h e t e n s e banking c o n d i t i o n s a t t h e t i m e , i t had brought on t h e v e r y c r i s i s i t hoped i t c o u l d avoid through t h e o p e r a t i o n of d i r e c t p r e s s u r e upon banks to r e d u c e t h e i r b o r r o w i n g s , and I am of t h e o p i n i o n t h a t t h e Board showed good j u d g ment i n f a i l i n g t o v i s i t t h i s p e n a l t y upon him, however r i c h l y i t may have been d e s e r v e d . In t h i s c o n n e c t i o n , a t t e n t i o n should be c a l l e d t o Mr. M i t c h e l l ' s g r o t e s q u e m i s i n t e r p r e t a t i o n of c r e d i t c o n d i t i o n s between t h e time of t h e above i n t e r v i e w s and t h e f i n a l c r a s h i n October. For example, on X-6873 September 23, 1929, he s t a t e d i n an i n t e r v i e w t h a t t h e r e was no o c c a s i o n f o r worrying about "brokera l o a n s or c r e d i t c o n d i t i o n s ; on October 22, 1929, r e t u r n i n g from Europe, he s t a t e d t h a t c o n d i t i o n s were sound, and t h a t many s e c u r i t i e s were s e l l i n g a t p r i c e s below t h e i r r e a l v a l u e ; on t h e same day, h e announced, w i t h almost s a r d o n i c humor, t h a t t h e p u b l i c was s u f f e r i n g from b r o k e r s l o a n i t i s ! As above s t a t e d , t h i s m a t t e r i s now on t h e docket of t h e Board a s u n f i n i s h e d b u s i n e s s , and can be brought up a t any time f o r f i n a l d e t e r m i n a t i o n b y any member. In my o p i n i o n , however, i t would be b e t t e r f o r t h e Board to l e a v e Mr. M i t c h e l l i n t h e morass i n which he h a s p l a c e d h i m s e l f , and n o t i n c u r t h e r i s k of making a m a r t y r of him by any f u r t h e r p r o c e e d i n g s .
@FedFRASER