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for t h e


of th e






e ig h t

atm an

The Late Vice Chairman of the
Joint Economic Committee


Printed for the use of the Joint Economic Committee



For side by the Superintendent of Documents, U.S. Government Printing Office
Washington, D.C. 20402 - Price $2.25
Stock Number 052-070-03861-6

(Created pursuant to sec. 5 (a ) o f Public Law 804,79th Cong.)
HUBERT H. HUMPHREY, Minnesota, Chairman
RICHARD BOLLING, Missouri, V ice Chairman
HENRY S. REUSS, Wisconsin
W ILLIAM S. MOORHEAD, Pennsylvania
GILLIS W. LONG, Louisiana
OTIS G. PIKE, New York
MARGARET M. HECKLER, Massachusetts
J o h n R . S t a r k , E xecu tive D irector
R ic h a r d F. K a u f m a n , General Counsel


*EDWARD M. KENNEDY, Massachusetts
WILLIAM V. ROTtH , J r., Delaware

E c o n o m is t s
W il l ia m R . B u b c h n b r
G . T h o m a s Cator
W i l l ia m A. C o x
L u c y A. F a l c o n e

R o b e r t d . H a m r in
Sa r a h J ac k so n
J o h n R . K a r l ik
L . D o uglas L ee

P h i l i p M c M a r t in
R a l p h L . S c h l o s s t e in
Cou rte n ay M . Sl a te r
G eo rg e R . T y l e r

A r t h u r J. K eefpb, Professional Staff Mem ber, Subcommittee on Economic Progress
M i n o r it y
C h a r l j &s

h. B r a d f o r d

D. K r u m b h a a r , Jr.
Ma&kR. P o l i c i n s k i

G eorge

M. C a t h e r i n e


il l e r

Decem ber 28,1976.
To the Members of the Joint Economic Committee:
This study of the history of the Federal Reserve System, in its way,
is an epitaph to a charter member of the committee and one of the most
public interest minded Members of Congress, the late Representative
Wright Patman, who died March 7,1976.
It is the last project in his long effort to convince the Congress and
the American public that a stable, full employment economy requires
meaningful reform of the Federal Reserve System and Federal bank
regulatory agencies. To this end the study and the accompanying docu­
ments, herewith transmitted to members of the committee, reflect his
commitment to “educate” his colleagues and the people throughout the
Nation about the Federal Reserve System, how and why it came to be
formed, the way in which it functions, the crucial effect its activities
have on our economy, and its relationship to the American banking
industry and other financial institutions.
In essence, the study is a final demonstration of Wright Patman’s
unswerving faith in our democratic system and the people of the Na­
tion. He never doubted that the American public would demand change
if it was armed with the facts. As a result, he devoted much of his
career, both as chairman and vice chairman of the Joint Economic
Committee and later as chairman of the House Banking and Currency
Committee, to sustaining a public dialog concerning the intricacies of
the Federal Reserve and the significance of its monetary policies to the
welfare of the Nation.
The core of his concern with the Federal Reserve System was the
way in which its monetary policies affect the availability and cost of
credit to “the common people—the little people who go out and fight
for the Nation during time of war and build it up in peacetime.” Many
of us who served with him on the Joint Economic Committee, which
was established by legislation which he cosponsored, can still hear him
lecturing the Federal Reserve on the relationship between monetary
policy and interest rates which “affect the price of groceries on the
shelf” and all other products and services which are essential to the
working people of the Nation.
In this respect he was convinced that establishment of a “good, re­
liable source of funds at reasonable cost” is essential to meeting the
Nation’s priority needs—solving the country’s chronic low- and moderate-income family housing problems, providing State and local gov­
ernments with the resources to finance vital public works and facilities
and assuring that small business achieves and sustains a position of
real competitive strength in the market place.
As chairman of the Subcommittee on Economic Progress of the
Joint Economic Committee, Mr. Patman authorized and personally di-

rected this detailed study of the Federal Reserve, which was conducted
by Prof. Arthur Keeffe. The project was still underway at the time of
Mr. Patman’s death. Professor Keeffe completed the research then
underway, carrying the history of the agency from its inception in 1918
through the mid-1960’s. It is hoped that at some future date the com­
mittee will be able to undertake additional research which will com­
plete this historical record of the Federal Reserve.
Among other things the study chronicles the special session of Congrass which adopted legislation establishing the Federal Reserve Sys­
tem, how the Federal Reserve banks were organized, how the New
York Bank came to occupy its prominent position in the System, the
organization and operation of the Open Market Committee, the legis­
lation of 1983 which altered the structure of the System, the removal of
Federal Reserve Board Chairman Marriner Eccles by President Tru­
man, and the battle between President Johnson and Federal Reserve
Board ^airman William McChesney Martin over monetary policy.
There follows an appendix which includes correspondence and
speeches by Mr. Patman dealing with operations of bank holding com­
panies, bank disclosure, the adequacy of bank regulation in connection,
with the failure and subsequent sale of the FranUin National Bank, the
advisability of allowing foreign branches of TJ.S. banks to underwrite
securities while they are prohibited from doing so domestically, the
controversial Federal Reserve monetary policy actions which resulted
in expanding the money supply while President Nixon was running for
reelection in 1972, and' the restrictive monetary policy adopted by the
Federal Reserve in 1975 which ran counter to the tax reductions voted
by Congress in that year.
The appendix is highlighted by two well-known law review articles
by Mr. Patman, “The Federal Reserve System: A Brief for Legal
Reform,” and, “What’s Wrong With the Federal Reserve System and
What To Do About It.” These two articles present the basic rationale
articulated over the years by Mr. Patman for meaningful reform of the
Federal Reserve System— proposals which, thanks in large part to his
determined efforts, have in some instances finally been moved to the
forefront of congressional consideration.
The reforms proposed by Mr. Patman include:
1. Reducing the terms of Federal Reserve Board members from
14 to 5 years and making the term of Board Chairman coterminus
with that of the President to help assure that monetary policy con­
forms with fiscal policy.
2. Canceling all but $10 billion of the $82 billion in Federal
securities held in the Federal Reserve’s open market trading port­
folio and requiring the System to operate on appropriated funds,
thus making it totally accountable to Congress and the administra­
tion for its policies and activities. The $10 billion remaining in
the portfolio would be sufficient to implement monetary policy
3. Requiring the Federal Reserve to be subject to full-scale
audits conducted by the General Accounting Office.
4. Creating a single Federal bank regulatory agency to per­
form the duties that are now performed by the Federal Reserve,
the Comptroller of the Currency and the Federal Deposit Insur-

ance Corporation in order to eliminate costly overlapping juris­
dictions and contradictory regulatory decisions.
It is in his advocacy of reform of the Federal Reserve System that
Mr. Patman provided his most valuable service to the Congress and
the Nation. No one had equaled the tenacity with which he has en­
deavored to rivet national attention on the Federal Reserve Board and
the Open Market Committee and tried to hold them accountable to
the American people. His work in this field alone has proven to be of
enormous importance.
It is a source of both pride and pleasure for me, as chairman of the
committee, to see the publication of this study. It conveys information
of lasting value and it traces dramatic chapters in the congressional
career of a man whose place in history as one of the Nation’s most dedi­
cated public interest champions is secure.
Artnur John Keeffe, of the JEC staff took major responsibility for
the preparation of the manuscript with the assistance of Jane D’Arista
of the staff of the House Banking and Currency Committee. The fol­
lowing also provided research and editorial assistance: Robert Abrams,
Dennis Braddock, Madelon Campbell, John Cummins, Adele Geffen,
Eric Gressman, Faith Grossnickle, Harry Jorgenson, Francine Kushner, Peter Lahey, William Francis Larkin, Robert Lord, Jean Danneberg O’Malley, John D. Raffaelli, and Paul Tierney.

H ubert H . H umphrey,

Chairman, Joint Economic Committee,


Letter of transmittal_____ . . . ____ . ______ __ « . . . ________ . . . . . . . . .

The Federal Reserve Act of 1913 becomes law________________ _
The Federal Reserve goes into operation______________ ____ . . .
Postwar adjustment, 1919-21_______________________________
How the New York bank came to take over all open market opera­
tions________________________ _________________ •_______ _
Monetary policy, 1923-28_________________________________ _
Andrew W. Mellon__ ________________________________ . . . . .
The history of the payment of adjusted-service certificates of
World War I................................................................. . ...........
The Banking Act of 1933_____________________________
The Banking Act of 1935_____________________________
Marriner Eccles before and after F. D. R ____________________ The disagreement between President Johnson and William
McChesney Martin on the Reserve Board’s December 1965
decision to raise interest rates____________________ . . . ____ Appendixes

I. Law Review Articles of Wright Patman
“ The Federal Reserve System: A Brief for Legal Reform,” St. Louis Uni­
versity Law Journal, vol. 10 at page 299, 1963________________ __
“ What's Wrong With the Federal Reserve and What To Do About It,”
American Bar Association Journal, vol. 61 at page 179, 1975_. __ __ _
II. Letters of Wright Patman
Letter of February 24, 1975, by Mr. Patman complaining to Ray Garrett,
Jr., then Chairman of the SEC with respect to certain nondisclosures
ana accounting practices of Citicorp in its prospectus for the sale of
$650 million of floating notes redeemable on demand on and after June
1, 1976.._____________________ . . . . ___________ _________ ____
On February 24, 1975, Mr. Patman also spoke on this subject to the
House of Representatives. His speech to the House appears at p. H 1117
and omitting the above letter to Ray Garrett, Jr.. is printed at the end
of the letter...____ . . . _________ ___________________ . . . ___ ___
A series of letters by Wright Patman as yice chairman of the Joint Eco­
nomic Committee with respect to the sale of the Franklin National Bank
to six of Europe’s largest banks:
Letter of April 24, 1975, to Arthur F. Bums, Chairman of the Board
of Governors of the Federal Reserve System raising five questions;
namely, whether the six European banks that own EuropeanAmerican Bank and Trust Co. should not be subjected to the Bank
Holding Company Act, whether the bank’s sister institution, European-American Banking Corp., likewise owned by the same six
European banks, is not doing a bank business in violation of the
Glass-SteagaU Act, and whether the ownership by each of these
foreign banks of subsidiaries that underwrite security issues does not
also violate the Glass-Steagall Act?___________________ ______
Letter of May 14, 1975, to AttomeyGeneral Edward H. Levi with
a memorandum of law asking the Attorney General to investigate
whether the purchase of Franklin National Bank by six of Europe’s
largest banks was not a per se antitrust offense____________. . .

Letter of May 27, 1975, to Attorney General Levi asking him to
oppose an application by a joint venture of four American bank
holding companies to establish a new bank in New York State,
together with certain Arab and French banks to be named “ United
Bank, Arab and French” ---------------------------------------------------Letter of June 26, 1975, from George W. Mitchell, Vice Chairman of
the Board of Governors of the Federal Reserve System, together
with a staff memorandum of law in reply to Mr. Patman’s letter of
April 24, 1975, to Chairman Bums and his May 27, 1975, letter to
Attorney General Levi------------------------------------------------------Letter of July 2,1975, by Senator William Proxmire to Vice Chairman
Mitchell of the Federal Reserve supporting Mr. Patman’s letter
of April 24, 1975, and asking the Federal Reserve to hold a hearing
before an administrative law judge to determine whether one or
more of the six banks which own European-American Bank and
Trust Co. as a joint venture control it so as to become subject to the
Bank Holding Company Act— -------------------------------------------Letter of July 18, 1975. from Thomas E. Kauper, Assistant Attorney
General, Antitrust Division, in reply to Mr. Patman’s letters of
May 14 and 27, 1975, in which he defends his approval of the pur­
chase of Franklin National Bank by European-American Bank
and Trust Co__________________________________ ________ _
Letter of August 1, 1975, by Mr. Patman to Attorney General Levi
inquiring whether Mr. Kauper’s letter of July 18, 1975, has his
approval and asking if so, wno is to present Mr. Patman’s point of
view______________________ ____ ___ ______________ __
Letter of August 4, 1975, by Mr. Patman to Mr. Mitchell making
three point®:
(a) Asking with Senator Proxmire for an administrative judge
to determine who controls European-American Bank and
Trust Co.;
(b) Protesting the grandfather clause in the Federal Reserve’s
foreign bank bm that would give congressional blessing to
European-American’s illegal acquisition of Franklin Na­
tional Bank; and
(c) Contending that it is illegal for the Fed to permit MorganGuaranty and some dozen other American banks to engage
in a securities business abroad which Glass-Steagall pro­
hibits them from doing at home----------------------------------Letter of November 20; 1975, frotn George Mitchell, Vice Chairman
of the Federal Reserve to Mr. Patman enclosing staff memo de­
fending the right of Edge Act Corporations and their subsidiaries
to do a securities business overseas that Glass-Steagall prohibits
their doing at home---------------------------- ---------- ----------------Letter of November 26, 1975, enclosing to George Mitchell, Vice
Chairman. Federal Reserve, a copy of the letter Mr. Patman
wrote to Senator Harrison Williams as to six directions his subcom­
mittee of Senate Banking might take in its proposed study of the
Glass-Steagall Act; namely:
(a) Consider plugging loopholes in Glass-Steagall pointed out
by Winthrop Aldrich and mentioned in an enclosed Busi­
ness Week article of December 9, 1933;
(b) Determine whether American banks through Edge Act
Corporations can do overseas a securities business GlassSteagall prohibits their doing at home, and enclosing a
study by Mir. Patman’s staff;
(c) Requesting Senator Williams to investigate how MorganGuaranty’s Edge Act Corporation was allowed to hold a
one-third interest in Morgan Cie, a Paris securities firm,
two-thirds of which Morgan Stanley then owned;
(d) Enclosing the tombstone notice of a loan of $100 million to
Peru arranged by Wells Fargo Ltd. and asking Senator
Williams to investigate how our banks are able to loan to
foreign countries without SEC supervision;








(e) Ascertain whether as an enclosed article in the New York
magazine, December 1, 1975, indicates there is an American
bank exposure to foreign countries of over $25 billion;
(j) Confirm that Franklin National has been unable to sell
$500 million of such loans; and
(g) Enclosing an article (Sept. 15, 1975, from Forbes) indicating
Senator Williams is to investigate domestic violations of
Glass-Steagall and urging him to do so---------------- - - - - - Letter of December 29, 1975, by Attorney General Edward H. Levi
to Mr. Patman saying he agrees with Assistant Attorney General
Kauper that six of the largest banks in Europe are free to form a
joint venture and purchase the Franklin National Bank— - - -----Letter of February 24, 1976, by Wright Patman to Attorney General
Edward H. Levi asking him to rule:
Whether European-American Banking Corp. organized under
article 12 of the New York Banking Law is a [‘bank” within
the meaning of the Glass-Steagall Act enclosing a Patman
staff study which concludes it is a “bank” ; and whether if his
answer is that it is not a “bank,” how this point of law;
The legality of a joint venture’s buying Franklin under our
antitrust laws; and
The question whether the six European banks are subject to the
Bank Holding Company Act and how this question can be pre­
sented to a court for decision when the Attorney General
refuses to do so--------------- ----- —
--------------- - - -----Letter of January 29, 1976, inquiring from Attorney General
Edward H. Levi whether the Board of Governors of the Federal
Reserve System had the legal right to name the new $50 million
Federal Reserve Building in honor of William McChesney Martin—
III. Speeches of Wright Patman in the Congressional Record
Congressional Record of July 8, 1975, at p. H 6370 wherein Mr. Patman
questions the methods the three banking agencies employed in
(a) The United States National Bank at San Diego;
(b) The Franklin National Bank in New York; and
(c) The Security National Bank on Long Island;
and questions in particular the rights of both creditors and stockholders,
as well as the Federal Deposit Insurance Corporation with respect to the
$1.7 billion advance to Franklin by the Federal Reserve----------------- --Congressional Record, March 14,1975, at p. H 1774 wherein Mr. Patman
contrasts the few changes in the discount, Federal funds and prime
rates prior to Dr. Arthur F. Burns becoming Chairman of the Board of
Governors of the Federal Reserve System and pointing out how Federal
Reserve under Bums increased the money supply in 1972 to reelect
President Nixon and thereafter abruptly reduced it, thereby bringing on
the recession of 1974-------------------------------------------------- --- --------Congressional Record, October 31,1975, at p. H 10539 wherein Mr. Patman
points out how the Federal Reserve sabotaged the tax cut the Congress
ordered in the spring of 1975.---------------- ------------------------ - —
Congressional Record, November 4,1975, at p. H 10621 wherein Mr. Patman
points out the conflict of interest inherent in Dr. Bums dual role as
Chairman of the Board of Governors of the Federal Reserve System and
as Chairman of the Committee on Interests and Dividends which led to
the sham “dual prime rate” ... ------------ ------------------ ------Congressional Record, December 18, 1975, at p. H 13023 wherein Mr.
Patman points out the extreme extent of concentration in this Nation s
banking industry_____ ___________________________________ - —Congressional Record, February 16,1976, at p. H 978 wherein Mr. Patman
points out the poor record of the Federal Open Market Committee in
achieving its own goals for monetary expansion, due to either in­
competence or duplicity______________________________________









In 1913 some Americans could recall five panics: Black Friday in
1869 when Jay Gould and “Jubilee” Jim Fisk cornered gold; Black
Thursday, 18f3, when, after wild speculation in railroaxl stocks, the
Cooke banking house failed; the panic of 1884 when President Grant’s
brokerage firm, Grant and Ward, and the Marine National Bank,
failed: the panic of 1893 when Baring Brothers in London failed, and
the panic of 1907 when Heinze and Morse, to their regret, cornered
copper, (Robert Sobel, “Panic On Wall Street: A History of America’s
Financial Disasters,” MacMillan Co., New York, 1968).
B la ck Fbiday 1869

The panic of 1869 descended on Wall Street after two speculators,
Jay Gould and “Jubilee” Fisk, unsuccessfully tried to corner thegold
market by purchasing the metal at artificially inflated prices. Tneir
scheme failed when the Treasury, under President Grant’s orders, put
an additional $10 million in gold on the market. However, before news
of the imminent crash became public, Gould and Fisk managed to pull
out with their share, leaving other speculators to bear tremendous
Undaunted by the gold fiasco, Gould went on to find success in rail­
road speculation. “Jubilee” Jim Fisk met quite another fate. When
Fisk ceased making payments to Edward Stokes who shared his
mistress, Josie Mansfield, Stokes released to the press Fisk’s love letters,
and on January 6,1872. shot and killed him as he ascended the stairs
of the Grand Central Hotel in New York. (Sobel, supra, 116-143.)
B la ck Thursday 1873

A year after Fisk’s death, Jay Cooke’s wild speculation in railroad
stocks and the failure of his bank resulted in another panic. With the
help of Horace Greeley and other influential personalities, Cooke, him­
self a well respected Wall Street figure, duped many investors into
taking stock in the Northern Pacific Railway. Its problems were no
different from those of other railroads at the time, or of real estate
investment trusts today, with overexpansion of borrowed money it
could not repay.
As a result, Jay Cooke’s banking house closed its doors on Septem­
ber 17,1873, causing the New York Stock Exchange for the first time
in its history to close, and the Nation for the next 6 years to wallow in
the panic of 1873. (Sobel, supra, 154-196.)
P resident G ran t’s P an ic op 1884

Just as we were recovering from the devastating effects of the de­
pression of 1873, Wall Street experienced a sudden relapse—the fail-


ure of Grant and Ward and the Marine National Bank in 1884. Grant’s
partner, Ferdinand Ward, and James D. Fish, President of Marine Na­
tional, used the funds of investors and depositors to play the stock
market. Bad investments outnumbered good, and both men sustained
heavy losses at the expense of unwary Marine National depositors.
Once the shaky condition of Marine National was revealed its de­
positors wasted no time in withdrawing their funds. The failure
sparked a run on other banks, and the large Metropolitan Bank failed
shortly thereafter. Numerous banks and brokerage houses followed
As a partner of the fallen brokerage firm, Grant lost his entire
fortune. Aided by one of his administration’s most ardent critics,
Samuel Longhorne Clemens (Mark Twain), Grant paid his many
debts by writing his memoirs which became a best seller. But Grant
did not enjoy his new fame as an author for long because he suc­
cumbed to cancer of the throat in the fall of 1885. (Sobel, supra
P an ic o f 1893
But the panic phenomenon did not end with Grant’s death. Along
came the panic of 1893. During the last decade of the 19th century
the country suffered from a depression that would not be surpassed in
severity for 30 years. (Sobel, supra, ch. 7 at 230-272.)
At the turn of the 19th century America was a land of ubiquitous
dissent. Business interests wanted a higher tariff to prevent entry of
foreign goods into the country. Farmers wanted a new silver purchase
act to create more money. To satisfy both, Congress in 1890 passed the
Sherman Silver Purchase Act, and in 1890 the McKinley Tariff Act.
Neither act produced the desired effects, and the failure in 1890 of
the London banking firm of Baring Bros., which specialized in
financing American enterprises, touched off a scare among European
creditors who demanded that henceforth American debt be paid in
gold. This caused depositors to withdraw their money from the banks,
and the tremendous strain put on them by massive withdrawals could
not be eased even through the issuance of clearinghouse certificates—
scrip which acted as a new currency.
Stocks and brokerage houses soon fell victim to the panic. Anna
Roberson Burr, in her biography by James Stillman, tells us that
within a year of 1893 panic there were over 600 bank failures, and that
13 out of every 1,000 businesses failed. (“Portrait Of A Banker,” Amo
Press, New York, 1927.)
The banking community was divided. John D. Rockefeller was mad
at Morgan, Jacob Schiff of Kuhn Loeb and Co., was “livid with rage”
at the expulsion by the Republicans of Theodore Seligman from the
Union League Club because he was Jewish, and gold reserves were
down to $9 million, with a check for $12 million about to be presented.
In this aftermath of the 1893 panic it was 56-year-old J. P. Morgan
who saved the country from financial disaster, with the aid of Euro­
pean bankers, by negotiating with President Cleveland for the flota­
tion of a $100 million bond issue. (Sobel, supra ch. 7, esp. 249,265-266.)
Juxtaposed against the severe depression of the 1890’s, the revival
of economic activity during the infancy of the 20th century was, to
many Americans, a sure sign of progress. Exports had nearly doubled,

and industrial production was increasing along with the amount of
money in circulation. However, a worldwide demand for investment
money increased, worldwide gold production decreased, causing a
worldwide capital shortage.
I1* America, concern over the uncertain state of the business world
was intensified by the antibusiness stance of Theodore Roosevelt’s ad­
ministration. Unprecedented Government actions against such awe­
some conglomerates as the Standard Oil Co. of New Jersey prompted
banks to become more and more conservative in their investments.
T h e 1907 P an ic

Panic came again on August 12,1907, when New York City tried in
yam to float a high-yielding $15 million bond issue. Many corporate
issues met the same fate. There were runs on two of New York’s largest
trust companies, the Trust Co. of America and the Lincoln Trust Co.,
and an important investment banking house, Moore and Schlev, was
about to fail.
The 1907 crash occurred when the Knickerbocker Trust Co., headed
by Frederick Augustus Heinze, Charles Morse, and Charles T. Barney,
failed as a result of the trio’s speculating with depositors’ funds. Barney committed suicide and, to forestall financial disaster. John Pierpont Morgan took charge.
During the panic of 1907, Morgan, then three score and ten, again
saved the country from financial disaster with profit for himsftlf, He
forced Morse and Heinze to resign theirpositions as directors of the
chain, and then organized a group of "Wall Street bankers to pour
money into the weaker surviving banks. Morgan even asked the clergy
to issue reassuring pronouncements from their pulpits.
The scion of Wall Street, however, was given more earthly support
from Theodore Roosevelt and Treasury Secretary George B. Cortelyou. Joint action in the nick of time by the Government and bankers
such as James Stillman, John t). Rockefeller, and George Baker, en­
abled Morgan to save the surviving banks with a European loan.
Smglehandedly, Morgan browbeat the other trust companies into
raising $25 million, convinced Secretary of the Treasury Cortelyou to
deposit $35 million of Government funds in needy New York Banks,
and prevailed upon both the trust companies and the banks to loan the
money. Both trust companies and Moore and Schley were saved. (Sobel, supra, ch. 9, especially pp. 313-314 and 319-320.)
Morgan’s action was not entirely altruistic. For his service to his
country, Morgan once more collected. His price was to force trust bust­
ing Teddy Roosevelt to eat crow and consent to the purchase by United
States Steel of the lucrative Tennessee Iron and Coal Co. at a bargain
price of $84 a share. (Sobel, supra, ch. 8. at 318-319.)
To Moore and Schley and other stockholders. Bier Steel issiiAd W rf*

R obert L. Owen

The aftermath of these panics was always the same. As Robert L.
Owen, chairman of the Senate Banking Committee during the Wilson
administration says, frightened creditors would press their debtors

nnflKlitig them “to take over the property of thousands” on a basis that
was “ruinous,” causing hundreds of bankruptcies, “violent dislocation
of business,” and vast unemployment. (Robert L. Owen, The Federal
Reserve Act,” The Century Co., New York, 1919.)
Banks, moreover, would refuse even certified checks or greenbacks,
tod insist on gold. In these panics when banks were out of monev,
Andrew Mellon and the “Witch of Wall Street,” HettyGreen, would
pick up bargains. It was in this way in the panic of 1878> that Jay
Gould acquired control of the Union Pacific Railroad. (Sobel, supra,
at 24-25,181 and 193.)
During the 1893 panic, Senator Owen, coauthor with Senator Carter
Glass of the Federal Reserve bill of 1913, was President of the First
National Bank of Muskogee, Okla., which he had organized. His little
bank lost 50 percent of its deposits in as many days. (Owen, supra, p.
To Owen, the panic of 1893 “demonstrated the complete instability
of the American banking system and the hazards which businessmen
haRobertLatham Owen was an interesting figureinAmericanlife. He
was bom on Candlemas, or Groundhog Day, February 2, 1B56, of
wealthly parents. His father was president of the Virginia and Tennes­
see Railroad; his mother, Narcissa Chisholm, was a chieftain of the
Cherokee Nation. His maternal grandfather was Chief Arm-Kilawki,
Thomas Chisholm in English, and a friend of Mr. Thomas Jefferson.
Owen’s Indian name was “Oconstota” (Grounding).
On graduation from Washington and Lee in 1877, Owen tegan the
practice of law in Oklahoma where he came to represent the five civil­
ized Indian tribes, recovering over $2 million for the Choctaws in 1891,
$800,000 for the Western Cherokees m 1894, and over $5 m i^ n for ttie
Eastern Cherokees in the Supreme Court of the United S ta lin 1906.
(Ph. D. thesis of Edward Elmer Keso at G eorg eP ea b od y C olle^ ,
Nashville, Tenn. (1938) on file at Federal Reserve Library, Washingt0Takinghis seat in the Senate in December 1907, Owen was redacted
in 1912 and 1918, retiring in March 1929. He died on July J V l ^ ;
Fortunately, for his country, Owen was a, wealthy, w^-edumted
man and was determined to reform our inadequate banking system.
At the Democratic Convention of 1896, Owen sought in vam to obtain
a plank promising currency reform to protect the country against
future panics. Then in the summer of 1898*he went to England, France,
and Germany studying how the London, Pans, and Berlin banks were
able to weather the same panics that raised havoc with our banking
^ O ^ n ^ fo ^ ’ S ^ v e rm n e n t regulation of banking mthgewmntries was quite different, and that panics, such as the United States
experienced, were virtually impossible.
1866 when Ovend, Gurney and Co. faaled, the g « ^ o *
“ “4
“loaned one day $20 million and in one week $50 million, and
when the Baring liquidation threatened, the Bank of England once
t e X d i S f M S T & L had also
how thnely intovention by the large central bank could prevent a reasonably^ sound
bank from failing. He knew, as few men of his time dad, that when

currency is scarce the best and most solvent bank will fail. From his
personal experience and studies abroad he also knew that this was
unnecessary if the country had a proper banking system*
National B an k N otes

Under the act passed in 1863, each national bank deposited with
the Comptroller of the Currency U.S. bonds equal to approximately
one-third of its capital, and received national bank notes equal to 90
percent of the par or market value of the bonds. The currency of the
country then became national bank notes. By 1900 the Congress had
taxed State bank notes out of existence.
To protect against loans, the act required banks in certain large
reserve cities to maintain in their own vaults a 25-percent reserve
in lawful money against deposits. In other large cities one-half the
25-percent reserve could be kept on deposit in New York banks, but
country banks were held to only a 15-percent reserve, three-fifths of
which could be in a city bank. (Paul Studenski and Herman E. Krooss,
“Financial History of the United States,” McGraw-Hill Co., New
York, 1952, pp. 154-155.)
This put a substantial amount of the country’s ready money on
deposit with large New York banks which loaned it at high interest
rates in the call money market. I f one of these banks was unable to pay
on demand, the repercussions were felt throughout America. Of course,
the depositing banks were paid interest on their balances, but there
was no assumption of liability on the currency by the U.S. Government.
Strange as it may seem to us today, the currency of the country from
1S65 down to 1913 consisted of these national bank notes, necessitating
the use by the Bureau of Engraving in 1913 of some 6,600 plates.
(Owen, supra, pp. 34-35.)
T he O wen A mendment

One thing the country had learned was that Morgan, with the aid
of the Secretary of the Treasury, had been able in the last two panics
to save sound banks by advancing to them moneys to meet the demands
of frightened depositors.
The amendment to the National Bank Act that Owen had drafted
rovided for the issuance of U.S. Treasury notes on an emergency
asis for 90 percent of the value of U.S. bonds. Senator Aldrich, then
in charge of the bill, rejected the amendment. In 1908 Senator Jones
wrote Owen that if the amendment had been accepted it would have,
in his opinion, prevented the panic of 1907, (Owen, supra, pp. 25-29.)
Instead of accepting the Jones amendment, Owen says that the


Craftily and unfairly expanded the paper currency of the national banks some
five hundred millions by authorizing the banks to issue currency against two
percent bonds at a profit to the banks of approximately one and one-half percent
per annum on such issue by the amendment of the National Bank Act of 1900.
This, of course, was no remedy, for the currency remained inelastic although
expanded. (Owen, supra, at 6.)

Robert Owen and Thomas Gore became Oklahoma’s first
L.S. Senators. When Owen, as a new Senator, began speaking out
against our banking laws, Senator Hale of Maine rebuked him. In his

biography of Owen, Edward Keso tells us that the Senator replied
“it was iwfciT to blame him for not arriving sooner as he had come to
the Senate from Oklahoma as soon as he could after Oklahoma was
made a State.”
"When the Aldrich-Vreeland Act was passed in 1908, Owen, as
Senator, had the satisfaction of reminding Senator Aldrich that if he
had accepted the proposed Jones amendment in 1900 there might not
have been a panic of 1907.
At Owen’s request, Aldrich did put the Jones amendment m the
Aldrich-Vteeland Act and, at the last minute, it went into the Federal
Reserve Act of 1913. It is said to have averted a panic in 1914, when
at the start of World War I, with J. P. Morgan dead, the stock ex­
change closed for several months. Against Owen’s objection, however,
the provision accepted in 1908 and 1913 limited the amount of such
emergency bank notes to $500 million. (Owen, supra, 46—48.)
S enate B anking C ommittee

In 1908 there was no Senate Banking Committee.^ When Senator
Owen came to the Senate he wanted one, and was instrumental in
forming a Committee on Committees which divided the Senate Finance Committee.
At Owen’s urging, the Senate created a Banking Committee on
March 18,1913, at the start of the special session which President Wil­
son called to rush through his tariff and currency legislation.
A bsene P . P djo

While in the 62d Congress the Republicans had organized the Sen­
ate. In that Congress the Democrats had been able to organize the
House of Representatives, and Arsene P. Pujo of Louisiana became
chairman of the House Banking Committee.
Bom on December 16, 1861, Pujo practiced law in Lake Charles,
La., and served in five Congresses, 58-62, March 4, 1903-March 3,
1913. On his resignation from Congress at the close of the 62d Con­
gress in 1913, Pujo resumed the practice of law in Lake Charles, and
died in New Orleans December 31,1939, on a visit for medical treat­
ment (Biographical Directory of the American Congress, 1774-1961,
Pujo will be best remembered for his investigation in the 62d Con­
gress of big business, or, as he put it, the “Money Trust” for which he
retained Samuel Untermeyer, a member of the New York City bar.
Pujo decided to divide his committee into two sections, one headed
by him to concentrate on the “Money Trust,” the other section headed
by Congressman Carter Glass, as the next-ranking Democrat, “to de­
vise a reserve banking scheme.”
Caster G lass

Glass, like Owen, had been bom in Lynchburg, Va.; Glass in 1858
and Owen in 1856. (See “Carter Glass: A Biography,” by Rixley
Smith and Norman Beasley, Longmans, Green and Co., Plainview,
N.Y., 1939.)

At 13 Glass had been takein out of school and put to work on his
father’s newspaper. By 1902 he was editor and owner of the Lynch­
burg Daily News and Advance. From 1899 to 1903 he was in the State
senate. He went to Congress in 1902 when the incumbent (Peter J*
Otey) died, and served until 1919 when he resigned to become Secre­
tary of the Treasury. When Senator Thomas S. Martin in the fall of
1919 died Glass became a U.S. Senator and served until his death in
1946. (“Biographical Directory of the American Congress, 1774-1961,”
U.S. Government Printing Office, 1961.)
P arty P latforms

Because of the panics, especially the panic of 1907, there were planks
for currency reform in the platforms of all three parties in the 1912
Presidential campaign. “National Party Platforms, 1840-1960,” Bark
H. Porter and Donald Bruce Johnson, University of Illinois Press,
Urbana, 111., 1961.)
The Progressive Party of Teddy Roosevelt wanted currency control
in the Government, not in the bariks, as in the Aldrich currency bill—
We betteve there exists imperative need for prompt legislation for the im­
provement of our national currency system. We believe the present method of
issuing notes through private agencies is harmful and unscientific.
The issue of currency is fundamentally a government function and the system
should have as basic principles soundness and elasticity. The control should be
lodged with the government and should be protected from domination or manip­
ulation by Wall Street or any special interests.
We are opposed to the so-called Aldrich currency biU, because its provisions
would place our currency and credit system in private hands, not subject to
effective pubUc control. (Porter and Johnson, supra, 175 and 179.)

The Republican Party of “Big Bill” Taft, while recognizing the
need for avoiding money panics, asked for the independence of banks,
and warned against either financial or political control. The Republi­
can platform avoided mention of the National Monetary Com­
Our banking arrangements today need further revision to meet the require­
ments of current conditions. We need measures which will prevent the recurrence
of money panics and financial disturbances and which will promote the pros­
perity of business and the welfare of labor by producing constant employment.
We need better currency facilities for the movement of crops in the west and
south. We need banking arrangements under American auspices for the en­
couragement and better conduct of our foreign trade. In attaining these ends,
the independence of individual banks, whether organized under national or
state charters, must be carefully protected and our banking and currency system
must be safeguarded from any possibility of domination by sectional financial,
or poUtical interests. (Porter and Johnson, supra, 171.)

The Democratic Party of Woodrow Wilson, in accordance with the
findings of the Pujo committee, rejected the Aldrich bill proposed by
the National Monetary Commission, and favored Government control
on the theory that banks exist for the accommodation of the public—
We oppose the so-called Aldrich biU or the estabUshment of a central bank;
and we believe our country wUl be largely freed from panics and consequent
unemployment and business depression by such a systematic revision of our
banking laws as will render temporary relief in locaUties where such reUef is
needed, with protection from control of dominion by what is known as the money
Banks exist for the accommodation of the pubUc and not for the control of
business. AU legislation on the subject of banking and currency should have for
77—752— 76------ 2

its purpose the securing of these accommodations on terms of absolute security
to the public and of complete protection from the misuse of the power that wealth
gives to those who possess it. (Porter and Johnson, supra 171.)

Because of these campaign planks, after his election in November
of 1912 Woodrow Wilson announced he would call the 63d Congress
into special session in April 1913 at the conclusion of the lameauck
session of the 62d in March to enact tariff and currency bills.
Inasmuch as the Democrats were to control both the Senate and
House in the 63d Congress in 1913, this meant that Senator Robert L.
Owen of Oklahoma would chair the newly formed Senate Banking
Committee, and that Congressman Carter Glass of Virginia, who had
been in Congress since 1902, would succeed Arsene Paulin Pujo as
chairman of the House Banking and Currency Committee.
Glass feared the banks would try to thwart his succeeding Pujo, but
the threat never materialized. Wnen Pujo retired in 1913 Glass be­
came chairman of the House Banking and Currency Committee, and
thus it was that the Owen-Glass bill of these two boys from Lynchburg
became the Federal Reserve Act of 1913.
In his book “Adventures in Constructive Finance” (Double-dav,
Page and Co., pp. 68-69, New York, 1927), Glass tells us that the
leading figures in the Pujo investigation were so pleased with them­
selves that they were “imbued with a desire” to take over his subcom­
mittee, but “a quick end was put to this intrigue” by the refusal of
himself and his colleagues “to tolerate interference.” Thus, between
the election and the special session, Carter Glass was able to prepare a
draft of a new currency bill for introduction in the special session
of the 63d Congress.
The Glass subcommittee began hearings on January 7, 1913, and
heard bankers, businessmen, and specialists on currency whose practi­
cal suggestions were incorporated into the technical provisions of the
bill by Dr. Henry Parker Willis. (Arthur S. Link, “Woodrow Wilson
and the Progressive Era,” New York, Harper and Row, 1963, p. 46.)
The hearings, concluded February 17, 1913, covered 745 pages of
printed material (remarks of Senator Owen, Congressional Record,
vol. 50, p. 6002).
H enry P arker W illis

Professor Willis who assisted Senator Glass was born in Racine,
Wis., attended Western Reserve University, B.A. 1894, and Univer­
sity of Chicago, Ph. D. 1898. From 1898 to 1901 he was a professor of
economics at Washington and Lee University, and later returned to
organize its school of commerce. In 1910 he became a professor of fi­
nance and dean of the College of Political Science at George Wash­
ington University.
Willis was an editorial writer in 1910 for the New York Evening
Post and, later, Washington, D.C. correspondent for the New York
Journal of Commerce and the Springfield Republican. In 1912 when
he joined Glass’ subcommittee he was associate editor of the Journal of
Commerce and teaching part time at Columbia University. Besides
assisting Glass on the Banking and Currency Committee, he was also
on the staff of the Ways and Means Committee aiding on the Under­
wood tariff bill.

§5B.4fi*i5S!5fa s s $£Z8&B&S&28 i&
° S l 9 2 3 iorkconteins a goldmine of pertinent Federal
formation. It contains drafts of the legislation from the first shown
to Woodrow Wilson, to the last as redrafted by the conference com­
mittee into the Federal Reserve Act of 1913.
Willis frankly discusses the rumors he picked up from bankers in
New York who hoped to block Carter Glass from becGmmg^airman
o f the House Banking and Currency Committee. More importantly,
he acknowledges that Glass had hoped to pursuade W iison to allow
three bankers to be made members of the Federal R e s e r v e
that, in this, Senator Robert L. Owen opposed Glass. I*
“ I
"William Jennings Bryan that made sure the Federal Reserve Board
was to be a Government agency.

G lass


o a r d

W illis S ee W ilson T wice

On December 26, 1912, Senator Glass went to Princeton with Dr.
Willis to see President-elect Wilson. The President was then m bed
with a cold, but Glass went over with him “a written division memo­
randum of bill.” While Wilson told Glass he was “on the right track,
Glass stated he “offered quite a few suggestions, the most notable being
one that resulted in the establishment of an altruistic Federal Reserve
Board at Washington to supervise the new system.
. w ;.
Glass and Willis had a second meeting with President-elect Wilson,
this time in the Governor’s executive offices at Trenton. At that meet­
ing Wilson approved “two vitally important provisions not previously
mentioned to him,” one “for open market transactions by regional
“banks” which “encountered bitter opposition from the larger banks,
and the other for “an abolition of exchange charges and the establish­
ment of par collections” which was “frantically opposed by a combina­
tion of small banks.” Nevertheless, both provisions remained m the
final bill. While not complete, Glass stated the draft he showed Wilson
at Trenton “contained nearly every fundamental provision subse­
quently enacted into law.” (Glass, supra, 91-92.)
At that time Glass and Willis had proposed that the Comptroller
•of the Currency, “already tsaristic head of the national banking sys­
tem of the country,” became the head of the new Federal Reserve
Dr. Wilson laughingly said he was for “a plenty of centralization, but not for
too much.” Therefore, he asked a separate central board provision be drafted, to
be used or not, as might subsequently be determined, “as a capstone to the
system which had been outlined to him. (Glass, supra, 82.)

As Glass tells it, at this first conference he was able to outline the
principal parts of what was to become the Federal Reserve System.
The conversation covered these points:
1. Regional reserve banks;
2. Use and transfer of reserve balances;

3. Compulsory stock ownership by national banks;
4. Membership for State banks;
5. Rediscounting;
6. Issuance of Federal Reserve notes;
7. Gradual retirement of national bank notes;
8. Joint liability of all regional banks;
9. Regional banks to be fiscal agents of the United States:
10. Conversion of U.S. 2-percent bonds into 3-percent bonds
with cancellation of circulation privilege; and
11. Giving the Comptroller of the Currency full supervisory
power over the Reserve System. (Glass, supra, pp. 83-84.)
No one anticipated that the new Congress at the special session
would pass both the tariff and currency bills. To the last, the New
York Times (May 3 and 9, 1913) was predicting that the currency
bill would have to go over to the next session of the Congress. It quite
rightly reasoned that Republicans opposed to it would prolong their
speeches against the tariff bill indefinitely, and Democrats for the bill,
loath to linger in Washington through another summer, would go
The Times at the same time (April 29,1913) was pointing out that
President Wilson felt he needed the bank bill to protect against the
Underwood tariff bill which might bring expansion or degression. In
any event, the Times declared the currency bill was to be Wilson’s own,
and he and his Secretary of the Treasury William G. McAdoo
(1913-18) were to deal with Owen and Glass about its passage.
C ontrol

op the


Senator Owen, in an interview with the New York Times (April 30,
1913), made it clear that in his mind the big issue was who should con­
trol the currency—the banks or the Government. He pointed out that
in France and Germany the government controls the currency, and
in England businessmen, not bankers, control the Bank of England.
As soon as his Banking Committee was appointed and his chairman­
ship secure, Senator Owen announced (New York Times, April 30,
1913) there would be Senate hearings. He circulated a series of 30
questions he expected the witnesses to discuss—11 of these the Times
listed as follows:
1. What are the essential defects of our banking and currency
2. Should a new system include State as well as national banks?
3. Should there be one central reserve association or a number
and, if the latter, how many ?
4. What metnod of preserving an elastic currency should be
^5. Should a central control of reserve associations be established
either by them or by the Government, or by both ?
_6. Should the Aldrich-Vreeland Act be extended after its ex­
piration in 1914 ? I f so. should it be amended ?
7. Should additional currency be permanent or temporary?
. 8. Should individual banks or central associations issue the ad­
ditional currency ?
9. Should reserve associations be stock companies?

10. Should national banks be required to keep their reserves in
their own vaults and with their own reserve association?
11. Should the rate on discounts be the same for all* and should
this rate be published weeldy?
In April at the home of Hugh Campbell Wallace, a member of the
Democratic National Committee, Glass read his draft bill to William
Gibbs McAdoo, Secretary of the Treasury, and Col .E. M. House,
friend and adviser to the President. Thereafter, the President re­
quested a copy which Colonel House obtained and passed on to Paul M.
Warburg ox Kuhn, Loeb & Co. When Glass learned later that Colonel
House was showing his draft to bankers, Glass showed it to banker
friends of his own, and then, for the first time, sent Senator Owen a
It was not until June 3,1913, that the House Banking and Currency
Committee was appointed and Glass made its chairman. Until that
time Glass was in doubt as to who were to be members of his committee
and, of course, could not be positive he was to be chairman. As Glass
explained, this made it important that he keep his draft bill secret.
As previously mentioned, in January 1913 Dr. Willis had “ner­
vously” warned Glass that “a very powerful banker” in New York
had told him that “there is such a thing as a committee chairman who
will accept our plan.” Also, the “air was filled with rumors” of an ef­
fort to set aside the rule of seniority in selecting the new chairman of
the committee.
Whether or not this was related to the delay in naming the commit­
tee is not clear. Glass never specifically criticized the leadership for
the delay, although he regretted it, but it may have been a factor in his
much-criticized secrecy in handling the bill. Furthermore, Glass stated
every other currency bill had been battered to pieces by hostile inter­
ests, so he kept his “closely guarded.” (Glass, supra, pp. 86-87,94.)
In addition, Carter Glass wanted to keep his draft of the bill secret
until it was cleared by President Wilson. It was well he did. When Sen­
ator Owen saw the Glass draft he was outraged—here is how he tells
The Glass tentative draft avoided the estabUshment of a central bank with
branches, and provided twenty Federal Reserve district banks under control,
however, of a Federal Reserve Board, with forty out of fifty-three members
chosen by the banks.” (Owen, supra, emphasis Senator Owen’s.)

At the time he gave his draft to Owen, Glass planned to add a provi­
sion under which the directors of the Reserve banks selected by mem­
ber hanks would name the Federal Reserve Board. But Owen says—
I was strongly opposed to either provision because it would not give to the
United States control of the system. I regarded it as practically the same as the
Aldrich BiU which would have put the management of the system in the hands
of persons chosen to represent the banks, and I insisted that the control of the
system was a governing function to be exercised alone by the Government of the
United States. About this feature I felt great anxiety because a powerful im­
pression had been created that the banks of the country would not enter a
government-controlled system, would not take stock in the Reserve banks, and
would not put their reserves in the Reserve banks unless they could control the
Federal Reserve Board. (Owen, supra, pp. 73-74, emphasis Senator Owen’s.)

In the debate in the Senate on the Owen-Glass bill, Senator Reed of
Missouri charged that Glass’ first draft gave “the banks absolute con­
trol of the system,” and that it was a “half-baked measure” drawn by

H. Parker Willis, editor of the Journal of Commerce, a Wall Street
publication. In a lengthy statement Glass denied this. (New York
Times, Nov. 10,1913, p. 1, col. 1.)
When Owen and Glass discussed the matter, Glass agreed to have
four members of the seven “chosen by the Government and three by
the banks” but this was as far “as he felt it safe to go.” Unable to reach
an agreement with him, Senator Owen brought “the vital difference
to President Wilson at a night meeting in tne White House. (Owen,
supra, pp. 74r-75.)
W ilson D ecides Control I ssue for Owen and B ryan

Glass stated frankly he “was very definitely committed to giving the
banks some voice” and the “feature of the bill” in dispute “gave the
banks minority representattion on the Federal Reserve Board.” He
also agreed the question was “crucial” as “Senator Owen of the Senate
committee had sided with Mr. Bryan” against banker control, and
there was fear that “Bryan and his following might revolt.” (Glass*
supra, pp. 112-113.)
Glass underestimated President Wilson, for whom he had great re­
spect. This is what happened as Owen told it—
After a discussion of two hours, approximately, the President coincided with
my contention that the Government should control every member of the Board m
the ground that it was the function of the government to supervise this system,
and no individual, however respectable should be on this Board representing
private interests. (Emphasis Senator Owen’s.)

Glass stated that Secretary McAdoo who was present “at first”
agreed with him, but later “proposed a compromise.” (Glass, supra,
p. 113.) However, Owen declares that McAdoo agreed with the view he
presented. (Owen, supra, p. 76.)
Henry Parke*' Willis in his 1923 book “The Federal Reserve Sys­
tem,” confirms Owen’s version (p. 250 et seq.). He states flatly that “in
the original draft of the bill * * * it had been intended to vest the real
management of the Federal Reserve System in the hands of an execu­
tive committee representing the Board consisting entirely of bankers.”
In “the best sense of the word,” Willis says that this executive com­
mittee was to constitute a “banking board.” For this reason “the idea
of turning it into a government body of the conventional type consti­
tuted a distinct innovation in the proposed makeup of the system.”
The danger was that this change would “alter in no small degree the
attitude of the banking community toward the measure,” and the
thought was that “the proposed change ought not to be introduced
except as a matter of the utmost urgency from a political standpoint.”
Convinced by Bryan and his associates that the Board was to be “an
active government body,” Willis said President Wilson “practically
ordered” the proposed amendments incorporated in the draft bill, ancl
he quotes from a letter Glass wrote to him at the time in which Glass
said he told Wilson—
* * * his proposition would put the whole scheme into politics and that he could
not expect a powerful Republican minority in the Senate to sit quietly by and per­
mit the creation of a banking system, the absolute control of which, to begin with,
would be in the hands of men aU appointed by a Democratic President. I said to
him I considered the proposal both inexpedient and fundamentally wrong; but
Owen promptly agreed to it and McAdoo yielded also (p. 251).

Glass was very upset. He thought President Wilson wrong and,
whatever else. Carter Glass was a fighter. He conferred that evening
at his hotel with Bulkley of his committee who was “for a government
note issue and for government control.” He wrote Wilson a note ask­
ing him “to take Mr. McAdoo’s suggestion” and, as President, select
the three bankers from “a list proposed by the banks.” But Wilson
was “adamant.” (Glass, supra, pp. 113-115.)
Undaunted, Glass thereafter led a delegation of bankers (Forgan,
of First National of Chicago; Wade, of Mercantile Trust, St. Louis;
Wexler, of Whitney Central, New Orleans, and Perrin, of Messrs.
Perrin, Drake and Riley, Los Angeles) to the White House to protest
his decision. It was then that Wilson turned to Forgan and Wade and
said quietly:
WiU one of you gentlemen teU me in what civilized country of the Earth there
are important government boards of control on which private interests are

After what Glass tells us was a “painful silence,”
President Wilson inquired:
Which of you gentlemen thinks that railroads should select members of the In­
terstate Commerce Commission? (Glass, supra, pp. 116-117.)

It was at this conference that President Wilson suggested that “as
compensation to the bankers for denial of representation on the central
board,” Glass “set up a Federal Advisory Council authorized to sit at
stated times with the Federal Reserve Board in a purely advisory
Paradoxically, Glass, who fought so hard for banker representation
on the Federal Reserve Board, Sated “there could have been no con­
vincing reply to either question” (Glass, supra, p. 116), and Senator
Owen says that afterwards “Mr. Glass gave the provision his very
cordial support.” (Owen, supra, p. 76.)
Willis, in his 1923 study, confirms Owen saying that while Glass
accepted the change “with great reluctance,” he “subsequently heartily
approved,” and “in severed public addresses he later testified to his
change of view expressing in unequivocal language die belief that the
original proposal had not been wise.”
As a result, the bill was changed to provide for a Board of seven
members, two, the Secretary of the Treasury and the Comptroller of
the Currency, and five to be appointed by the President with the
advice and consent of the Senate.
On Juiie 23 the bill, “in final amended form,” made its appearance
and “as thus reconstructed, met the approval of Mr. Bryan” who kept
his bargain by issuing a statement which the Philadelphia Public
Ledger printed on June 26,1913.
There, Bryan says that:
When tbe bill Is considered upon its merits, one at once realizes that it is
written from the standpoint of the people rather than from the standpoint of the
financiers. The latter are quite unanimous in the belief that the issue of money
is “a function of the hanks” and that “the government ought not to go into the
banking business.”
The Democratic Party, however, has consistently taken the position that the
issue of money is “a function of the government” and should not be delegated
to the banks. It all depends upon the point of view from which one considers this
question, or for that matter, any public question (p. 258).

Bryan points out that the bill involves “three fundamental prin­
ciples” :
First. The notes issued must be issued by the government and not by the
Second. The issue must be controlled by public servants and not by private
institutions or individuals.
Third. The emergency currency issued must be issued through state banks as
well as through national banks.

Inasmuch as the bill as amended “observes these three require­
ments,” Mr. Bryan enthusiastically endorsed it. He thought the nghts
of 'the general public protected, the needs of the business interests met,
State banks put into association with national banks for the first time,
and “a life preserver” thrown to the national banks, causing him to
ask who could oppose “so wise a measure.”
When Glass and the four bankers went to see President Wilson to
protest their being left off the Federal Reserve Board, they also pro­
tested the President’s decision to take out of the bill the provision
designed “to retire in time, national bank notes.” With the concurrence
of Senator Owen, the President had agreed to eliminateit.
Glass, however, after the conference of the bankers with the Presi­
dent issued a statement that he would move to restore the provision
the Senate was taking out—he did so, and it went into the final bill.
Once more the fine Italian hand of President Wilson came into play.
Though Glass believed that Wilson did not discuss it with him per­
sonally, Glass says that Wilson knew that William Jennings Bryan
and his large following would not support the currency bill unless the
Federal Reserve notes were “obligations of the United States.” When
Glass argued for his position and pointed out that behind each Reserve
note was the liability of the memberbank, double liability of its stock­
holders, and gold and commercial reserves, Wilson replied that Glass
was right as to “the substance of the thing.”
President Wilson pointed out to Glass, that with all this security
for the notes, agreeing to make the notes also obligations of the Unitea
States was a mere “shadow,” and it was well worth doing to save the
bill. (Glass, supra, pp. 123-125.)
One has to admire the way President Wilson, Carter Glass and
Robert L. Owen guided the currency bill through the Congress. 1116
banks of the country, one and all, were blindly opposed to the legis­
lation and, in the Senate, Senators Reed, O’Gorman and Hitchcock, all
powerful Democrats, were against it.
The opposition’s first move was to get President Wilson to bring the
bill up in the next Congress. Even Oscar Underwood, the House ma­
jority leader, urged this upon him but Wilson adamantly refused.
(New York Times, June 17-18,1913.)
At one point, the President made clear, in a letter to Senator Till­
man, that he felt the Congress must pass a currency bill “so that any
attempt to create artificial disturbances” after the Underwood tariff
bill had become law may be offset by a free system of credit. Such a
system would make it possible for men, big and small, to take care of
themselves in business. Wilson wisely reasoned that when the tariff
bill had passed, the House could work on the currency bill while the
Senate debated the tariff. (New York Times, June 1 and IT, 1913.)

President Wilson had made up his mind there would be a currency
bill at the special session, and never gave an inch. Moreover, as we
have seen, Wilson took the time personally to reconcile the differences
between Oweniand Glass as to whose obligation the currency bill should
be, and as to what body should control the Federal Reserve^ System.
This resulted in Wilson’s obtaining 100 percent party support from
Bryan to Glass for his currency bill.
In sharp contrast to later Presidents, Wilson’s next move was to read
the currency bill to his Cabinet and obtain their approval, and calmly
spend 21/2 hours discussing the bill, section by section, with the Demo­
crats on the House Banking and Currency Committee.
Although there were a few favorable comments, bankers from coast
to coast blasted the bill. Senator Hitchcock of Nebraska, next ranking
Democrat on Senate Banking, made a long detailed attack to Owen
on it. (New York Times, June 17-22,1913.)
W ilson Calls J oint S ession

With the showmanship of P. T. Bamum on June 23,1913, President
Wilson, wearing a frock coat, light-striped trousers, a four-in-hand
cravat of some dark material with white figures in it, and accompanied
by Mrs. Wilson and his daughters, Jessie and Eleanor, went to the
Capitol with his currency bill and addressed a joint session of the
Congress over which Speaker Champ Clark and Vice President
Thomas Marshall presided.
The 9 minute message President Wilson read is as refreshing to read
today in the New York Times of June 24,1913, as it must have been
to hear on the 23d day of June in 1913. He began by acknowledging
that by calling a special session to enact the tariff bill and now the
currency bill he was subjecting his non-air-conditioned Congress to
the excruciating heat of a Washington summer. However, he told
It is under the compulsion of what appears to me a clear and. imperative duty
that I have a second time this session sought the privilege of addressing you in
person. I know, of course, that the heated season of the year is upon us, that work
in these chambers and in the committee rooms is likely to become a burden as
the season lengthens, and that every consideration of personal convenience and.
personal comfort, perhaps in the cases of Some of us, considerations of personal
health even, dictate an early conclusion of the deliberations o f the session, but
there ate occasions of public duty when these things which touch us privately
seem very small, when the work to be done is so pressing and so fraught with
big consequence that we know that we are not at liberty to weigh against it any
point of personal sacrifice. We are now in the presence of such an occasion. It is
absolutely imperative that we should give the businessmen of this country a
banking and currency system by means of which they can make use of the free­
dom of enterprise and of individual initiative which we are about to bestow
upon them.

As President Wilsofo said, it is not enough for the Underwood Tariff
Act “to strike the shackles from business.” One of the chief things
business needs now “is the proper means by which to readily vitalize
its credit, corporate and individual, and its originative brains.”
What will it profit us to be free if we are not to have the best and most acces­
sible instrumentalities of commerce and enterprise? What will it profit us to be
quit of one kind of monopoly if we are to remain in the grip of another and
more effective kind? How are we to gain and keep the confidence of the business
community unless we show that we know how both to aid and to protect it? What

shall we say if we make fresh enterprise necessary and also make it very difficult
by leaving all else except the tariff just as we found it?
The tyrannies of business, big and little, lie within the field of credit. We know
that. 'Shall we not act upon the knowledge? Do we not know how to act upon it?
If a man cannot make his assets available at pleasure, his assets of capacity and
character and resources, what satisfaction is it to him to see opportunity beckon­
ing to him on every hand when others have the keys of credit in their pockets
and treat them as all but their own private possession? It is perfectly clear that
it is our duty to supply the new banking and currency system the country needs,
and that it will immediately need it more than ever.
The only question is, when shall we supply it now or later after the demands
shall have become reproaches that we were so dull and so slow? 'Shall we hasten
to change the tariff laws and then be laggard about making it possible and easy
for the country to take advantage of the change? There can be only one answer
to that question. We must act now, at whatever sacrifice to ourselves. It is a duty
which the circumstances forbid us to postpone. I should be recreant to my deep­
est convictions of public obligation did I not press it upon you with solemn
and urgent instance. (New York Times, June 24,1913.)

The President saw how his free trade tariff bill might well affect
the economy of the country and he wanted a banking system capable
of controlling it, boom or bust.
Our banking laws must mobilize reserves; must not permit the concentration
anywhere in a few hands of the monetary resources of the country or their use
for speculative purposes in such volume as to hinder or impede or stand in the
way of either more legitimate more fruitful uses. And the control of the system
of banking and of issue which our new laws are to set up must be public, not
private, must be vested in the Government itself, so that the banks may be the
instruments, not the masters, of business and of individual enterprise and
The committees of the Oongress to which legislation of this character is re­
ferred have devoted careful and dispassionate study to the means of accompany­
ing these objects. They have honored me by consulting me. They are ready to
suggest action.

Coming specifically to the need for a sound currency, President
Wilson said:
We must have a currency, not rigid as now, but readily, elastically responsive
to sound credit, the expanding and contracting credits of everyday transactions,
the normal ebb and flow of personal and corporate dealings.

Noting there had been objections to the “12 scattered and independ­
ent banks” in the proposed Federal Keserve System, Wilson said the
criticism went “straight to the mark” as—
•We have purposely scattered the regional reserve banks and shall be intensely
disappointed if they do not exercise a very large measure of independence.
H ouse P asses B ill

After President Wilson’s currency message, the first order of busi­
ness was for Glass to get the bill through the House. Having held hear­
ings in the 62d Congress, Glass saw no need for more. Moreover, the
Monetary Commission had studied the problem for 4 years and was
pushing the Aldrich bill.
What Glass did was to mark up the draft bill with the Democrats
on his Banking and Currency Committee, have a House Democratic
Caucus vote of 168 to 9 to make the bill an administration measure,
and then for the first time, consult with the Bepublioan members of
his committee. (Glass, supra, pp. 141 and 149.)

The Republicans objected bitterly to their exclusion from Glass’
discussions of his draft bill with McAdoo, Owen, President Wilson,
and Democrats on the committee* Their argument was that the crushfng effect of the caucus made the bill impossible to change in floor
debate. That of course was Glass’ object in convening the caucus.
Surprisingly, there is no indication^that Wilson, our political sci­
entist President (who had written against the caucus, “Congressional
Government: A Study In American Politics,” pp. 326-332,1905, re­
print 1958, Peter Smith Publishing, Inc., Gloucester, Mass.), raised a
hand to stop him as he did later in the Senate with Owen.
The Republican members of the House Banking and Currency Com­
mittee proposed “variance minor amendments” which Glass accepted,
including “a provision for a savings department for national banks”
from Representative Everis A. Hayes of California. However, this
provision was “stricken out in the Senate.”
The Glass bill when reported promptly passed the House with 48
Republicans joining the Democrats. (Glass, supra, pp. 149-150.) _
Glass was very sensitive about charges made against him for driv­
ing the currency bill through the House and being so secretive about
it. His answer (Glass, supra, p. 150) was that the proposed Federal
Reserve Act—
Had been considered for months in the Committee (from January 7, 1913),
d5s«i8sed ten days in party caucus, debated in general for five days in the House
itself, amendments without number offered to its provisions and the freest
controversy allowed to persist in the House for three weeks.

As Glass pointed out, this conduct was in sharp contrast to the way

the Republicans in 1908 had pushed through the Vreeland-Aldrich

emergency currency law by a caucus that discharged the committee
before the bill could be printed. In fact. Glass stated, the House debated
the bill 1 hour before the bill reached the floor from the printer, then
passed it in 5 hours and not 10 Members knew what was in it. Glass
said Republicans deserved charges of “King Caucus” and “gag law” ;
Democrats did not.
Glass declared that “nothing in (President) Jackson’s battle against
th« U.S. Bank Charter” exceeded the intensity of the currency bill
fight. (Glass, supra, p. 179.) The New York Times fully corroborates
Editorially, the Times damns the Committee on House Banking
and Currency as having “rancor toward the rich and considerations
of partisanship and territorial sectionalism.” In the Times of Au­
gust 23,1913, Forgan, president of First National Bank of Chicago,
quotes Glass as having admitted, as a, country editor, to being incom­
petent to handle the bank bill, causing Glass to denounce Forgan as
violating a confidence and speaking falsely. What Glass claims he said
was that he felt “at a great disadvantage.” (New York Times, Au­
gust 23,1913, p. 8, col. i.) For this outburst Forgan apologized, and
Glass forgave nim. (Glass, supra, pp. 179-181.)
To the last, the banks sought changes in the Senate according to the
Times of August 24,1913, page 3, column 1. Editorially, the Times
continued to praise Forgan and the bankers, and damn Bryan, Wil­
son and the administration. (New York Times, August 24, 1913, p.

After the House Caucus approved the currency bill, the Times on
August 29,1913, continued its editorial lament that “it is not wise, it
is not safe to reject contemptuously the advice given in the resolutions
adopted by the bankers at Chicago.” And on August 30, 1913,. the
Times said editorially that it was printing “many dispatches from
bankers of the small and large towns in many States” as “a contribu­
tion to the administration’s stock of knowledge.”
T he H ouse V otes

Minority Leader James Mann of Illinois, and Senator Weeks of
Massachusetts, along with Senator Hitchcock, the next ranking
Democrat, attacked the bill and demanded Senate hearings. (New
York Times, Sept. 2, 1913, p. 1, col. 8.) In the same paper Senator
Owen wrote a letter to James Simpson, vice president ox the Marshall
Field Co. of Chicago, in which he charged that the bankers spent
from a quarter to a half-million dollars in propaganda against the
bill, falsely representing that Congress had not given the bankers a
hearing, and complained that the Democratic Caucus robbed them of
any right to propose amendments. Meanwhile, the Republicans pre­
pare to fight the bill on the House floor. (New York Times, Sept. 10,
1913, p. 8, col. 8.)
With Glass and Underwood in new suits of clothes, the floor debate
opened. First, Glass pointed out that panics are decennial and another
was due in 1917. Then Hayes, the ranking Republican committee
member, opposed the bill and, finally, the “Bull Moosers”, 20 strong,
led by Victor Murdock, supported the bill. (New York Times,
September 11,1913, p. 5, col. 1.)
President Wilson demanded that the House meet every day until
the currency bill was passed, and that the Senate hold hearings every
day until passage. (New York, Times, Sept. 11,1913, p. 5, col. 1, and
Sept. 13,1913, p. 3, col. 1.)
While the Statist of London thought the provision authorizing the
Federal Reserve banks to issue $500 million in notes bordered on state
socialism, the Times of London thought that the passage of the tariff
bill and the handling of the currency bill a great tribute to Wilson’s
leadership, and that his leadership “is gradually imparting to the
American form of government a smoothness and flexibility it had
hitherto lacked.” (London Times, Sept. 14,1913, sec. I ll, p. 3, col. 2.)
And, the London Telegraph viewed with apprehension the clause in
the Owen-Glass bill permitting foreign branches. (New York Times,
Sept. 22,1913, p. 1, col. 2, Sept. 23,1913, p. 1.)
The House passed the bill, and then with Wilson’s permission, ad­
journed to await the Senate bill. (New York Times, Sept. 13, 1913,
p. 3, col. 1.)
T he S enate P asses


B ill

As the currency bill moved from the House to the Senate, the
bankers’ attack on the bill grew louder and stronger. As Glass says
(Glass, supra, p. 168), and the Times of the period confirms, die
day-to-day press reports would have you believe the bankers were
right, and the Owen-Glass bill would fail to pass altogether, or cer­
tainly go over to the next Congress.

As the Senate hearings began, Senator Owen announced that all
the bankers invited testified,, except Joseph T. Talbert of the Na­
tional City Bank. The Chicago bankers thought the New York bankers
had made “a serious mistake’^
’ in “keeping too far in the background.
(New York Times, Sept, 17,1913, p. 20, col. 3.)
Editorially, the Times urged that the currency, bill go over to the
next Congress, and blasted Glass for saying the National Monetary
Commission study was of no value, pointing out that the Owen-Glass
bill adopts whole chunks of the study. Nevertheless, the Times con­
ceded the bill, as amended, had merit. (New York Times, Sept. 18,
1913, p. 10, col. 1.)
. - .
Prof. Jeremiah W. Jenks of New York University praised the
Owen-Glass bill (New York Times, Sept. 26,1913, p. 8, col. 2) , and
Glass said that banks could use their reserve funds to buy stock m the
Federal Reserve and won’t need new funds. (New1 York Times,
Sept. 27,1913, p. 3, col. 1.) The Times bitterly criticized Professor
Jenks, saying the bill should not be passed merely because it is the
best politically obtainable when it is the creation of three-time-loser
Bryan, and the money is Government money. (New York Times,
Sept. 27,1913, p. 12, coLl.)
^ ,
Praising Owen as a former banker. Professor Jenks answered the
Times editorial and said the Owen-Glass bill is “the best law possible
now,” and that Congress motives, like the bankers, were none but the
best and noblest. (New York Times, Sept. 30,1913, p. 12, col. 7.)
Editorially, the Times lamented that while Wilson knew tariff mat­
ters, he did not know banking—it has “not lain at his heart from boy­
hood.” (New York Times, Oct. 5,1913, p. 16, col. 1.) Wilson became
impatient with the Senate delay, Dlamed the big banks, and planned to
see Democratic Senators Reed, O'Gorman, and Hitchcock who opposed
the bill. (New York Times, Oct. 7,1913, p. 2, col. 6.)
The Times continued its editorial attacks on the bill and feared Wil­
son would make it a party measure. (New York Times, Oct. 8,1913,
p. 10.) The next day 2,000 bankers at Boston denounced the OwenGlass bill. (New YorkTimes, Oct. 9,1913, p. 1.)
The Times attacked the Owen-Glass bill again, asking that the com­
position of the Federal Reserve Board be chanced so that “the great
banking interests should be represented by membership on the Board.
(New York Times, Oct. 10,1913, p. 10, col. 1.)
Another Times attack pointed out how the banks that supported the
National Bank Act of 1863 were opposing the Owen-Glass bill and
how the bill was the essence of Bryamsm. (New York Times, Oct. 11,
1913, p. 14, col. 2.)
To meet the propaganda attacks on the bill by the banks, Glass said
that “at the personal request of the President” (Glass, supra, p. 168),
he accepted invitations to defend the House bill “at various large
centers.- One such meeting was wifch the New York Chamber of Com­
merce on October 14, 1913, at Columbia University at which both
Owen and Glass were to speak. Glass fell ill and sent his speech which,
in part, read:
The real opposition to this bill is not as to government control upon which
we shall never yield. It is not as to compulsory membership which is provided
in another way in the Aldrich scheme—a scheme that was unanimously endorsed
by the American Bankers Association. It is not in the required capital subscrip­
tion, nor the 5 percent dividend. It is none of these.

It is in that most vital requirement of the bill that in the future, funds >n
deposit in other national banks cannot be counted as legal reserve. This mean;*
an immediate loss of profits to many bankers—I say immediate, for in the long
run the change will benefit bankers as well as the public—and it is the prospect
of that loss that explains most of the organized opposition to the bill.
The fight is to drive us from our firm resolution to break down the artificial
connection between the banking business of this country and the stock specula­
tive operations at the money centres. The Monetary Commission, with more dis­
cretion than courage, absolutely evaded the problem; but the Banking and
Currency Committee of the House has gone to the very root of this gigantic
evil, and in this bill proposes to cut the cancer out. This we propose to do cau­
tiously, graduating the operation to prevalent conditions and extending it over a
period of thirty-six months. (New York Times, Oct. 15,1913, p. 8, col. 2; omphftgi*

As you can see, this was straight talk by Carter Glass to bankers who
well knew what he meant.
At a dinner of the Academy of Political Science at the Hotel Astor
in New York City on October 15,1913, Senator Nelson Aldrich gave
the principal address which occupied 62 printed pages in the record
of the proceedings. In that address Aldrich assailed “every essentia]
feature” of the Owen-Glass bill, and concluded in this way:
I hare tried to show that the bill has serious defects. It appeals to the populists
by adopting their plan of note issues; to the socialists by seeking to place th*
management of the most important private business of the country in the hands
of the government; it seeks the support of bankers in great centres by its unex­
pected discrimination in their favour, but its dangerous doctrines and unwise
methods do not appeal to the judgment of the American people. Its objectiona!
features have neither the support of public opinion nor the approval of the bank­
ing fraternity. They are contrary to the teaching of economists and they are not
supported by the judgment of practical men. It threatens to upset business and to
produce the evil results it was projected to cure. (Glass, supra, pp. 242-249.)

President Wilson conferred with Senators Reed, O’Gorman Mid
Hitchcock, and agreed to cut stock subscriptions to the new banks in
half. Glass told the Times that the nomenclature he took from the
Aldrich Bill “had been used in 20 bills before Mr. Aldrich and his
associates utilized it.” (New York Times, Oct. 17.1913, p. 10, col. 8.)
Bankers raised fears of foreign retaliation for the provision per
mitting foreign branches. (New York Times, Oct. 19,1913, p. 9, col. 6.)
Although bankers said that it was the Owen-Glass bill, or none at all,
Frank A. Vanderlip proposed a brand new bill, and Senator Weeks
offered more amendments. (New York Times, Oct. 25, 1913, p. 15,
cols. 1, 2.) Vanderlip constituted what Glass calls the “Big Bertha”
of the bankers’ attack.
Frank Vanderlip rose from baseball reporter to president of the
National City Bank. (Glass, supra, p. 166.) As Chicago baseball reporters, Finley Peter Dunne and Frank Vanderlip coined the name
“southpaw” for a left-handed pitcher because his left arm in the White
Sox part: faces South Chicago. (“Mr. Dooley’s America: A Life Of
Fl™ey £,eter Dapne,” by Elmer Ellis, Archon Books, England 1969.)
The Chicago Association of Commerce and the Economic Club of
^e^Y ork Citv held a dinner at the Hotel Astor in New York at
which Vanderlip and Professor Joseph French Johnson of New York
University debated the Owen-Glass bill with Senator Owen and Con­
gressman Glass. Professor Johnson was a last minute substitute fo?
Sol Wexler of the Whitney-Central National Bank in New Orleans
In discussing this debate in his “Adventures In Constructive Ft-

nanoe,” Glass says that “eleven hundred banks and businessmen in
evening dress” attended.
Quoting from fan letters he later received from A. Barton Hepburn
at Chase and Professor Johnson of New York University, and re­
ferring to the favorable comment on his speech by Dr. Abbott in Out-;
look magazine, Senator Glass Concluded that the “Roman holiday”
the bankers had prepared for Owen and himself turned out to be one
for themselves. (Glass, supra, pp. 168-17&)
Banker opposition nevertheless continued. Banker W. J. Wollman
told how bad London banks thought the Owen-Glass bill was. (New
York Times, Oct. 26, 1913, p. 3, col. 2.) Roger W. Babson attacked
the Owen-Glass bill in the Sunday'Times. (October 26, 1913, p. 8,
col. 1.) However, Jacob H. Schiff of Kuhn Loeb &Co. opposed Vanderlip’s bill and supported the Owen-Glass bill with reservations. (New
York Times, Oct. 27,1913, p. 1.) But the Times wanted changes along
the line of the Vanderlip bill. (November 7,1913, p. 2, col. 6.)
As we have seen, Owen had a much more difficult time with the
currency bill in the Senate than Glass did in the House. In the first
place Owen was a gentleman, not a tough fighter like Glass. Glass
went to work as a boy, and not to Washington and Lee College as
Owen had done. Right or wrong, Glass was prepared to pass the bill,
Mid Owen’s approach was to pass it on a nonpartisan oasis because
it was the right thing to do. Owen, for instance, spoke with Nelson
Aldrich before the Academy of Political Science at the Hotel Astor
in Manhattan. Glass, unable to attend, sent Bulkley who took warning
from the heckling to which the bankers subjected Owen on that oc­
casion. Glass_said Bulkley “had on his fighting clothes and did not
mince words.” You can infer that Glass thought Owen was, to quote
Leo Durocher, “a nice guy who finishes last.”
As usual, Glass was probably too hard on Owen who, though a
Democrat, was a competitor. It was Owen’s first term as Senator.
Unlike the House, the margin by which the Democrats controlled the
Senate was much closer, ana three senior Democrats, Reed of Missouri,
O’Gorman of New York, and Hitchcock of Nebraska, opposed the bill.
In early October, the Senate was still holding hearings on the cur­
rency bill which the Democratic Caucus would not cut off. Wilson then
announced he would see Reed, O’Gorman, and Hitchcock. (New York
Times, Oct. 7,1913.)
Wilson, on October i6, 1913 saw the three separately. The Times
reported on October 17 (p. 10, col. 8) that “the President got little
encouragement from his callers,” but that he listened “good humoredly” to their “pessimistic predictions.” His purpose in seeing them, the
Times said, was—
A desire on his part to relax the strained relations that have threatened to
restdt from the frequent publication of his intention to stamp the states of
Senators opposing the currency bill.

President Wilson developed an intense dislike of James Reed when
the Senate defeated U.S. membership in the League of Nations on
March 20,1920. Later, whenever asked his opinion, promptly by return
mail would come a letter from the former President denouncing Reed
as “a party traitor and marplot incapable of sustained allia n ce to
any man or to any cause.” (“Jim Reed Senatorial Immortal,” Lee Meri­
wether, the International Mark Twain Society, Webster Groves, Mo.,

1948.) From this, we can see that the intellectual Wilson was also a
The troubles Owen had with his Banking Committee were evident
on October 28,1913, when five Republican members of the committee,
Weeks, McLaren, Nelson, Crawford, and Bristow, joined by Democrat
Hitchcock, voted for the single central bank provided by the Aldrich
bill. Only six Democrats, Owen, Reed, Pomerene, Shafroth, O’Gorman,
and Hollis were for the Owen-Glass bill and its regional banks, leav­
ing the committee tied at 6-6. (New York Times, Oct. 29,1913, p. 16,
col. 1.)
Woodrow Wilson, as usual, came to the rescue. In “two frank talks”
Wilson won over Reed “the refractory Missourian” who thereafter
“ went along with his party associates.” (Glass, supra, p. 196.) In addi­
tion, O’Gorman switched, and the 6-6 tie became an 8-6 victory for
Even though the switch of Reed and O’Gorman gave the votes
needed, Owen decided not to attempt to have his committee report a
bill. Instead, without recommendation, it reported three bills—the
Owen-Glass bill as it passed the House, a slightly modified House bill,
and a bill sponsored by Senator Hitchcock. (New York Times, Nov. 21,
Due to Owen’s motion, the Owen-Glass currency bill became the
Senate’s unfinished business, but the future of the bill was touch and
go. This is how Glass pictured the Senate situation:
The chairman of the Senate Committee was not able to report the bill as
agreed on; he reported it without recommendation to the Senate. This resulted
in further delay and prolonged confusion, until the President could be won over
to a party caucus proposal. On this point Mr. Wilson would not readily yield.
At first he was disposed to assert vigorously his established aversion to “rule
by caucus” and to put responsibility for failure of currency reform on those who
appeared to be conspiring against it. Had he persisted there might have been no
reform of the currency for years; and the war which burst eight months later
would have caught the country unprepared for the frightful financial strain.
“Bight of way” is of no value to the autoist who gets killed asserting it; so the
practical politicians finally convinced the President that there must be a caucus
or an abandonment of all hope for legislation. He agreed to the caucus, which
was euphoniously termed "a conference”, and did the cleverest kind of work
among the Senators in healing differences and imparting a new and militant
spirit to the whole movement (Glass, supra, pp. 194-195.)

As Senator Glass conceded, “the memorable part of the Senate de­
bate on the currency bill was a 3-hour speech by Senator Elihu Root
against it. The speech was so good that Minority Leader Senator Gallinger said that unless the Republicans in 1916 nominated Root for
President, they would miss the greatest opportunity ever presented to
the Party.” (New York Times, Dec. 14,1913, and Glass, supra, p. 200.)
Senator Root began by lamenting that the “caucus,” under the guise
of a “conference,” made the bill a party measure thus depriving the
majority party, and the country, of the benefit of the minority’s dif­
fering views. Though he recognized the futility of the effort, Senator
Root concentrated his attack upon section 16 of the bill which read as
Federal Reserve notes to be isued at the discretion of the Federal Reserve
Board for the purpose of making advances to Federal Reserve banks through the
Federal Reserve agents as hereinafter set forth, and for no other purpose, are
hereby authorized. The said notes shall be obligations of the United States and
shall be receivable for all taxes, customs, and other public dues. They shall be

redeemed in gold on demand at the Treasury Department of the United States in
the City of Washington, D.O., or in gold or lawful money at any Federal Reserve

A slight change had been made in the wording of section 16 (12
U.S.C. 411) that payment would be in “lawful money” instead of gold.
Section 16 today reads substantially the same as when Elihu Root in
1913 said this alxmt it:
You will perceive that the provision contains in the terms no limit whatever
upon the quantity of notes that may be isued: Federal Reserve notes to be is­
sued at the discretion of the Federal Reserve Board for the purpose of making
advances to Federal Reserve banks. The said notes shall be obligations of the
United States.
That, Sir, is to my view a plain, simple enlargement of the national currency of
the United States. It is authority for the increase, practically, of what we call
greenbacks. The notes will be obUgations of the Government of the United States
pure and simple. They are not credits of anybody else; they are credits of the
Government of the United States. (New York Times, Dec, 14,1913, and Congres­
sional Record, Dec. 13,1913, p. 831.)

What Root said then is as true today. The Owen-Glass bill then, and
the Federal Reserve Act today delegate to the Federal Reserve Board
the power to issue currency without limit.
What was said by Root on the floor of the Senate on December 14,
1913, others have been saying ever since in successive Presidential ad­
ministrations, namely, that since the power “to borrow money on the
credit of the United States” and “to coin money” are powers conferred
upon the Congress by the Constitution (section 8, clauses 2 and 5),
they are powers which the Congress cannot constitutionally delegate
to any agency. Moreover, the Constitution, in section 9, clause 7, clearly
provides that “no money shall be drawn from the Treasury but in con­
sequence of appropriations made by law.”
As Elihu Root so eloquently pointed out, the Federal Reserve Act in
section 16 delegates to the now Board of Governors of the Federal Re­
serve System the awesome power to issue currency without limit.
It is by exercise of this unlimited power that the Federal Reserve
Board, through its Open Market Committee, buys U.S. bonds in
amounts far beyond its needs so that it can draw interest upon them
out of which to pay agency expenses.
The net result is that the Board of Governors of the Federal Reserve
does not have to apply to the President, the Office of Management
and Budget, the Banking or Appropriation Committees of the House
and Senate.
The Federal Reserve collects interest on the U.S. Government bonds
it buys, deducts its expenses, and yearly returns the excess to the Treas­
ury. So long as it holds, as it does today, upwards of $90 billion of
U.S. Government bonds, it can keep the wolf from the door.
Although altered in many respects, the Owen-Glass bill passed the
Senate on December 19,1913, by a vote of 54 to 34, and was immediate­
ly sent to conference with the House. (Glass, supra, p. 212.)
In the conference, Glass and Korbly (Democrats), and Hayes
(Republican), represented the House; Owens Reed, Pomerene,
Sliarroth, O’Gorman, and Hollis (Democrats), and Bristow, Nelson
and Crawford (Republicans), the Senate. There Glass and Owen won
back almost every provision of their bill that the Senate had changed.
(Glass, supra, pp. 317-336.)
77-752— 76-------S

At the White House on the evening of December 23,1913, President
Wilson signed the Owen-Glass bill into law to become the Federal
Reserve Act of 1913. (Glass, supra, p. 220; New York Times, Dec. 24,
It was a festive occasion and a Christmas present to the President
who was surrounded by his family, his Cabinet, Senator Ham Lewis,,
the Senate Majority Leader, Champ Clark, the .Speaker of the House,
Oscar Underwood, the House majority Leader, Senator Owen, Con­
gressman Glass, and members of the Banking Committees.
As so vividly mentioned in the New York Times of December 24,
1913, in signing the bill the President used four gold pens one of which
he presented to Senator Chilton of West Virginia, and the other three
were presented 'by the President to Senator Owen, Congressman Glass,
and Secretary McAdoo. In addition, the President sent notes of ap­
preciation to both Glass and Owen, and spoke for about 10 minutes to
a very happy audience.
The Times, which had been so consistently critical, wrote two favor­
able editorials for the first time, and the act became law.
The trouble was about to begin.

In July 1914, just as the “Reserve Bank Organization Committee”
composed of the Comptroller of the Currency, the Secretary of the
Treasury, and the Secretary of Agriculture set about putting the
Federal Reserve System into operation, World War I broke out. In­
dividuals and banks hoarded $600 million, the stock market closed,
and the banks were in trouble again. (‘‘The Federal Reserve: A Study
of the Banking System of the United States,” by Henry Parker Willis,
published in 1915 by Doubleday-Page and Co. as one of a series called
“The American Books”. See ch. V, especially 104.)
On April 1,1913, J. P. Morgan had died in Rome, at the age of 76.
On June 28,1914, Serbian terrorists assassinated Archduke Ferdinand
of Austria. On July 28,1914, Austria declared war on Serbia, and gold
reached new highs. On Friday, July 29,1914, minutes before its sched­
uled 10 a.m. opening, the stock exchange, which had remained open
during the panics of 1893 and 1907, closed. There were those who said
it would not have done so had J. P. Morgan been alive and kicking. By
another week’s end, World War I had started. Within 2 weeks over
$80 million was withdrawn from New York banks, and the situation
was serious. (Sobel, supra, ch. 10, especially 322,328,330,335.)
As noted earlier, as a young man Senator Robert L. Owen, president
and founder of the First National Bank of Muskogee, Okla., had lived
as a banker through the panic of 1893. Owen knew, as few men of his
time, that when currency is scarce the best and most solvent bank will
fail. From his personal experience, and studies abroad, he also knew
that this was unnecessary i f the country had the proper banking system.
By 1908 Owen was the Senator for newly admitted Oklahoma. He
was inspired to shake his finger at Senator Aldrich, say “I told you so,”
and offer his amendment again to the then Vreeland-Aldrich Act. This
time Aldrich accepted the amendment, but he put it into the act,
hedged with many restrictions.
The Glass-Owen Act provided for the repeal of the Vreeland-Aidrich Act which was to take place after the Reserve Organization Com­
mittee had put the Federal Reserve System into operation. On July 31,
1914, when the European war broke out, Senator Owen rose in the
Senate, and amended the emergency banknote provision in the Vreelad-Aldrich Act, removing from the section all the many restrictions
Aldrich had tacked onto it.
The emergency notes were limited to national banks, the existence
of a national emergency, a total issue of $500 million, and a certain
percentage of the bank’s capital and surplus. The Owen 1914 amend­
ment removed all restrictions, and left the Secretary of the Treasury
free to assist a bank applying to any extent he wished. (Owen, supra,

Professor Henry Parker Willis who had been consultant on the bank
bill to Glass in the House, and afterward Secretary to the Federal
Reserve Board, tells us that the Aldrich-Owen amendment, as amended
by Owen “gave free range” to taking out emergency banknotes.
Before the Federal Reserve System began operating, “more than”
$350 million of emergency banknotes were issued. Together with over
$200 m illion of clearing house certificates, Willis estimates that “in
all,” $575 million “of new media was injected into circulation within
a short time.” (Willis, supra, 104-105.)
Sobel says the provision extending the emergency provision until
June 30,1915, was “an afterthought, and almost failed to be included
in the fina.1 draft.” Thus, “accident and chance enable the Government
to use a huge amount of paper under conditions Wall Street could not
have imagined in 1908.” (Sobel, supra, 337.)
As American business improved and foreign money came to Amer­
ica instead of leaving it, the emergency bank currency was gradually
retired. By June 1915, it “had wholly disappeared.” (Willis, 122.)
This is but another example of Senator Owen’s farsightedness. It
was Owen who convinced Senator Aldrich in 1908 to provide in the
Vreeland-Aldrich Act for the issuance of emergency currency, and it
was Owen who removed Aldrich’s restrictions. This simple provision of
Senator Owen prevented hundreds of bank failures in 1914.
One would have thought that Professor Willis would have thought
well of the Owen amendment and appreciate how well it enabled the
country to meet the 1914 emergency.
Alas, Willis was a banker, and even more conservative than Sen­
ator Glass. Along with his brother bankers, Willis firmly believed in
the so-called “real bills theory,” to wit, that banks must confine them­
selves strictly to financing “commercial” transactions, and the banking
system must only issue currency against such transactions. For in­
stance, a loan to a man who “has sold goods to another and draws on
him, at say 90 days sight,” and the buyer “accepts the draft by writing
the word ‘accepted’ and his signature across the face,” is “a commercial
transaction.” (Willis, 177-178.)
Also, when B, who buys goods from A, finds it to his advantage to
induce his own bankers to accept, the loan becomes a “banker’s accept­
ance” and “commercial paper of the purest type.” Seller A often finds
it much easier to sell such an acceptance in the open market than to
discount it at his bank. Sometimes the banker’s acceptance is “so good
that it can be sold without any endorsement or undertaking.” Of course
Professor Willis says that had “the reserve banks been in operation at
the beginning of August (1914), they would naturally have supplied
the great volume of currency which was called for.” (Willis, supra,
This is wishful thinking. Section 13 of the Federal Reserve Act
states clearly that “commercial paper” to be eligible for discount must
be of a self-iiquidating character and mature within 90 days, unless for
agricultural purposes when it can mature in 6 months.
Put into the Federal Reserve Act is the monetary real-bills theory
that Willis embraces on every page.
You can look from one end to the other of the Federal Reserve Act
of 1913, but. you will not find in it the provision that the farsighted
Owen had in his amendment under which member and nonmember

banks could be issued currency in emergencies against government
G etting the F ederal R eserve Started

As one could well imagine, many cities in the United States felt they
were entitled to a Federal Reserve bank. Professor Willis states that
some 36 applied. (Willis, supra, 85-86.)
During January and February 1914, the committee traveled to as
many cities as it could and met with representatives of all.
The act provided that there be not less than 8, nor more than 12 re­
gional Reserve banks. The political pressures were such that 12 were
selected, namely, Boston, New York, Philadelphia, Cleveland. Rich­
mond, Atlanta, Chicago, St. Louis, Minneapolis, Kansas City, Dallas,
and San Francisco. (Willis, supra, 94-95.)
The act of 1913 also provided that membership in the Federal Re­
serve System was compulsory for national banks, and opponents of the
legislation had freely predicted that many national banks would with­
draw. But not so. Of the more than 7,600 national banks in the coun­
try all except 15 joined. In addition, by April 1914 a dozen State banks
pledge to the committee to join. (Willis, supra, 88.)
Each district Reserve bank was to have a board of directors with
staggered 3-year terms. Since under the act class A banker directors
and class B businessmen directors of the regional Reserve banks were
to be selected by member banks in the region—one by large, one by
medium, and one by small banks in each bank district—the committee
went ahead and conducted these elections.
However, the committee had to leave the appointment of the socalled class C public directors of each regional Reserve bank to the
Board. Under the act it was to designate one of these class C directors
as “chairman, and Federal Reserve agent”, and another vice-chairman.
(Willis, supra, 319, and sec. 4 of the 1913 Act.)
Despite the terms of the act, the Board suggested that the chief
executive officer of each regional Reserve bank should be designated
as “Governor,” and another “Vice Governor,” both to be elected by
each bank board of directors. (Willis, supra, 98.)
Not only was there no statutory authority for the creation of this
office of “Governor,” but also, the Governor apparently was, in many
instances, paid more than the statutorily designated Chairman and
Federal Reserve agent. Willis explains the salary difference by saying
that the Federal Reserve agents were lower paid Government em­
ployees, whereas the “Governors” were “hired on a commercial basis”
as if they were “entering the employ of an ordinary commercial bank.”
(Willis, supra, 164-165.)
As we know the act provided for banker representation through a
“Federal Advisory^ Board.” After their election the board of directors
of each of the 12 district banks selected one person from its district to
be on this board which, by section 12 of the act, was to meet in Wash­
ington, D.C., four times a year.
The Federal Reserve Board under the 1913 Act was to have seven
members, two of whom would be the Secretary of the Treasury, and
the Comptroller of the Currency, ex officio. One Board member was to
be designated “Governor” and one “Vice Governor.” On August 10,

1914, Board membership was complete, and the Board members took
their oath of office. (Willis, supra, 96-97, and sec. 10.)
The members of this first Board were:
John Skelton Williams—Comptroller, February 2,1914-March 2,1921.
William 6. McAdoo—Secretary of Treasury, December 23, 1913-Deeember 15,
Charles S. Hamlin—Governor, August 10, 1914; 1916 and 1926 reappointed.
Served until February 3,1936—successor took office.
Frederick A. Delano—Vice Governor, August 10,1914r-July 21,1918—resigned.
Paul M. Warburg, August 10,1914-August 9,1918—tenure expired.
William P. G. Harding, August 19,1914—August 9, 1922—tenure expired.
Adolph C. Miller, August 10,1914; 1924—reappointed; 1934—reappointed from
Richmond District. Served until February 3,1936—successor took office.

You can see that the Federal Reserve Board is unusual in its organi­
zation. From the beginning, with staggered 2-year terms, a President
coming to office cannot make more than two appointments to the Fed­
eral Reserve Board during his first term unless an incumbent dies or
resigns. The most he can hope is that late in his second term he can
make a fourth appointment.
Of course, no one is eligible for an appointment if he is an officer, di­
rector, employe or stockholder of a bank, and not more than one can
be a resident of any one of the 12 Federal Reserve districts. (Willis,
supra, 319-329, and sec. 10 of the 1913 Act.) Two are to be “experienced
in banking or finance.”
On November 2,1914, the member banks were asked to subscribe for
stock, and on November 16, 1914, the Federal Reserve Board began
Under section 7 of the 1913 act the stock was to pay a 6-percent
dividend. The subscriptions were to be equivalent to the member bank’s
capital and surplus: one-sixth on organization, one-sixth in 3 months,
and one-sixth in 6 months. The remaining three-sixths subscription
was payable on call of the Board.
Besides buying stock in the Federal Reserve bank of its district, each
member bank also had to post reserves upon which no interest would
be paid. Under the National Banking Act, these reserves were held,
in large part, in New York City banks which loaned the money out on
There was, therefore, great opposition to the Federal Reserve Act,
particularly by small country banks, which relied for their earnings on
2-percent interest on these city balances. To meet this objection, the
Federal Reserve Act, in section 19, reduced required reserves so that
banks in large Reserve cities were to keep 18 percent of demand, and
5 percent of time deposits, medium city banks 15 percent of demand,
and 5 percent of time deposits, and small country banks only 12 per­
cent ox demand, and 5 percent of time deposits. (Federal Reserve Act
of 1913, sec. 19.)
Professor Willis very neatly illustrates how this reserve reduction
worked. Assuming a country bank has $100,000 of deposits, this re­
quired a 15 percent reserve, or $15,000. Under the National Banking
Act, three-filths of this $15,000, or $9,000, might be carried as a bank
balance in a large city bank which would pay 2-percent interest, or
$180 per year.
Under the new Federal Reserve System, the country bank had to
keep its reserves in cash with its regional Federal Reserve bank, which

was prohibited from paying it interest. When, however, the reserve
requirements for country banks were reduced by the Federal Reserve
Act, $3,000 was thereby released for the country bank to use as it
pleased. If 6 percent were the prevailing rate or interest, the $3,000
could be loaned and return the same $180 that the $9,000 had earned
in New York. But, since our banking system is a fractional reserve
one, the $3,000 could be used to sustain new bank loans.
Assuming the country bank could find borrowers, the $3,000 would
support $25,000 of new loans. At 6 percent the bank would earn $1,500,
as against the $180 it was drawing in interest on its New York balance.
(Willis, supra, 203-205.)
As soon as the Federal Reserve System began to operate, it then pro­
vided a method to clear checks of member and nonmember banks at
par, relieving American business of a burden that cost them from $75
million to $125 million. (Glass, supra, 300.)
Prior to the enactment of the Federal Reserve Act of 1913, the socalled “reasonable collection charge” was a “flimsy” pretense for rea­
sonableness. So successful had Reserve’s accomplishments in check
collection become that Senator Glass, writing in 1927, could say:
The reserve system has largely done away with the enormous and hazardous
"float” which formerly clogged the mails and prevented banks from knowing
exactly where they stood, while it has immensely reduced the exchange charges
visited upon the community by “toll-gate” institutions which seized this method
o f filling an otherwise somewhat depleted exchequer. (Glass, supra, 801-803.)

Federal Reserve banks from the beginning were set up to aid mem­
ber banks by discounting their paper. However, as indicated, the paper
had to be self-liquidating growing out of commerce, industrial, or
agricultural transactions. I f the latter, the paper should mature in 6
month; otherwise, the paper must mature in 90 days. (Willis, supra,
181, and sec. 13 of the Act.)
Of course, in the open market, Reserve was authorized to buy and sell
acceptances and Government securities. 'In truth, the powers of the
Board were sweeping:
To readjust districts created by the Organization Committee
and create new ones.
To regulate the establishment of branches of Federal Reserve
To designate three (class C) of the nine members of the board
of directors of each Federal Reserve bank, one of these to be
chairman of the board with the title of “Federal Reserve Agent.”
The Federal Reserve Agent to maintain a local office of the
Federal Reserve Board on the premises of the Federal Reserve
bank. He shall make regular reports to Federal Reserve Board
and be its official representative.
To remove any director of class B (businessmen) if it should
appear that he does not fairly represent the commercial, agricul­
tural, or industrial interests of his district.
To remove officers of Federal Reserve bank with due notice.
To establish rules governing applications fr o m State banks and
trust companies.
To levy a semiannual assessment upon the Federal Reserve
banks for estimated expenses for succeeding 6 months, together
with deficit carried forward.

To examine at its discretion the accounts, books, and affairs of
each Federal Reserve bank and to require such statements and
reports as it may deem necessary.
To require, or on application to permit, a Federal Reserve bank
to rediscount the paper of any other Federal Reserve bank.
To suspend for a period not exceeding 30 days (and to renew
such suspension for periods not to exceed 15 days) any and every
Reserve requirement specified in the act.
To supervise and regulate the issue and retirement of notes by
Federal Reserve banks.
To add to the number of cities classified as Reserve and central
Reserve cities under existing law in which national banking as­
sociations are subject to the Reserve requirements set forth in
section 19 of the act, or to reclassify existing Reserve or central
Reserve cities and to designate the banks therein situated as coun­
try banks, at its discretion.
To require the removal of officials of Federal Reserve banks for
incompetency, dereliction of duty, fraud, or deceit.
To require the writing off of doubtful or worthless assets upon
the books and balance sheets of Federal Reserve banks.
To suspend the further operations of any Federal Reserve bank
and appoint a receiver therefor.
To perform the duties, functions, or services specified or implied
in the act.
To determine or define (subject to stipulation) the character of
paper eligible for discount for member wtnks.
To prescribe regulations for purchase and sale by Federal Re­
serve banks of bankers’ bills, et cetera.
To review and determine the rate of discount established by
Federal Reserve banks.
To authorize establishment of branches of Federal Reserve
banks in foreign countries.
To establish rates of interest on notes issued.
To prescribe regulations for substitution of collateral.
To make and promulgate regulations governing the transfer of
funds at par among Federal Reserve banks.
To act, if desired, as clearinghouse for Federal Reserve banks.
To require, in its discretion, Federal Reserve banks to act as
clearinghouses for shareholding banks.
To require extra examinations of member banks when deemed
To determine and report annually to Congress fixed salar­
ies of all bank examiners.
To arrange for special or periodical examinations of member
banks for account of Federal Reserve banks.
To assess upon banks in proportion to assets or resources the
expenses of special examinations.
To receive from Federal Reserve banks information concern­
ing the condition of any national bank in the district.
To receive applications from national banks having $1 million
or more capital for the establishment of branches in foreign
countries, or reject or accept such applications and to prescribe
conditions under which such branches may be opened.

To require examinations of foreign branches as it may deem
(Willis, supra, 141-144.)
For instance, Reserve could not only buy and sell Government,
State, and municipal securities, but also receive applications from na­
tional banks to establish branches abroad, and establish foreign agen­
cies there of its own to buy and sell bills of exchange. (Willis, supra,
323-324 and sec. 14 of the act.)
However, these early American bankers had a very narrow concept
of the purpose and effect of these so-called open market operations.
Willis says the purpose of the Federal Reserve System (Willis, su­
pra, 190-191)—
is to enable persons who have debts to pay to get the funds with which to
meet them, and that banking is a process of equalizing the supply of fluid funds
among those who require them. The Federal Reserve System is intended to pro­
vide just this means of liquefying and equalizing resources. It is not a method
of supplying capital to borrowers for investment. Such investments as it makes
are made for the purpose of affecting the rate of interest in the market, and
of enabling banks to meet their own maturing obligations without difficulty.
While this service appears to be directly and primarily for the benefit of the
commercial world, it is beneficial indirectly to every member of the community.
A bank’s suspension effects the whole community, and the same is true of the
failure of any commercial enterprise.
Important as is the function of supplying capital to those who need it for long
term investment, this is the field of finance and not of banking. Preventing sus­
pension of payment and insuring constant convertibility of demand obligations
into cash is quite as great a service to the public at large as it is to those bankers,
merchants, and traders generally for whom the service is immediately performed.

You can see from this extract that it never passed Willis’ mind that
Reserve’s buying and selling of Government securities could regulate
the money market and protect our economy from extremes of boom and
Of course, perhaps the greatest change effected by the Federal
Reserve Act of 1913 was to provide for the gradual withdrawal and
cancellation of the national bank notes which had constituted the cur­
rency of the Nation since the War between the States. The printing of
this "currency required a plate for each of the 7,600 national banks in
existence in 1913, whereas, since 1913, the Bureau of Engraving has
needed but one plate to print our currency since the Reserve System
opened on November 16,1914.
As section 16 of the Federal Reserve Act of 1913 makes clear, Fed­
eral Reserve notes are to be issued at the discretion of the Federal
Reserve Board to make advances to Federal Reserve banks through the
Federal Reserve agents in each of the 12 regional banks subject, of
course, to Reserve requirements set forth at some length in section 16.
While the currency is issued in the first instance to the Board on ap­
plication, the Federal Reserve agents are not authorized to give it to
the Federal Reserve banks until those banks secure the issue by eligible
Suffice it to say that the Federal Reserve System began operation on
November 16,1914, possessing the above-mentioned powers. When the
banks opened in 1914 these were the “Governors” in each of the dis­
trict banks:
District 1—Boston, Alfred L. Aiken—Resigned 1918.

District 2—New York, Benjamin Strong, Jr.—’Died while in office
District 3—Philadelphia, Charles J. Rhoads—Resigned 1917.
District 4—Cleveland, E. R. Fancher—Died while in office 1935.
District 5—Richmond, George J. Seay—Retired 1937.
District 6—Atlanta, Joseph A. McCord—Resigned 1918.
District 7—Chicago, James B. McDougal—Retired 1934.
District 8—St. Louis, Rolla Wells—Resigned 1918.
District 9—Minneapolis, Theodore Wold—Retired 1919.
District 10—Kansas City, Charles M. Sawyer—Resigned 1915.
District 11—Dallas, Oscar Wells—Resigned 1918.
District 12—San Francisco, Archibald Kains—Resigned 1917.
O pen M arket O perations

As we have seen, overcoming even the closing of the stock exchange
in the summer of 1914, as World War I broke out in Europe, the Fed­
eral Reserve System opened for business on November 16,1914.
It is right to say that the Federal Reserve System was a big im­
provement over the banking system that preceded it. There is not
much question but that the Federal Reserve banks were of great value
in the day-by-day collection of checks. The Federal Reserve was worth
the effort for its check collection system alone.
Theoretically, as the drafters hoped, the 12 regional banks could
shift money quickly from one end of the country to another to aid a
beleaguered bank. But how good the System was to be at that task
remained for the future.
Then, the question was open in 1914 as to who would run the Federal
Reserve System. Treasury? Congress? The President? The Federal
Reserve Board? The Federal Reserve banks? Or, as it turned out. the
Federal Reserve Bank of New York of which Benjamin Strong was
Likewise, problems arise if Reserve is buying or selling acceptances
in the open market. Its buying power is so great, that from the begin­
ning, Reserve knew that its transactions could control in large measure
the prevailinginterest rate in the country.
When the Keserve began in November 1914, member banks were
beginning to withdraw the $300 million they had in bank balances
with New York City banks. The act gave them 3 years in which to do
this. (Willis, supra, 198-199.)
The member banks, at this time, were discounting bills at 4 to 4%
percent, whereas, the Federal Reserve banks were holding to a dis­
count rate of 6 to
To show how out of line both the member bank and Reserve interest
rate was, a brokerage house in Dallas, Tex., offered to buy all the
rediscounts at the Federal Reserve Bank of Dallas at 2*4 percent.
The situation was discussed by Benjamin Strong, Governor of the
Federal Reserve Bank of New York with his counterpart McCord,
Governor of the Atlanta bank.
Strong made three points with McCord:
1. Member banks have $7 to $8 million they will not loan at 4 to 4% percent
and if we allow them to rediscount at a lower rate won’t the banks loan at a
rate less than 4 to 4% percent. And “force the surplus into use?”

2. But reducing the rediscount rate at this time (1914-1917) would cause a
withdrawal of $300 million reserve New York balances that under the Act are
to be withdrawn over a 3-year period.
3. It is important that we see to it that the decision as to the interest rate is
one for the bankers in the Federal Reserve banks and not one for the politicians
on the Federal Reserve Board. (Staff report of Subcommittee on Domestic
Finance, Committee on Banking and Currency, 92d Congress, 1st Sess., December
1971 entitled: “Federal Reserve Structure And The Development of Monetary
Policy, 1915-1935,” pp. 13-14, footnote 6.)

Thus, you see at this very early period there developed a funda­
mental conflict between the interests of the country and the selfish
interests of the commercial banks. Though he was a banker, Benjamin
Strong had a brilliant mind, and he saw at once both the country’s
need and the banker’s need.
Of course, this conflict was foreshadowed, when the Federal Reserve
Board made the mistake of allowing the Directors of each district
bank to elect a chief executive officer and call him a “Governor,” when
the statute clearly provided that each bank should have a chairman
who was also the fiscal agent.
Adding insult to injury, we see that without statutory authority,
the Board elevated bankers on the district banks to head the banks,
and then paid them better salaries than the Chairman and fiscal agent
who were Government employees.
In this early argument, it was the Federal Reserve Board that
wanted the interest rate reduced—
The conflict was heightened by the problem of defining the role of the System.
The governors tended to view the System as essentially a cooperative enterprise
for the mutual assistance of bankers and to favor a conservative interpretation
of sound banking policy as a guide for their actions. Seldom was public policy in
the broader sense an issue in the Conferences of Governors, and even in the area
of open market operations—the development of which was the most important
contribution of the Governors during this period—the overaU emphasis was less
on questions of policy than on bureaucratic procedures.
The Board, on the other hand, reflected the views of the majority of Congress
and of the Wilson administration which had seen the establishment of the System
as necessary to insure economic growth. To accomplish this end, the legislation
had been designed to provide a more elastic currency, to insure governmental
control of the banking system, and to guarantee reasonable rates of interest for
the commercial borrower. Although the latter objective frequently has been for­
gotten, it provided the initial policy goal for the System as the Board acted to
implement the intent of Congress and pressed for lower and more uniform interest
rates. (Staff Study, supra, 12-13.)

When the Board first suggested that the interest rate be lowered
Benjamin Strong bristled and remarked:
. their duty is to sit there as a judicial J>ody to review what we suggest to
them. What we have in fact established at the respective banks is for them to pass
upon, and nobody is entitled to go to that board and teU them what they ought
to do in suggesting rates to the Federal Reserve banks. (Emphasis supplied.)
(Staff Study, supra, 13.)

It seems strange to us today to see Reserve’s rediscount rate during
the first few months Of its operation at 6 to 6% percent, and 4 to 4Y2
percent for February 1915 to August 1916, both rates being substan­
tially above market rates. The argument of the 'bankers, in line with
orthodox theories on central banking, was that member banks should
not be able to profit by rediscounting with Reserve banks at rates lower
than they had received on loans.

Joseph A. McCord of the Atlanta bank was not satisfied. He argued
that low interest was good for the country. He withdrew his plea for
lower interest after Strong depicted the dire consequences any reduc­
tion might have on member bank balances in New York City banks.
(December 1971, staff study, supra, 14.)
Thus, we see that the very first question the Federal Reserve System
faced is resolved not on its merits, but on the basis of what is good for
the commercial banks. In this, the System was breaking faith with its
Just a few months earlier, Oscar Underwood, then chairman of
Ways and Means had said to Congressman Glass:
I congratulate the wisdom of this committee in
establishing a Government
control of this system that would represent the borrowers of money and enable the
people of America to secure the medium of exchange at reasonable rates of in­
terest at all times. I think that is probably the greatest reform that has been
worked out in this bill , (and) I believe that this board will carefully and safely
manage this, not only in the interest of the American people and low interest
rates, but also will have the wisdom to see that the great banking interests of
the country are properly safeguarded and proctected. (Congressional Record,
63d Cong., 2d Sess., vol. 51, p. 1459.)

And William Gibbs McAdoo, then Secretary of the Treasury had said:
Ample credit resources at reasonable rates are an indispensable factor in the
development of a country and in the growth and prosperity of its business and pro­
ductive enterprises. The primary purpose of the Federal Reserve Act was to so
alter and strengthen our banking system that the enlarged credit resources de­
manded by the needs of business and agricultural enterprise wiU come almost
automatically into existence, and at rates of interest low enough to stimulate,
protect, and prosper all kinds of legitimate business, and to bring about ulti­
mately a greater equality of interest rates throughout the coutry. (“Annual
Report of the Secretary of the Treasury for 1915,” p. 12.)

The Federal Reserve System had thus met its first test, and failed. A
weak Federal Reserve Board allowed the bankers in the district banks
to take over, and the country’s interest was ignored.
So much for the first squabble at the new Reserve banks—more were
to come.
There is something pathetic about these early days. Ben Strong and
the other Governors had fought for the Aldrich bill, and lost, but
there they were running the Federal Reserve System and getting away
with it. Strong even initiated a discussion among the Governors “of the
Board’s authority to require one Federal Reserve bank to rediscount
for another Federal Reserve bank.” This was hardly a point for dis­
cussion, because the Congress had insisted on the Board’s being able
to have one distirct bank help another, and if anything was settled in
the legislation, this was.
The matter came up at a second conference of the banks. Strong,
pointed out, that the South and West had periods of seasonal pres­
sure, and he felt if at those times those Reserve banks would apply,
the Federal Reserve Bank of New York would, on its own initiative,
make a fair rate. He argued that it was never the draftsman’s inten­
tion that “there should be a board of seven men acting as a broker
between the Federal Reserve banks.” (December 1971, staff study,
supra, 15.)
It is readily apparent that the discussions at these early conferences
of the Governors bode no good for the System as a whole. To begin

with, the Governors were meeting alone, and with each successive
meeting they were developing more and more opposition to the Fed­
eral Reserve Board whose very creation they had all opposed.
The matter came to a head at the fifth conference of the Governors
when they had the audacity, by resolution, to say:
The function of initiating discount rates of all sorts shonld be exercised by the
Federal Reserve banks without pressure from the Federal Reserve Board.

That did it.
The Federal Reserve Board reprimanded the bank Governors. (Staff
study, supra, 14-15.)
Governor W. P. G. Harding of the Federal Reserve Board appear­
ing before the Governors Conference of January 16,1916, said:
The Governors should meet only when called together by the Board, all their
conferences should be in Washington, D.C., and would adhere to an outline of
topics approved by the Board. (Staff study, supra. 15).

Granted that Strong had a point that $300 million should not be
precipitately pulled out of the New York banks, Harding declared that
the formation of the Governors Conference, as a permanent organiza­
tion, was “beyond the scope of the powers” of the Governors under
the Federal Reserve Act.
He could have added it was also beyond the Board’s authority under
the act to suggest there be a “Governor” at any Federal Reserve Bank.
Under the Glass-Owen Act the title “Governor” and “Vice Governor”
was reserved for the heads of the Board.
As its memorandum made clear, the Board told the bank Governors
that they wished “to deal with the Reserve banks as individual banks,”
and the “Board had no intention of permitting the Governors to
assume a role in formulating policy.” Their role was to be confined to
“technical questions of operation.(Staff study, supra, 15-16.)
The next conflict with the Board came when it asked the Reserve
banks to buy acceptances, not as a unit, but individually.
The open market operations at this period were very important be­
cause the Reserve banks needed the earnings. However, whereas the
Board wanted the Reserve banks to purchase individually as the act
contemplated, to a man the Governors were opposed because, as Gov­
ernor Aiken of the Boston bank said, that necessitated their going into
the market and bidding against one another.
With the majority of the Governors agreeing with A.iken. the Xew
York bank began buying acceptances for the account of the Boston
bank and several others, the New York bank’s being allowed for its
services “a certain percentage of the interest.” (Staff study, supra,
The Board, which had advocated individual action, suggested an
assessment on all the banks to cover the New York bank’s expenses.
Strong rejected this because it would discourage State banks from
joining the System, and it ended by the Board’s allowing, by regula­
tion, the Reserve banks to purchase acceptances where the corporation
publishes its financial statement and acceptances of member banks.
(Staff study, supra, 18-19.)
Once a/win the Board had been overruled bv the Reserve banks, and
the intentions of the draftsmen of the act repudiated. Federal Reserve
had become a central bank, at least for purchases of acceptances.

It should be added that the way it all worked out, Benjamin Strong,
alone at the New York bank was directing these open market opera­
tions. His bank was in the “driver’s seat” (Staff study, supra, 20), and
in no small measure due to him.
Interestingly, when several Reserve banks bought above par the
2-percenit Government bonds that held the circulation privilege under
the National Bank Act which the Federal Reserve Act compelled the
Federal Reserve banks to buy at par and accrued interests the Federal
Reserve Board asked the New York bank to represent all the Reserve
banks in Hie purchase and sale of these bonds.
Once again the Governors were delighted to see the Board support
their plan for unit purchases by the Reserve Bank of New York. Vice
Governor Treman remarked that the banks “ are one unit and we
should help each other to make enough to pay expenses.” (Staff study,
supra, 21.) Of course it was this concern for earnings that caused some
Reserve banks to buy the 2-percent bonds above par in defiance of the
clear provisions of the act

As we have seen, the Federal Reserve System’s handling of the fi­
nancing of World War I left much to be desired.
Its actions, during the postwar period were so inept, that a case could
be made for the fact that the Federal Reserve itself caused the 1920-21
W h a t’s Good fo r Member Banks —Is Good fo r th e C ountry

World War I ended in November 1918. At the Governors Confer­
ence of March 1919, Governor Strong suggested that the discount rate
be raised, but member banks had a huge amount of loans outstanding
on government bonds at current rates, and an increase in the discount
rate would result in their taking a loss on borrowings from the Re­
serve banks, using the bonds as collateral. For this reason Strong de­
cided not to press the point. (Stenographic Record, hereinafter cited
“S.R.”, March 1919 Conference, 158, 162, 166, 233-235.)
The Conference agreed that the status quo should be maintained
until after the flotation of the Treasury’s fifth loan, but to recommend
a higher rate on the next Treasury issue so that the discount rate could
be raised without disturbing bank profits. (S.R., March 1919 Confer­
ence, 353-354.)
Under Secretary Leffingwell and Reserve officials from farm areas
saw a need to lower interest rates to stimulate production, but the de­
cision was made on the basis of what was best for the banks, not on
what was best for the economy. (S.R., March 1913 Conference, 158,166,
Built into the Federal Reserve System is a conflict of interest in
favor of bankers. This is the inevitable consequence of the fact, that
almost all the officials of the Federal Reserve district banks are either
bankers, or men selected by bankers.
At no time was this more evident than during this period.
S trong G ives G lass


L effingwell


E conomics L ecture

In September of 1919, Under Secretary Leffingwell purchased
$500,000 bonds, naively assuming the funds would be used by the banks
to pay off loans on Government bonds.
But as any first year economics student knows, under our fractional
reserve banking system, when $500,000 is deposited in the Nation’s
banks, the banks will, naturally, use it to make loans to their customers.
This is precisely what happened. The banks loaned out the money not
only to stockbrokers, but to other borrowers, and there was an expan­
sion of bank credit. (S.R., November 1919 Conference, 89-90, 234>wever, when Glass and Leffingwell discovered that the banks had
not used the $500,000 to pay off their loans on Government bonds,

Senator Glass charged that Federal Reserve had permitted the banks
to use the money for “loans on stocks.” (S.R., November 1919 Confer­
ence, 89-90, 234-235.)
Strong chided Glass for naivete in thinking that banks would do
what Glass thought they ought to do, criticized Treasury for not financ­
ing at short intervals, and stated the Treasury should frame its policies
so as to accommodate the banking system. (S.R., November 1919 Con­
ference, 73,261,277-278,285.)
Strong warned Glass and Leffingwell that if their December and
January 1920 bond issues were to carry a 5-percent interest rate, then
they “would have a profoundly inflationary effect unless the prefer­
ential and discount rates were raised.”
There is, of course, an inconsistency in the Strong position in that
higher interest on short-term Government paper and higher discount
rates are more inflationary than long-term debts.
His reason for advocating them was to compensate the banks be­
cause he wrongly believed that it was an integral aspect of Federal
Reserve policy to protect the profits of the member banks. (S.R.,
November 1919 Conference, 280,282.)
T he F ederal R eserve’ s H igh D iscount R ate H eightens and
W orsens the 1920-21 D epression

By September 1919 inflation had escalated and, as soon as the mem­
ber banks were clear of their last Liberty Loan obligation, the Fed­
eral Reserve Board raised the discount rate. (“Banking and Monetary
Statistics,” Washington, D.C., U.S. Board of Governors of the Federal
Reserve System, 1943,439.)
What happened was both dramatic and traumatic. The yield on 90day acceptances rose from 4.28 to 4.53 percent. New stock exchange
call loans rose from 9.80 to 14.90 percent. (Banking and Monetary Sta­
tistics, Federal Reserve System, 1943,452.)
Strange as it may seem, these increases in market rates seem hardly
to have been noticed within the System, and W.P.G. Harding, Gover­
nor of the Federal Reserve Bank of Boston, (January 16, 1923 to
April 7, 1930). applied pressure for further discount rate increases
during the November 1919 Conference. (S.R., November 1919 Confer­
ence, 16-17, 234.)
Glass had gone along with the rest of the Board in November 1919
in approving rate increases, but later wrote a letter to Governor Hard­
ing urging that System officials use what he called “moral suasion”
with the member banks to prevent use of Federal Reserve funds to
support “reckless speculation.” (S.R., November 1919 Conference,
But his Under Secretary, Leffingwell, had learned the hard way. He
announced after Glass’ departure to the Senate that the Treasury’s
intention was to revert, for the time being, to the moderate-size, semi­
monthly issue of certificates. This acquiescence, plus the rate increase,
meant total victory for Strong’s position.
In January 1920 the Board had raised the discount rate again to 6
percent. But when the Governors met in April 1920, their Conference
ended on a pessimistic note, for which there was ample reason.

The wholesale price index was continuing to rise, and the New York
bank indicated another rise in the rediscount rate was needed. (Sum­
mary, April 1920 Conference, 2.)
Of course the fundamental fault was that the bankers running the
System thought that when a bank discounted paper at a Reserve bank,
the discount rate just had to be higher than the market rate. This
meant a loss to the member bank.
But even in the face of falling prices and a weakening economy, the
Governors kept the interest rate high hoping thereby to force the
member banks to liquidate their loans at Reserve.
This high-intrest policy did not work. Loans were not liquidated,
and not until the bottom of the depression in December 1920 did the
discount rate fall below market rates. (Banking and Monetary Sta­
tistics, 283,439-440,463.)
T he Congress and the 1920 D epression

However contented the Federal Reserve officials were about their
credit policies, the U.S. Senate was not. On May 17,1920, the Senate,
by resolution, asked the Board to prepare a statement on how it pro­
posed to meet the current inflationary trend, and mobilize credit to
move the 1920 crops.
During the Senate debate on the resolution, the Republican major­
ity made clear it favored an increase in the rediscount rate, while the
Democratic minority, consisting of Democrats and Bull Moose Repub­
licans, contended the rate increases already approved had caused the
price increases and were ruining the farmer.
Senator Robert L. Owen warned that the current deflationary pol­
icy “is going to lead to an industrial depression,” and it can only
“bring down prices by creating a depression.”
Owen contended that the remedies were not to raise interest and
deter business expansion but, rather, to “bring down prices by creat­
ing a new volume of commodities.”
Ignoring the fact that increases in the discount rate would tend to
reduce production and increase unemployment, the Republican chair­
man of Senate Banking and Currency, Senator George P. McLean of
Connecticut, contended that when the object is to reduce prices, “the
normal way is to raise the discount rate.” (Minutes, May 18, 1920
Conference, 2-3.)
On May 18,1920, the Federal Reserve Board held a conference with
the private bankers in the System, namely, the 12-member Federal
Advisory Council, and the three class A directors of each of the Fed­
eral Reserve banks. (Congressional Record, 66th Cong., 2d sess., vol.
In addition, Edmund Platt of New York, then chairman of House
Banking and Currency, subsequently appointed Vice Governor of the
Federal Reserve Board, and a representative of the American Bankers
Association also attended.
As a rationale for such a peculiar conference, the then head of the
Federal Reserve Board, Governor Harding, said that it seemed “ pe­
culiarly appropriate at a time when there is a banking situation to
discuss, to have bankers here to discuss it.” (Minutes, May 18, 1920
Conference, 2-3.)
77-752— 76-------i

What Harding should have said at this historic meeting at the be­
ginning of the 1920 depression was, as Adolph Casper Miller, former
Cornell University professor of Economics, and a member of the Fed­
eral Reserve Board (1914 to 1936) was to say subsequently that the
Board had no policy, that it was about to make a declaration of op­
erational bankruptcy, and had decided to pass the burden of credit
control (by moral suasion) to the member banks. (Sixth Annual Re­
port of the Federal Reserve, 1919,68-73,77-90,99-100.)
“Moral suasion” was to hard headed Ben Strong a poor substitute
for the use of open market operations and the discount rate. He
ointed out th a t if one Reserve Dank refused to loan money to b a n k s
a v in g money on call in New York, th en th e b u rd e n w o u ld te n d to
fall too heavily on th e New York bank. To h im “moral su a sio n ” w a s
divisive, and a m ere p a llia tiv e w h ich would drive “ th e infection” fr o m
one place to another and undermine th e unity of the System.
In November 1919, Governor Strong, hoping to resolve differences
of opinion, convened a second session of the November 1919 Confer­
ence of Governors as a symposium. Most of the Governors agreed with
At this symposium there was an extended discussion of the advisa­
bility of a penalty discount rate, most System officials agreeing with
Glass that the penalty rate at Reserve should be above the market. But
Adolph Miller dismissed the concept of penalty rates as irrelevant
and antiquated. What was needed, Miller said, was a dear understand­
ing as to what standards you use to determine what rates should be.
An analysis of conditions in the district to Miller was the all-important
It was their belief in the so-called penalty rate theory that led the
Governors to accept in January a 6 percent rate. That increase led to
a further increase in bank rates. Loans were not liquidated, and the dis­
count rate never got above market rates until after the bottom of the
depression was reached in December 1920. By that time “the number
of bank failures had surpassed the amount recorded for any year
since 1893” (Banking and Monetary Statistics, 283,438-440,463.)
Hie Governors who came into the System from positions as private
bankers saw its role as essentially passive, and favored rate policies
which would act less to control then to stabilize the market indirectly
by providing accommodations at a penalty.
Whereas, as Senator Glass pointed out, the Board on the other hand
reflects a political climate which sees the control of credit as a public
trust and, therefore, a more active role for the System, (S.R., Novem­
ber 1919 Conference, 12.)


T h e F ed eral R eserve I gnores E co n o m ic S to r m S ig n a l s

With economic storm signals flying at top mast, New York, Chicago,
and Minneapolis banks raised the discount rate to 7 percent on June 1,
1920. Boston followed on June 4, Atlanta on November 1, and the
Dallas bank on February 15,1921. (Banking and Monetary Statistics,
Of course this is incontrovertible proof that a high interest policy in
the face of a declining economy, aggravates the difficulty. Yet, bankers
in hard times traditionally press for high interest, and as they press,

the weakened economy grows weaker. Certainly this was so in the
1920-21 depression.
The Federal Reserve System suffers from officials who have minds
of bankers. The country cannot allow bankers to determine interest
rates. More especially when, as at the Reserve, the bankers act secretly,
and alone, without consultation with the President, his Council of
Economic Advisers, and the congressional leadership.
Who runs this country ? Reserve ?
Dr. Adolph Miller at the April 1920 conference put it this way:
Our Reserve Banking System is the only considerable banking system in the
world in which there is no definitely fixed limit of any kind upon the operations
of the system” ; that reserve requirements, the only factor affecting System
operations which is covered by statutory limitation, “can be suspended by vote
•of the Federal Reserve Board” ; that, “when you analyze the thing funda­
mentally, the discretion of the Federal Reserve Board intimately is the regulat­
ing principle of our Federal Reserve System” ; that “it requires virtually parlia­
mentary sanction in England to do what the Federal Reserve Board was set up
to do in this country” ; that “there is no governmental body in the world, cer­
tainly none that concerns itself with banking and finance, that begins to have
anything like the powers that the Federal Reserve Board has under the Federal
Reserve System” ; and that, “in brief, ours is a reserve system by discretion
instead of by any fixed principle”. Nevertheless, these enormous powers should
not be restricted, Dr. Miller added. On the contrary, “I think the Board should
exercise its power to restrict.
(Emphasis supplied.) (S.R. April 1920 Con­
ference, 518,526-528,535-537.)

Here again we see a decision to be made; namely, to raise or lower
the interest rate. It cannot get a fair hearing. The jury is packed with,
bankers who profit from an increase in interest rates. A depression is
in sight and interest rates should be lowered to stimulate production.
Instead, rates are raised and held at peak levels until September 1921.
Reserve’s catastrophic policy was to “restrict credit and expand
production.” It was like fiddling while Rome burned.
In less than 8 months, beginning November 1919, the discount rate
was increased from 4 to 7 percent at the Federal Reserve Bank
of New York. (Banking and Monetary Statistics, 439-440.)
Between May and October 1920 wholesale prices fell 20 percent.
Cotton fell 93 percent, oil 50 percent, cottonseed oil 80 percent. Manu­
facturing was down 42 percent, unemployment was up to 11.9 percent,
lumber was stagnant, and agriculture was a disaster. (Seventh An­
nual Report of the Federal Reserve Board 1920,7-9; Eighth Annual
Report 1921, 10-12; S.R., April 1921 Conference, 53, 65, 75, 90, 610,
616, 635; Benjamin M. Anderson, “The Road To Full Employment:
Financing American Prosperity,” Paul T. Homan and Fritz Machlup
Edition, New York, The Twentieth Century Fund, 1945, 25; “His­
torical Statistics, Colonial Times to 1957,” House Document No. 33,
86th Cong., 1st sess., 73.)
As the Federal Reserve Annual Report for 1921 notes, the economy
declined 26 percent in 1921, and 56 percent in the 18-month period
from June 1920 through the end of 1921.
The Board had many explanations: Bad transportation, inefficient
labor, world-wide lack of capital. (Minutes, May 18,1920 Conference,
2--3.) But with prices for everything falling, the Board allowed the
bank loan rate to remain at 7 percent. It was a unique depression. All
prices fell except the price of money.

Even as late as January 1921 when agricultural prices in the south­
west were at their lowest, the Board allowed the Federal Reserve Bank
of Dallas to raise its rediscount rate to 7 percent, and keep it there
until September 1921. The most orthodox monetary theorist would not
have suggested an increase in rates during such a sharp deflationary
spiral. It was a dreadful error, and one the Federal Reserve Board to
its regret was to repeat in 1931, with even worse consequences.
Given the economic disaster which had occurred, it is difficult to
understand why the Federal Reserve System persisted in its high in­
terest policy down to September 1921. As early as the May 18, 1920,
Conference that Governor Harding convened, Senator Owen had
pointed out that the inflationary pressure was directly due to increases,
in interest rates triggered by the January 1920 increase in discount
rates. Owen said what was needed was a rollback in rates to stimulate
production, and bring down prices. He suggested a discount rate of 3
percent, coupled with a rigorous policy of moral suasion. (Congres­
sional Record, 66th Cong., 2nd sess. vol. 59,7039,7202-7203.)
There are interesting similarities between Senator Owen’s position
and that of the Council of Economic Advisers during a subsequent pe­
riod of inflationary pressure.
In November 1950 the Council told the Joint Committee on the Eco­
nomic Report that “an important inflationary movement should be
met by increasing the facilities and volume of production. This process
requires cheap and ample credit and, until the volume of output in­
creases, inflationary pressure will increase, and must be curbed by other
than monetary measures of the kind which increase the cost of capi­
tal/’ (Statement of John D. Clark, former member of the CEA:
“United States Monetary Policy.” hearings before the Subcommittee
on Economic Stabilization of the Joint Committee on the Economic
Report, 83d Cong., 2nd sess., December 1954,48.)
Governor Harding replied that however desirable, “on general prin­
ciples,” the expansion of trade and industry such as Senator Owen
wanted must await “the actual supply of capital and credit available.”
(Recommendations of Federal Advisory Council, May 10,1920; Sum­
mary, April 1920 Conference, 2, Minutes May 18, 1920 Conference.
3, 5, i4.)
In that reply is the answer to the mystery of the System’s inappro­
priate response.
Reserve officials were looking at financial, rather than economic
data. As bankers, this is what they had been taught to do. They were
obsessed with the fact that member banks were heavily in debt to the
Reserve banks, and were determined to reduce that debt at whatever
The cost was high. And, in fact, the System did not succeed in doing
what it set out to do. It did not reduce "the level of bank indebtedness
to the System by maintaining the 7 percent discount rate. It was not
until Benjamin Strong “discovered” open market operations in the
early part of 1922 that member banks were taken out of debt (as they
are still put into and out of debt to the Reserve banks) by actions o f
the Reserve banks themselves. The other effect of Governor Strong’s
purchases of Government bonds in the open market was to lower inter­
est rates. Thus, in the spring of 1922 with the member banks out of debt
and able to make new loans, and with interest rates falling, recovery
got underway.


hen the

F ederal R eserve H as T o D epend on I ts E arnings I nstead


C ountry’ s Needs Is W arped

It was not only a desire to benefit member banks that made the Sys­
tem favor high interest. At this period it held few Government securi­
ties and relied on discounting for its own income. With an increase m
the discount rate, its earnings rose. For instance, the New York Times
in January 1921 noted that the New York Federal Reserve Bank re­
ported earnings of 217% percent for 1920, as against 129^ percent in
1919. (New York Times, Jan. 3,1921, p. 2 of sec. 2, and January 30,
1921, p. 7.)
# ,
The Times figured the New York bank’s profits “at the rate of a clear
million or more a week,” and “total Reserve earnings” at “more than
double that.” (New York Times, Jan. 2,1921, p. 2, sec. 2.)
The 12 banks for the first 6 months of 1920 made $6.8.5 million of
vrhich the New York bank alone made over $24 million. (Ibid.)
The profits the Reserve banks were making as a result of their high
discount rate were a source of great embarrassment to the System. Well
it might be. As the New York Times commented editorially, such
profits are “a matter of national, rather than local concern” because
“these profits belong to the Nation,” and there is “a first lien on them”
for “the accommodation of the customers of the Reserve banks through
member banks.” (Ibid.)
The Times, however, accepted the System’s argument that the Treas­
ury pegged rates too low when the Liberty Loan bonds were floated,
and that when the national spending stopped at war’s end, the Reserve
System had no alternative but to raise interest rates.
Naturally, the amount of the Reserve’s banks’ profits upset the west­
ern farmers and southern planters. Their outstanding borrowings
climbed from $729.2 million in 1919, to $1,980 billion in 1920. (New
York Times, Jan. 2,1921, p. 2 of sec. 2.)
This led to demands by Senator McLean of Connecticut, then chair­
man of Sennate Banking, to apply $100 million to reduce the short-term
debts of the United States, by Senator Hitchcock of Nebraska to use
it as a special deposit to create credit for loans to farmers, and by Sen­
ator Sterling of South Dakota to use it to purchase debentures of the
farm loan bank. (New York Times, Jan. 5,1921, p. 23.)
R eserve I gnores G old F lows

Gold had left the country at the war’s end when controls were re­
moved, but started to flow back into the United States with the interest
rate increases in November 1920. When it flowed out reserves had to
be increased and, correspondingly, when it flowed back, needed reserves
•were less.
Reserve officials ignored the relationship between the gold inflow,
and their high interest policy. They concentrated on how to hide the
increase in reserves in order to avoid rate reductions. (S. R., April 1921
Conference, 1089-1090.)
But the surplus reserves did not escape the eagle eye of Henry C.
Wallace, father of Henry A. Wallace who was Secretary of Agriculture
(1933-1940); Vice President (1941-1945), and Secretary of Commerce

In his paper “The Farmer,” Wallace called for a reduction in the
rate in view of the rising reserve ratios. (S. R., April 1921
Conference, 5-8,562-581,1090.)
It was cnrstal clear that the pressures for rate reduction would
increase, and Reserve would have to take some action.
At both the April and October 1921 Conferences various schemes
to hide the reserves were suggested. Strong said the New York Bank
had the stock exchange fellows “tamed,” but he was scared to death
about the farmers. His remedy was to buy all the farm paper he could
from other Reserve banks, and keep the reserves to a minimum.
Dr. Miller objected that this method would help New York, but set
up reserves in other banks. He suggested a bookkeeping change under
which Reserve would put gold into the note reserve.
But the Governor of the San Francisco bank objected to Miller’s
suggestion as it would be impossible to get the public to look at any­
thing but the high reserves wherever you put them.
Strong offered a second suggestion. Put the gold in cold storage
by leaving it abroad on the excuse it would shortly flow back.
This would save transportation costs. Abroad, it could not count in
Strong came up with another suggestion which, temporarily, won
favor. This was to have the Treasury issue gold certificates against the
gold, to reduce the reserve percentages of the Reserve banks which
might relieve the pressure for lower discount rates. Strong favored
this method, even though he regarded it as inflationary. And, when
it was put into effect at the end of 1921, it did serve as an inadvertent
aid to recovery.
John U. Calkins, Governor of the Federal Reserve Bank of San
Francisco (May 16,1919 to Feb. 29, 1936), and Strong, warned that
any improper use of the gold would leave the System open to hostile
criticism. Under Secretary of the Treasury Gilbert also warned against
the hoarding of gold by the Reserve banks. (S. R., October 1921 Con­
ference, 90-91,95-96,99,374r-377.)
No matter how Reserve attempted to cover it up, it sat in the fall
of 1921 as the repository of a majority of the world’s gold supply,
and it had to reduce its discount rate. The question was how.
Strong privately admitted that the Federal Reserve should intervene
in economic events, but he did not want to admit publicly that it could,
and did, for fear of ’ ''' ’
ssure on the Reserve banks. Likewise,
operations because that means of
he favored using
control could be use
>o great a red flag.” (S.R., November
1925 Conference, 208-209.)
As we have seen, Strong opposed lowering the discount rate, but
advocated an increase in open market operations to bring the rate
down so that the System could appear to be reacting to market condi­
tions rather than making them. Strong’s reason for wanting lower
rates had more to do with the international situation than with
domestic economic events.
Strong’s argument to the Governors was as follows:
. . we cannot afford in this country to impound all the monetary gold in the
world and lock It up and not permit the world to do banking here and borrow
money here. In other words, we are shutting down on the world’s recovery and1
closing our markets, if we require gold payments for everything, and then don’t
use some of that gold as the basis of some extension of credit, and we feel in

New York that the general recovery of trade around the world is going to be
brought about by our making New York a good market in which the world can
borrow money, and that applies to the world, but New York is where they first
come”. (S.B., October 1921 Conference, 638-636.)

A large part of the expansion in Federal Reserve credit in 1919
was due to a demand for circulating currency, a fact overlooked by
Reserve officials.
The drain did not persist after 1919. I f it had, given the System &
high discount rate, our banks would have collapsed in 1920, as they did
in 1933. In 1920 and 1921 cash flowed back into the banks which, with
gold inflows, reduced member bank indebtedness to the Reserve banks*
to $1,340 million in 1921. (Chandler, supra, 175, 186-187.)
M ello n R educed t h e D is c o u n t R a t e

When President Warren G. Harding took office in March 1921,
Andrew Mellon was appointed Secretary of the Treasury, and Ogden
Mills, his under secretary. Both wanted lower interest rates in order
to market government securities.
In April and May 1921, Andrew Mellon pushed through slight rate
reductions that both Adolph C. Miller and Benjamin Strong, Jr.
Miller and Strong thought that retail prices should decline further,
and that despite an alarming increase in unemployment, wages were
still too high. (S. R. April 1921 Conference, 674-679; Chandler, supra,
We had an 11.9 percent unemployment rate. Four million more peo­
ple were thrown out of work—a five-fold increase. (Benjamin M.
Anderson, “The Road to Full Employment; Financing American
Prosperity,” Paul T. Homan and Fritz Machlup, ed.), New York, The
Twentieth Century Fund, 1945, 25, “Historical Statistics, Colonial
Times To 1957,” House Document No. 33, 86th Cong., 1st sess., 73).
Nevertheless, Mellon prevailed.
In April 1921 the Reserve Bank of Boston agreed to the Treasury’s
request to reduce its discount rate to 6 percent, and by November 1921
its rate was down to 4% percent.
The New York and Philadephia banks also adopted a 4 ^ percent*
rate, and rates at the other Federal Reserve banks were 5 to 5% percent.
And so in November 1921, for the first time in over a year the overall
level of discount rates fell below the average rate charged by banks on
customers’ loans.
Apparently the System had learned its lesson on that score.
At no time since has it attempted to function with discount rates
above the level of market rates as in 1920-1921. (Banking and Mone­
tary Statistics, 283,261, 356, 440, 443, and 463, Chandler, supra, 175,
T h e F ederal R eserve S y s t e m E vades R e s p o n s ib il it y fo r t h e
1 9 2 0 -2 1 D epr e ssio n

As one would expect a disaster such as had been experienced in
1920-21 brought forth demands from Congress, and the public at
large, thatFederal Reserve officials explain what had happened, and
justify their actions. Governor Strong told the Agricultural Commis­

sion that America’s economic problems originated abroad—the result
of a postwar depression which was both inevitable and worldwide in
To further suppress any hint that the System itself might have been
responsible for events, Reserve officials also deliberately minimized its'
In his first appearance before the Congress on June 7,1921, Andrew
Mellon adopted this position, saying:
The Federal Reserve System is merely the general banking organization of the
. and
the private member banks are the banks which do the
business, which advance the money. It is not the Government’s money; the Gov­
ernment merely has the fiscal organization for the deposit of the reserves of those
banks. (Amendment to Farm Loan Act, Hearings before House Committee on
Banking and Currency S.1837,67th Cong. 1st sess., June 7,1921,9.)

By minimizing the role of Reserve’s open market operations as a
policy tool, and perpetuating the idea that Reserve bank investments
were primarily a means of covering expenses, it was possible to argue
as Governor Harding did that the System’s discount rate “had no
effect on the market”—that it merely interpreted market conditions.
(S.R., April 1921 Conference, 30.)
The Harding-Mellon argument would have you believe that the Fed­
eral Reserve System was not a central bank conducted by Federal
Reserve New York for the whole System. However, in two respects the
System was already centralized by 1922. First, on the administrative
level. Second, by the New York Reserve Bank’s conducting a systemwide open market account.
. . .
Benjamin Strong was of course responsible for this. In his opinion
control of the System by the political appointees to the Federal Re­
serve Board, rather than by experienced bankers, would be dangerous.
(S.R., Second Conference 1915,451-463; S.R., April 1921 Conference,
During the April 1921 Conference, for instance, Strong argued the
Reserve banks rather than the Board should have the dominant voice
in determining policy. While they may differ as to rates, “in the long
run (they) are m a better position to escape the most dangerous kind
of pressure, not the pressure of member banks, but the pressure right
up here in the Capitol.”
As Strong saw it:
What this System requires is protection against misled public opinion, which
will be reflected in Congress, in some foolish act by Congress, and I must say in
all frankness that I believe the Federal Reserve Board is very vulnerable, if it
exercises that control; much more so than are these twelve reserve banks un­
doubtedly. If the Federal Reserve Board is in a position to say in response to
these demands. “We do not control these reserves, we have not got the power to
shovel a hundred or two hundred or give hundred milUons of gold into the reserve
of the Reserve banks, the question is answered at once, and my experience,
through every administration that I have been through, indicates that there is
always going to be pressure applied to the Federal Reserve Board.” (S.R., Oc­
tober 1921 Conference, 469.)

To paraphrase Strong’s comment from another point of view, there
is always a threat of legislative action to make the Reserve System more
responsive to economic conditions, and this explains the aura of sub­
terfuge which has characterized Federal Reserve policy positions from
this period down to the present.

T he B ill T o P ut


Secretary op A griculture
R eserve B oard

on the

F ederal

In march 1922 Congress held hearings on a bill to add an eighth
member to the Federal Reserve Board to represent agricultural
The Federal Advisory Council petitioned President Harding to op­
pose the legislation, because the Board should reflect a “judicial point of
view uninfluenced by the wishes of parties or classes.” (“Amendment
to Federal Reserve Act,” hearings before the House Committee on
Banking and Currency on S. 2263, 67th Cong., 2d sess., March 15-16,
1922,6,17-21. S.R., 2d Conference (1915), 458, Summary, 5th Confer­
ence (1915), 9, S.R., January 1916 Conference, 2-10.)
Secretary Mellon, as a witness before House Banking and Currency,
testified that:
The Federal Reserve Board does not pass upon paper from agricultural regions
and has no latitude as to what may be discounted
The Board is just a regu­
lative board, and it is the individual Federal Reserve banks which exercise dis­
cretion as the extent of accommodation to the member banks. (Idem.)

When Congressman Eugene Black of Texas questioned Mellon say­
ing he understood that the policies of the Federal Reserve banks “are
determined largely by the Federal Reserve Board,” and that this was
the intent of the law, Secretary Mellon rephrased the law this way:
The Federal Reserve Board has general supervision of the Federal Reserve
banks and has authority to correct anything which it believes to be unsound in
policy. (Amendment to Federal Reserve Act, 9.)

Mellon’s testimony is important because in March and April 1922
he had striven to repress the open market authority of the Federal
Reserve banks, and assert the Board’s powers in this area. Their pur­
chases influenced lower rates, though the extent of the downward
push was not generally known.
But Andrew Mellon did not fool Henry C. Wallace, Secretary of
Agriculture, who told the committee:
I have not thought of the Federal Reserve Board as a purely administrative
body, but rather as an institution which determines the general financial and
credit policies of the country, and from that standpoint, I am not able to agree
with the suggestion that a larger membership would be inadvisable. On the con­
trary, it seems to me that the membership of a board, which in time, if not now,
will, through the exercise of its administration of the great credit machinery of
the country, have a very direct influence upon prices and upon business in general
should be a cross section of our industrial life, including agriculture—I am not
using the words “industrial life” in a restrictive sense. Such a board might well
represent a cross section of the entire business life of the Nation.
The board should be made up of men who have a keen understanding and full
appreciation of the effect of every policy of this board on agriculture, industry,
commerce, labor, and other large interests, because the administration of this
credit machinery can make or break labor as weU as agriculture. (Amendment
to Federal Reserve Act, supra, 9,23, and 25.)

When Congressman Brand of Georgia asked whether the Federal
Reserve Board could adopt policies which would have “the effect of
increasing or decreasing the price of agricultural products,” Heniy C.
Wallace assured him that it certainly could. This caused Governor
Harding to tell the committee that:
The (Reserve) banks are localized. Bach federal reserve bank is an independ­
ent entity, as you wiU see if you wiU read section 4 of the Federal Reserve Act,
which describes the powers of the Federal Reserve banks. The duties of the

Federal Reserve Board, as pointed out by the Secretary of the Treasury, are
largely supervisory and, in a general way, administrative. But the powers of the
Federal Reserve Board have been grossly exaggerated. I do not think the Secre­
tary of Agriculture has a correct conception of the functions of the Federal
Reserve Board, with all due respect to him.
The board cannot exercise, under the law, any such influence on prices as he
seems to think it can. (Amendments to Federal Reserve Act, supra, 27.)

It is no exaggeration to say that Governor Harding was deliberately
attempting to mislead the Congress. The Board had pushed through
all the reductions in the discount rate in 1921 and, as we have seen, the
reductions in April and May were put through despite Governor
Strong’s objections because Secretary Mellon insisted.
By one of the ironies of Federal Reserve history, there is neverthe­
less a great deal of truth in the false testimony Governor Harding and
Andrew Mellon gave House Banking and Currency in 1922.
The System was, as we have seen, at that very time moving irrevoc­
ably in the direction of centralization through open market operations
in Government securities. As a result, because of its location, and the
personal and intellectual qualities of its Governor, Benjamin Strong,
Jr., the influence of the Federal Reserve Bank of New York was greatly
enhanced. Correspondingly, the influence of the Board diminished.
The false witness of Messrs. Harding and Mellon, therefore
resembles a classic case of the self-fulfilling prophecy.
O ur N ew I nternational F ederal R eserve S ystem

In October 1921 Governor Strong was deeply absorbed in the first
of many international ventures, ana more concerned with them than
domestic policies. At the October 1921 Conference, he proposed, and
the Conference accepted, setting up a pool to operate an exchange
account with foreign central banks.
Although the 1920 election had soundly repudiated President Wil­
son’s proposal for a League of Nations, and Democratic proposals to
lower the tariff, the Federal Reserve Conference enthusiastically
hacked Strong’s suggestion, Governor Norris of the Philadelphia Bank
I am bound to say that I think the three great opportunities that we have
had to accomplish the stabilization of foreign exchange were, first, to go into
the League of Nations; second, to make a readjustment of our tariff view to
opening our doors to export as far as it could be done with the least disturbance
to our industries rather than put up barriers. Neither of those things has been
done or will be done, and the third was to empower the Secretary of the Treasury
to deal in an intelligent way with the refunding of foreign obligations . . .
(and) the limitations that have been written into the bill will make it impossible
-for him to do anything of any real use
But because we have lost those
three, it does not follow, of course, that we ought to throw aside and discard
all others
(and) it seems to me that the proposition you have suggested is
one that undoubtedly has merit and may reasonably be expected to accomplish
some results. (S.B., October 1921 Conference, 721-741.)

Of course foreign central banks under control of their governments
would need approval of their executives. The Federal Reserve was
-exempt from such control, being an agency of Congress and needing
congressional authority in the form of legislation approved for any
activity outside the scope of existing law. The System was, however,
-authorized to maintain accounts in foreign banks, and Strong pro­
posed to operate his foreign exchange pool through this technicality

In order to avoid the certainty of a congressional veto of Federal
Reserve participation. (S.R., October 1921 Conference, 721-741.)
This was a first and a very significant step toward full participation
by the System in international financial arrangements. More important
was Strong’s modus operandi, since it served as a model for later
actions. Not only did he bypass the Congress, but he set up a new rela­
tionship between the New York Bank and the Treasury.
This relationship became so congenial that it became habitual for
Strong to bypass the Federal Reserve Board altogether, and deal
directly with Secretary Mellon and his aides in matters involving
international finance.
With the aid of sympathetic Treasury officials, Strong transformed
the Federal Reserve Bank of New York into a central bank which
could deal with international finance as effectively as its European
Regretfully, Strong’s action in taking upon himself the interpreta­
tion of the act has become a pattern at the Federal Reserve.
Their secret operations of the open market account, and their alleged
independence from oversight by either the executive or the Congress,
or even the Comptroller General, encourages the bureaucrats at Re­
serve to interpret the act to fit their purposes.
In making this particular interpretation, Andy Mellon and Strong
are no different from “Silver Tim” Sullivan of Tammany Hall who
used to say “What’s the Constitution among friends?”
In Mellon and Strong’s case it was “Wnat’s the Federal Reserve
Act among efficient and experienced bankers?”
Unfortunately, as we will see, this tendency to so interpret a pro­
vision in the act persists to the very day.
Strong’s ipse dixit was but the first of many to come. What an oper­
ator he was!

In the short time the Federal Reserve banks existed before World
War I, at the New York Bank, under its able Governor, Benjamin
Strong, there had developed a sophisticated mechanism for centraliz­
ing there the open market operations of the Federal Reserve System.
Of course the market was quite undeveloped, and limited to bankers’acceptance, municipal warrants, and the one billion of 2-percent Gov­
ernment bonds that prior to the Federal Reserve Act had secured the
bank note currency then in use.
And, during World War I, Reserve did not conduct open market
In these early days Strong had endeavored to have his New York
bank act as the agent for all the Reserve banks in their open market
operations, and he was moderately successful.
However, New York acted on its own and. at the outbreak of World
War I, was left with a portfolio of $300 million of acceptances on its
hands. (Stenographic Record, hereinafter cited “S.R.”, April 1920'
Conference, 439-443.)
Strong, at the March 1919 Conference tried once again, and there,
for the first time, he proposed that open market operations be used as
a tool of policy independent of the question of the need of a Reserve
bank to purchase to obtain earnings.
The New York Bank’s proposal was contained in a set of guidelines
which recommended that transactions in bankers’ acceptances of all
Reserve banks be coordinated as a means of developing a market for
these bills. (S.R., March 1919 Conference, 329.)
It contemplated that the New York Bank would buy but not sell'
except to other Reserve banks. Selling was to be left- to dealers in dis­
count, and specialists with whom the New York Bank felt it should not
But to insure that these dealers could carry bills until marketed,
the proposal contemplated the use of repurchase agreements, (S.R.,
March 1919 Conference, 356-357). much as Reserve’s Open Market
Committee does today.
In the event a Reserve bank bought or sold acceptances outside its
district, the Strong proposal called for this being reported. To this
end, the New York Bank inserted into the guidelines at the March
1919 Conference a provision that all sales of bills by one Federal Re­
serve bank to another “promptly be reported to the Federal Reserve
Board.” (S.R., March 1919 Conference, 329-330.356-358.)
The Board sanctioned New York’s proposal, and in its comment
pointed to the provision in the act under which the Board had power
to compel one Reserve bank to rediscount the paper of another, argu­
ing that it had a vital interest in any arrangement shifting investments^

because of its effect on reserve ratios. (S.R., March 1919 Conference,
At the March 1919 Conference and at the suggestion of Strong, it
was agreed that when one Reserve bank buys acceptances outside its
own district, it should be through the Federal Reserve bank of the
other district. (S.R., March 1919 Conference, 359.)
Since New York was “the primary market”, the potential effect was
to return to the New York bank the position of control over the open
market transactions of the Reserve banks which it had enjoyed in
the period prior to World War I.
At the April 1920 Conference, J. Herbert Case, Vice Governor,
Chairman, and Federal Reserve Agent of the New York bank
(1930-36), proposed that all Reserve open market operations go
through their bank as was the case pre-war. (S.R., April 1920 Con­
ference, 439.)
Currently only three banks (San Francisco, Chicago, and Cleve­
land) were having the New York bank buy for them.
When some of the Governors stated that their banks had ceased to
participate with New York because their reserves were low, Gov.
John U. Calkins, Governor of the San Francisco Federal Reserve
Bank (1919-36) used this point to argue for allowing New York to
buy for all 12 Reserve banks, thereby distributing the acceptances pro­
portionally among them. (S.R., April 1920 Conference, 439-440, 440In this, Gov. Elvardore R. Fancher, Governor of the Federal
Reserve Bank of Cleveland (1914-35) supported Case and Calkins
primarily because of New York’s strategic location. (S.R., April 1920
Conference, 440-443.)
But there was opposition. You recall that in the fall of 1919, as a
result of its selling $500 million of bonds, Treasury had difficulty
thereafter in selling to the member banks its December issue of $400
million, and its fifth Liberty Loan in January 1920.
In November of 1919 in particular, Treasury had to make substan­
tial purchases to stabilize the Government bond market. Under Sec­
retary Leffingwell complained that because of Strong’s low buying
rates, the market for bankers’ acceptances had not been affected by the
discount rate increases. His comment was that if Strong were to ap­
ply to the Treasury bill market the same doctrine that he seeks to im­
pose on Treasury, the situation would be well met.
Gov. Charles A. Morss, Governor of the Federal Reserve Bank
of Boston (1917-22), joined Leffingwell in opposition to the New York
bank contending he could not defend in Boston, New York’s low buy­
ing rate. (S.R., April 1920 Conference, 446-447.)
^Manager of the New York bank’s open market operations E. R.
Kenzel, Deputy Governor of the New York bank (1921-33), then
pointed out that New York bought acceptances to stabilize the mar­
ket, and Gov. James B. McDougal, Governor of the Federal Re­
serve Bank of Chicago (1914-34), added that if the New York bank
did not do so, “there would not be any market.” (S.R., April 1920
Conference, 447-449.)
Governor Morss, however, remained unconvinced, and Kenzel had
to move that a committee be appointed to study the problem. The mo­

tion was carried and Morss, Fancher, and Kenzel became the Com­
mittee. (S.R., April 1920 Conference, 451-453,455.)
The Committee attempted to accommodate different points of view.
It recommended each Reserve bank develop its local market, but that
the Reserve banks buy bills without regard to the amount created in
their own districts and stand behind acceptances unreservedly. The
Committee also noted that 5 of the 12 Reserve banks held 90 percent of
the total acceptances.
But Governor Morss of the Boston Bank vetoed New York’s pro­
posal that each Reserve bank agree to take its portion of bills bought
by other Reserve banks under any and all circumstances. When, in an
effort to meet Morss’ objections, the Committee recommended it be
replaced by a Standing Committee” to suggest buying rates for open
market purchases of bankers’ bills, Morss refused to allow it. (S.R.,
October 1920 Conference, 31-39.)
Besides its disagreement with the Boston bank, just before the Oc­
tober 1920 Conference, the New York bank got into a hassle with the
Chicago bank which had wired New York to sell $25 million of Chi­
cago s endorsed acceptances. New York, as noted, had a firm policy
against the sale of acceptances, leaving sales to specialized dealers.
But Governor McDougal of the Chicago bank at once asserted that the
acceptances belonged to it, and it had the right to do with them what
it pleased. (S.R., October 1920 Conference, 89-46.)
Moreover, McDougal points out that when the New York bank buys
bills from its dealers, it requires each bill to be endorsed by a bank
which receives a commission for the endorsement. As a result, banks
that endorse are liable on acceptances they have never owned, so that
New York’s real interest in not wanting endorsed bills sold is to
prevent their being “hawked around to the embarrassment, if not
the detriment, of the endorser.”
M®Pou^ concluded his discussion by saying that inasmuch as
the New York bank conceded Chicago’s right to sell bills in its pos­
session regardless of the contrary policy of the New York bank,
Chicago did not regard the Committee recommendation to the conJ?16 Kenzel Committee report as binding on it (S.R., Octo­
ber 1920 Conference, 106-111.)
. Once more the Conference sought to resolve differences by appoint­
ing as a Standing Committee the same three members, but nothingcame of it. There was a natural tendency by the twelve Reserve banks'
to keep to the regionalist cast that the Congress intended for the
bvstem. New York’s efforts to dominate were met with hostility. Its
efforts to centralize open market operations were consistently thwarted
by other Reserve banks seeking to maintain functional independence.
, , 1J” der these circumstances it is not surprising that this attitude o f
the Reserve banks curtailed the amount of investments purchased.
But, of course, 1920 was a depression period, and both the low
reserves of the New York bank, and its low buying rates, did not
encourage investment.
However, it is quite evident that at this time Strong did not understand open market operations. The New York bank should never*
have increased the discount rate in November 1919, and January 1920.
and kept raising it thereafter into 1921.

But also both its low buying rates, and its restrictions on the free
sale of acceptances, were counter productive.
What was wrong was the New York bank’s devotion to the so-called
“real bills” theory.
By 1921 Benjamin Strong had learned his lesson, and lost his attach­
ment to the real bills theory. He was by then ready to have his bank
conduct open market operations to control the economy and avoid
Strong was to die in 1928, and his successor at the New York bank,
George L . Harrison, Governor and President (1928-40), was to repeat
Strong’s mistake of buying acceptances in volume, while holding the
discount levels so high as to force member banks to liquidate their
In addition, in 1928 Boy A. Young became chairman of the board
(1927-30), and to his country’s deep regret, he revived Strong’s
1919-20 policies.
T he 1921 M arket O perations

of the

N ew Y ork F ederal R eserve

B ank

Despite being able to reach agreement as to open market operations,
the Special Committee reported at the April 1921 Conference that
it had appointed a Secretary at the New York bank, arranged for
weekly reports by telegram to him from the district banks as to
operations and conditions, amounts of bills bought, rates, comments
of dealers as to supply, price, movement of bills, et al.
Thus the Committee was able to summarize developments between
October 1920 and April 1921.
It noted a lack of uniformity in the rates, and recommended, absent
extraordinary circumstances, that rates at all Reserve banks be
The Committee protested the practice of San Francisco, Minneap­
olis, and New York in holding unendorsed acceptances.
It also complains that Richmond, Atlanta, and Dallas are purchas­
ing acceptances directly, and recommends that sales of bills be in
well established markets, such as New York.
It favors the use of repurchase agreements as New York has been
doing, and advocates a minimum buying rate. (S.R., October 1921
Conference, 62-70.)
Of course early in 1921, interest rates began to fall so that the
Committee could say, as a result of easier market rates, the member
banks were depending less and less on Reserve.
It attributed the fall in rates to about $300 million of foreign funds
invested in the New York discotmt. market, and the inflow of gold.
(S.R..October 1921 Conference, 70-75.)
Until April 1921 we must remember that Beniamin Strong felt
that Federal "Reserve, as a central bank, should follow high lending
r>rincinles of Walter Bagehot who was an English economist^ (182677). His work, “Lombard Street,” published in 1873. and written to
explain the necessity for keepinsr a greater reserve in the hands of
the Bank of England, is regarded as first formulating the modem
theory of central banking.

However, Strong’s reliance on Bagehot had brought on the 1920-21
depression, and whatever other faults he had, Strong learned from
that bitter experience.
In other words, by April of 1921 Strong was prepared to have
his New York bank use open market operations to control the economy,
lowering interest rates as needed to increase production, and no longer
holding the discount rate high to force member banks to liquidate
their loans.
Between April and October 1921 the New York bank, under Strong’s
guidance, undertook to lower rates by means of purchases in the open
While Strong’s public statements about this time were confusing
and misleading (S.R., October 21 Conference, 634—637, and see Chand­
ler. 207-208 for a confusing letter written in October 1921 by Strong
to an Ohio manufacturer discussed in “Federal Reserve Structure,”
Staff Study of House Banking and Currency Committee,” December
1971,92d Cong., 1st sess., at 72-73).
Strong’s statements to the Conference, and the actions of the New
York bank, indicated quite clearly that Strong was directing New
York’s open market operations to lower interest rates.
Strong’s method was to be in the market to buy Treasury bills, not
in volume, but enough to put pressure on the market, and, in the
case of Treasury certificates, to buy up every one that was offered so
as to keep them at a premium on the assumption that when a thing
sells at a discount no one wants it. (S.R., October 1921 Conference,
Of course as the October report of the Committee indicates, both
the gold inflow, and increased foreign purchases, were decisive factors
in lowering interest rates during 1921.
The New York bank’s efforts unilaterally on its own to reduce
interest helped, but its allotment proposal had been rejected by its
brother banks, and it could not be a decisive factor unless it had
power to deal for the entire Federal Reserve System.
However, New York’s success in the last half of 1921 was such that
Strong could, and did, call it to the attention of the other Governors.
Since a majority of them wanted to reduce interest, he was able, on
the basis of New York’s 1921 experience, to persuade many of them to
adopt a more activist policy.
In 1922 R eserve E stablishes the Committees on C entralized
E xecution op P urchases and Sales op G overnment S ecurities

Beginning in 1922 the Federal Reserve banks began acquiring Gov­

ernment securities. Between January and June they bought $365 mil­

lion, bringing their total holdings to $620 million.
These purchases caused alarm, and led to charges that the Reserve
was trying to create easy money. (See “Federal Reserve Policy 1921BO,” by Prof. Harold L. Reed of Cornell University, New York,
McGraw-Hill 1930 at 28; “minutes,” July 12, 1922, Committee on
Centralized Control, Federal Reserve file 383a.)
As a result, there was pressure primarily from the Treasury for
Reserve to create a committee to centralize Reserve’s purchases of
government securities.

This caused Secretary Mellon to consult with the General Counsel
of the Federal Reserve Board who advised him the Board could take
any action it needed. (Memorandum, April 13,1922, Walter S. Logan^
general counsel; letters of April 14, 1922 by TJnder Secretary of
Treasury, S. Parker Gilbert to Board, and April 25,1922, from Sec­
retary Mellon to Federal Advisory Council, FRB file 333a.)
Mellon also consulted with the Federal Advisory Council which
agreed with Mellon that Reserve should hold only acceptances, and
not buy Government securities, at least in excessive amounts.
The Council thought Reserve should confine their purchases to
short term Government obligations, taking care to schedule their
purchases so as not to interfere with Treasury security operations.
As one would expect, both Andrew Mellon, and his 12 apostles_on
the Federal Advisory Council were wedded to the so-called real bills
theory, and viewed with horror the central bank’s holding Govern­
ment bonds to back the national currency.
Mellon was ready. Accordingly, he requested that the Council of
Governors at their May 2,1922 meeting discuss the topic.
Except for Beniamin Strong, all the Governors acted defensively,
and insisted they "bought Government bonds “for income purposes.”
Governor Calkins stated his bank bought them because “acceptances
are practically unobtainable at the present time.” (S.R., May 1922
Conference, 7-10.) But Strong argued his bank’s purchases were for
economic reasons. (Summary, May 1922 Conference, 10.)
Strong went so far as to say mat one of his bank’s chief purposes
was to have on hand investments which would enable it to exert con­
trol on the money market in case it was necessary to do so.
In his view there is a relationship between these purchases, and the
declining interest rate, so that had not the Reserve banks intervened
“recovery of business would have been somewhat slower.”
Reducing interest, and keeping funds available to the country, said
Strong, “has been one of the influences that has hastened and facili­
tated the recovery of business that has taken place.” (S.R., May 1922
Conference, 133-134.)
What a change the depression of 1920-21 had wrought in Strong!
The man who fought the passage of the Reserve Act had been
transformed from Capitalist, to Populist!
The open market operations of the Reserve banks in late 1921 and
early 1922 had actually been “an advantage and blessing” to the Treas­
ury as Governor George J. Seay, Governor and President of the Fed­
eral Reserve Bank of Richmond (1914-36) was quick to tell Mellon.
(S.R., May 1922 Conference, 133-134.) The trouble was that Treasury
thought it had been harmed.
Even though the Federal Reserve banks, to a man, thought they
were within their rights, Ben Strong said the wisest thing to do was
not to stand on their rights but to work out a satisfactory arrangement
with Treasury so that, henceforth, it would be fully apprised of Re­
serve’s open market operations.
This was sensible as the Treasury did not object to purchases that
supported the market. Their displeasure was with purchases that
pushed up the price of Treasury issues.
At the suggestion of Governor Strong, the May Conference referred
to the Governors of Boston, New York, Philadelphia, and Chicago,
77-752— 76-------5

how Reserve could work out an orderly method of buying and selling
Government securities. It was also asked to come up with a wise in­
vestment policy for Reserve, and to consider “to what extent can we
afford to pump credit into the market?” (S.R., May 1922 Conference,
Later, at the October 1922 Conference, the Governor of the Federal
Reserve Bank of Cleveland was added to the Committee.
This Committee became the “Committee of Governors on Central­
ized Execution of Purchases and Sales of Government Securities by
Federal Reserve Banks.” It met for the first time on May 16, 1922.
and is the predecesessor of the “Open Market Investment Committee”
established in 1923.
Strong became permanent Chairman of the new Committee which
was to handle all purchases and sales for the 12 Reserve banks (Min­
utes, May 16,1922, FRB File 333a.)
Thereafter, this new Committee set out to sell the Government
securities owned by the Reserve banks.
By June 30,1922 some $55 million was sold.
At a July 12,1922 Committee meeting it was agreed that certificates
maturing August 1,1922 would be allowed to run off.
As of September 20, 1922 the $629 million held by the Reserve
.banks on June 14, 1922 was reduced by $168 million, $130 million of
this being Treasury certificates allowed to mature. (Minutes, June 12,
.1922; Report of Committee, October 10, 1922; FRB File 333a.)
On October 2,1922 when the Committee met it agreed that during
the second half of the year conditions had so changed “that increased
attention must be paid by the System to the bearing of the investment
operations of the Federal Reserve banks upon the money market.”
It asked a free hand, but when its recommendations were presented
to the Governors Conference, McDougal of the Chicago Bank ob­
jected. (Minutes, October 2, 1922, Meeting and Committee Report
of October 10, 1922, FRB File 333a S.R., October 1922 Conference,
P. 4.)
With Under Secretary Gilbert, present, Strong was very much on
the defensive, remarking since the five banks on the Committee were
agreed, their purchases were such as to commit the System.
Gilbert praised what the Committee had done, but said that Treas­
ury would continue to impose on the Board and the Committee its
own policy objectives. He .said a critical time was ahead as Treasury
planned lieavy operations, and he hoped.that the Federal Reserve
oante could continue to liquidate their Government securities with­
out giving a false market either way. (S.R., October 1922 Conference,
It was not until the February 5,1922 meeting of the new Commit­
tee that it reviewed the policy directive of the October 1922 meeting.
It was then agreed that open market operations should be adminis­
tered in such a way as to assist the Federal Reserve System in dis­
charging its national responsibility, to prevent credit expansion from
developing into credit inflation, ft voted to continue its present op­
erations, but not put more Federal Reserve funds into the market by
open market operations. (Minutes, February 5,1923, FRB File 333a.)
This policy of restraint was followed bv the Reserve banks selling
more Government securities. Of the $629 million the Reserve banks held

on June 14,1922, as we saw, $168 million was sold by September 20.
By February 1,1923 the sales were $276 million, and the total securi­
ties then held down to $353 million.
As you might expect, this volume of sales sent the interest rate up.
All 12 Reserve banks went to a uniform 4*^ percent rate which pre­
vailed imtil the middle of 1924. (February 5,1923 Report of Commit­
tee, FRB File 333a; Wicker, Banking and Monetary Statistics, 440.
With the sale of all these Government securities, the income of the
Reserve banks was reduced. This led one Reserve bank in February
1923 to bypass the Committee, and purchase two million of Govern­
ment securities.
This provoked Secretary Mellon, and on March 10, 1923 he wrote
the Federal Reserve Board as follows:
It is hardly necessary to point out that purchases of Government securities
by the Federal Reserve Banks put Federal Reserve funds into the market, there­
by increasing the supply of available funds, and that it is destructive of any
credit policy which the Federal Reserve System may be pursuing to permit the
Federal Reserve Banks to expand credit in this way simply for the purpose of
increasing their own earnings and putting themselves in. a position to pay expenses
and dividends. Such an attitude on the part of the Federal Reserve Banks sub­
ordinates the major question of credit policy to a purely incidental question of
Federal Reserve Bank housekeeping . It seems to me clearly necessary, there­
fore, that the Federal Reserve Board, acting under its general powers, should
prescribe regulations governing the open market operations of the Federal
Reserve Banks, and require in these regulations that the Federal Reserve Banks
shall not make any further purchases of Government securities, or biUs, for the
purpose of increasing their earning assets without first getting the express ap­
proval of the Federal Reserve Board, and that generally speaking the Federal
Reserve Banks shaU not in. the future make investments simply for the purpose
of increasing earning assets. It should also be definitely understood that under
any circumstances aU purchases and sales of Government securities for account
of the Federal Reserve Banks are to be handled through the Central Committee
of Governors which is now functioning.

Coming to the then policy of Reserve, Andrew Mellon added that
in his opinion, with rising interest, the Fedenal Reserve banks should
liquidate the Government securities they then held rather than accu­
mulate more. (Letter, March 10,1923, Mellon to FRB, File 333b.)
This blast by Mellon caused Edmund Platt, Vice Governor of the
Board, to appoint a Committee to prepare regulations for open market
operations. The outcome was a resolution drafted by Dr. Adolph C
Miller dissolving the “Committee on Centralized Execution of Pm\
chases And Sales”, and replacing it with a new Committee entitled
“Open Market Investment Committee” with the same five bank Gov
ernorsas members, namely, Boston, New York, Philadelphia, Chicago,
and Cleveland.
The new Open Market Committee directed the Board to be guided
by these principles:
(1) That the time, maimer, character and volume of open market
investments purchased by Federal Reserve banks be governed with
primary regard to the accommodation of commerce and business and
to the effect of such purchases or sales on the general credit situation.
(2) That in making the selection of open market purchases, careful
regard be always given to the bearing of purchases of U.S. Government
securities, especially the short-dated issues, upon the market for such
securities, and that open market purchases by primarily commercial
investments, except that Treasury certificates be dealt in as at present,

under so-called “repurchase” agreement. (Resolution, Federal Reserve
Board, March 22,1923, Board Memorandum X —
3675, FRB File 333a,
S.R. March 1922 Conference, 16-23.)
Interestingly enough, Mellon, in a later letter of March 15, 1923
(FRB File 333b) made clear to the Board he expected the Committee
to continue open operations in support of government securities, and
in t.hia connection use repurchase agreements with dealers. Later in
1925 when Dr. Adolph C. Miller tried to outlaw these repurchase agree­
ments this letter o f Mellon and his support blocked Miller’s gallant
When this statement of principles as drafted by the Committee, and
approved by the Federal Reserve Board, was presented to the Gov­
ernors’ Conference of March 1933, four Governors (Boston, Phila­
delphia, Chicago, and San Francisco) questioned the Board’s power.
Harding of the Boston Bank said:
I want to stress two points. It is very doubtful, at least in my mind, whether
the Federal Reserve Board has specific power to fix a definite limit as to the
amount of these legitimate open market transactions that a Federal Reservebank
may engage in. They have the right to regulate it, twit nowhere in this Act is
the Treasury Department of the United States charged with that responsibility
for the credit policy for the Federal Beserve Bank; nowhere In the Act is the
Treasury vested with the power to limit arbitrarily the purchase by Federal
iRnnira of notes and bonds of the United States, and nowhere is the Federal
Beeerve Board given specific power to limit the amount for bonds and notes of
the United States that the board or director* of the Federal Reserve banks may
wish to bay.

This caused Norris of Philadelphia to raise the even more funda­
mental objection that if a Committee of the Board were to hold all
the powers of the twelve Reserve banks then, instead of a regional
franking system, we would have a central bank, and the Federal Re­
serve Board would be that bank.
Dr. Adolph C. Miller’s reaction was instant. Efe said that if the
Board lacks these powers, its first duty wasto obtain them.
Dr. Miller said:
I became more and more of the opinion that the open market operations of tt»e
System are going to be the most important part of the System, largely because it
is through the open market danse of the Act that the reserve bants are in a
position to take the Initiative; the bank doesn’t have to sit back and wait until
£Xm»h/viy comes to it, but it is in a position to go ahead and absorb frauds for
its purposes, when it desires to do so.
In this Miller had the support of Under Secretary Gilbert, who

the Treasury thinks that the Central Committee, which has operated now
for about a year has had a most wholesome influence, and that its actions have
been most helpful both to the Treasury and to the general situation. There has
been a liquidation of something over three hundred million dollars in holdings
of Government securities, and regardless of what we may think about the original
action of the banks in buying this extraordinarily large volume of Government
securities without reference to the Board or to the Treasury, I think there is no
disagreement that the subsequent steps which have been taken have been effec­
tive and helpful all around.

Implicit in Gilbert’s remarks is the assumption that Treasury has

the right to intervene in Reserve policy.

It is instructive to note here that the Treasury’s position m this
episode stands out in sharp contrast to the role which, today, it is
widely believed the Treasury would play in monetary policy were the

Federal Reserve deprived of its independence and made subordinate
to the Treasury andPresident.
The prevailing belief is that the Treasury (and presumably there­
fore the President) desires, above all, low interest rates. Thus, infla­
tionary expansion of money and credit would be certain to follow if
monetary policy were formulated by the Treasury or others respon­
sible to me President.
The events of 1923, when the Treasury favored monetary restraint
and put pressure on the Federal Reserve to liquidate holdings of Gov­
ernment securities, contradict this so often asserted scenario.
It is interesting to observe that Strong’s New York bank did not get
into this argument.
Its Deputy Governor Case remarked that New York and the Com­
mittee had worked very smoothly, and very satisfactorily with Treas­
ury. He also stated the New York bank hud only ten million of Gov­
ernment securities, and after June 15,1923, the total holdings are now
about $230 million.
In other words, the New York bank has been being a good boy, and
just loves Andrew Mellon, and the Treasury.
No wonder that the Federal Reserve Bank of New York came into
its dominant position.
T h e O ctober 1922 S y m p o s iu m O n C r e d it P o l ic y

On notice to bank Governors and Agents, Reserve held on October
10,1922, a conference to discuss credit policy in various ramifications.
It is embalmed in the “Tenth Annual Report of the Federal Reserve
J. M. Keynes took notice of it (“Monetary Reform,” New York,
Harcourt, Brace and Co. 1924, pp. 214-215), and the Report has been
widely admired for the sophistication of its analysis ever since.
Given the wide divergence of opinion expressed during the Confer­
ence, it may be argued that the Report is misleading as an indication,
of the full spectrum of attitudes in the System and its guides for
policy. It necessarily rejects the views of at least half of its officials
on any given subject. Most analysts assume that the Report was written
by the Board’s staff and reflects the views of the Board. The record of
the Conference would appear to support this view with the qualifica­
tion that the Board’s position tends to reflect a selection from the
Conference material, rather than a unilateral effort by the Board to
enunciate an official position for the System.
The Tenth Annual Report states that experience had indicated that
the System could not exercise its function of “fixing rates with a view
of accommodating commerce and business by the simple expedient of
any fixed rule or mechanical principle,” and that the System must rely
on “judgment” as a guide for credit policy.
The position is based directly on Governor George W. Norris’ state­
ment that “changes must always be the expression of a judgment, and
no absolute formula can be devised.”
This view was, however, highly controversial, and was attacked by
Governor Norris’ own board chairman, Richard L. Austin, Chairman,
Vice Governor, vice president and Federal Reserve agent for the Fed­
eral Reserve Bank or Philadelphia (1914-36) who argued that it was

■an obligation of the System to “remove from our rate making the
element of the lack of principle.”
. .
The debate over whether to use rules or discretion in' formulating
.monetary policy is still unsettled.
In recent years it has centered on proposals to increase the money
supply 2-4 or 2-6 percent per year. But the advocates of discretion
prevail today as they did in 1923.
The Conference also reveals the reluctance of a majority of Reserve
.officials to abandon the framework of the real bills doctrine. On the
other hand, there are indications that earlier attitudes had been modi­
fied by the recognition of greater responsibility for economic events.
Governor Norris’ statement that “the prevention of disaster, and
.iiot succor following disaster, is the goal of a successful credit policy,”
appears to reflect a majority view, as well as the view expressed sub­
sequently in the Report.
But the concern for economic events was not put into specific form.
Thus, with Governor Norris concurring, the Report explicitly rejects
price levels as a guide for policy.
Meanwhile, the statements of both Pierre Jay Chairman and Federal
Reserve agent for the New York bank (1946), and Benjamin Strong
stress the significance of the relationship between price levels and
credit policy.
, . .
In one of the most significant statements on record during the
period, Strong said:
Of the various causes of price changes, none Is so potent as changes
in the volume of “money”, that is of credit and currency” (Tenth Annual Report
of the Federal Reserve Board, 1933,8,32.)

This last statement indicates a level of sophistication beyond that
expressed in the tenth annual report. As Wicker has observed, the
Report is concerned with credit, not money.
. . .
But. again, the significance of the Conference material lies in its
•presentation of the full spectrum rather than only the official views
of the System, and indicates the extent to which shifts in personneJ
or influence during the decade which followed were factors in shaping
its response to events.

In 1914 before the Federal Reserve System could be organized World
War I began in Europe, and the New York Stock Exchange closed.
With the end of the war came the 1920-21 depression, only to be
followed by similar trouble in 1923—
24 and 1926-28. (Milton Friedman
and Anna Jacobson Schwartz, “A Monetary History of the United
States,” 1867-1960, Princeton, Princeton University Press, 1963, 284,
298. Elmus R. Wicker, “Federal Reserve Monetary Policy,” 1917-33,
New York, Random House, 1966, 67. “Historical Statistics of the
United States, Colonial Times to 1957,” House Document No. 33,86th
Cong. 1st sess., 116).
Moreover, as we have seen, Strong had the good will of the then
Secretary of the Treasury Andy Mellon and, so far as Reserve was concerned, he was in charge of open market operations.
Mellon favored open market operations that assisted Treasury in
selling bonds, and their use, otherwise, to counteract inflation. But he
distrusted open market operations designed to produce easy money and
counteract depression. Mellon, fortunately, was content to allow Strong
to conduct open market operations, and Strong acted contracyclically.
T he 1923-24 T rouble

As we have seen, the Federal Reserve System held for its own account
$630 million of Government securities on June 14,1922. On orders from
Mellon to the Board, by January 31, 1923 the System had sold $353
million, leaving $277 million on hand.
On May 31,1923 Mellon insisted that the Board order the Federal
Reserve banks to sell their remaining $277 million (Stenographic Re­
port, May 1922 Conference, 520-524.) It did so but it was not a popular
decision. The Reserve banks needed the interest on the securities to pay
their expenses.
Moreover, it was invitable when the Board forced the banks to sell
over $600 million in Government securities between June 1922 and
May 1923 that the economy would be adversely affected, and it was.
In September 1923, the t)allas bank reported a large number of bank
failures in its district and, because of its low earnings and surplus asked
And received permission to buy $10 million of Government securities.
(Letter from B. A. McKinney, Governor, Federal Reserve Bank of
Dallas to Edmund Platt, Acting Governor of the Federal Reserve
Board, September 29, 1923. Proceedings of the Board, October 3,
1923. Letter from Platt to McKinney, October 4,1923.)
As early as the November 1923 Conference, the Open Market Invest­
ment Committee found that steel orders were lower, production in the
New England cotton mills and in automobile tires had slowed down,
and $532 million of stock exchange loans had been liquidated.

Because of this pessimistic report, the Committee stated that it
should resume open market purchases to reduce bank borrowings and
ease money rates. (Report of the Chairman of the Open Market In­
vestment Committee to the November 1923 Conference^ 29.)
Thereafter, and ostensibly to give the System earnings, the Open
Market Committee in January 1924 voted to buy $15 million of Gov­
ernment securities. (Memorandum from Randolph Burgess to J. H.
Case, January 12,1924. Report of the Open Market Committee, Febru­
ary 8,1924. FRB File 333b.2. Letter from Governor Strong to Governor
Crissinger, February 18,1924. FRB File 333b.l. Recommendation of
the Committee on Discount and Open Market Policy of the Federal
Reserve Board, February 20,1924. Letter from Governor Crissinger
to Governor Strong, February 21,1924. FRB File 333b.l.)
However, it was February of 1924 before the Board approved. Eco­
nomic conditions worsened, and all available indexes for March 1924
showed a considerable decrease in production and business transac­
tions. The Committee, again ostensibly because the System was short
$18 million in earning assets, voted to buy first $150 million of Govern­
ment securities in April. (April 1924 report of the Open Market Com­
mittee on “Credit Conditions and the Open Market Program,” April 22,
1924 report of the Secretary to the Open Market Investment Com­
mittee, May 1924 report of the Open Market Investment Committee.
FRB File 333b.2), and $100 million more in July, 1924. (Minutes of
the Open Market Investment Committee July 1, 1924, FRB File
Between the end of April and September 1924 the Open Market
Committee bought $500 million of Government securities. (Minutes of
the Open Market Investment Committee, November 1924, FRB File
Moreover, in May 1924 the New York Bank cut its interest rate from
4% percent to 4 percent, (S. R., November 1923 Conf., 30-32), in June
to 3% percent, and in August to 3 percent, forcing rate reductions at
other Reserve banks as well. (S. R., May 1924 Conf., 14.) This action
of Strong in reducing interest was in response to conclusive evidence
of a business recession.
Nothing succeeds like success. In its November 1924 Conference Re­
port the Committee could confidently say that a “genuine recovery apears
to have begun and the bottom of the depression appears to
ave been passed without serious unemployment.”
Strong’s use of open market operations contracyclically had saved
the day, and the 1923-24 depression never took hold. To the great credit
oi the Federal Reserve System the recession had ended, and the depres­
sion never came.
By the simple expedient of buying Government securities, and lower­
ing interest, the 1923-24 trouble disappeared. By mid-December 1924
the System had begun to sell off its holdings. (Government securities
were down to $413 million, but the holdings of individual Reserve
banks rose $140 million during November and December 1924. Fortu­
nately, there was then a gold outflow so that these purchases by the
individual banks did not offset Strong’s sales for the System. The dis­
count rate at the New York bank in November 1924 went to 3 ^


The 1923-24 recession that began in May 1923 struck bottom in
July 1924. Having won its battle to avoid the recession’s turning into
a full blown depression, the challenge to Strong and his New York bank
in the fall of 1924was to keep the economy stable.
To accomplish this in February 1925, the New York bank raised its
interest rate from 3 percent to 3 percent. This brought it more in line
with its sister banks four of which were at 3^£, and the remainder at
4 P6rc6nt.
In January 1926 it went to 4 percent, lowering its discount rate to
Syz percent m April, and going back to 4 percent in August 1926.
The Committee, throughout the period, used open market operations
to avoid fluctuation in discount rates and keep the economy stable. Ob­
viously, it did so for financial reasons and, judging by that criterion,
was successful. The ratio of net profits to total capital accounts aver­
aged 9 percent for both 1925 and 1926. (Banking and Monetary Statis­
tics, Supra, 264-265,440,454-455,463-469.)
England was an important consideration. On April 28,1925 it went
back on the gold standard, and Montagu Norman, Governor of the
Bank of England (1920L-44), had convinced Ben Strongthat to protect
England’s gold reserve, it was necessary to keep money rates in New
York under those in London. (Chandler, supra 303,319,322-324.)
Early in 1925 with the economy stabilized, the Committee sold $250
million of Government securities, reducing the System’s holdings from
$413 million in December 1924, to below $250 million by April 1925.
When the Dallas bank asked permissioin to buy $10 million of
Government securities in March 1925, permission was refused. (Min­
utes of the Open Market Committee, April 1925, FRB File 333b.2.
Report of the OMIC November 1925, FRB File 333b.l. Report of
the OMIC June 1925, FRB File 333b.2.)
In 1925 and 1926 there were over $100 million of Government
securities purchased by individual banks for their own account, as
the Dallas bank was quick to advise the Committee.
Ostensibly to protect against England’s return to the gold standard
in April 1925, the Open Market Investment Committee voted to
enlarge its Government securities to $300 million. This had the
effect of easing what was then a slight recession probably as the
result of the System’s sales of Government securities.
In any event 1925 was a stable year and the National Bureau of
Economic Research did not record a recession for that year.
1926 was also a good year. The gross national income in constant
dollars increased from 4% percent in 1925 to 5% percent. The gross
national product was at $97.7 billion. Unemployment which was at
5.5 percent in 1924, and 4.0 percent in 1925, went to a staggering
low m 1926 of 1.9 percent.
The special investment account which held $270 million of Gov­
ernment securities in September 1926 was reduced to $210 million—
a $60 million sale. This was done to moderate what was thought to
be an incipient stock market boom. While financial stability was
the purpose the operation was contracyclical and kept the 1926
economy stable.
During the last quarter of 1926 industrial production declined 6
percent, and factory employment about 2 percent. But the Federal

Reserve System made no response* It kept the interest at 4 percent,
and confined its open market operations to replace maturing issues;
While there was an increase in the Federal Reserve Board'sindex of industrial production, nevertheless wholesale prices between
January and April 1927 dipped 3 percent, and the New York Bank
pressed for a reduction in the discount rate.
At year’s end in January 1927 the prime commercial paper rate
was 4.50 percent. By February it fell to 4 percent. But the Federal
Advisory Council did not believe the discount rate should be lowered,
and instead of buying, recommended selling Government securities.
How wrong can bankers be ?
Accordingly, between March 9 and May 9,1927, the System sold:
$100 million of Government securities, reducing its special account
to almost $136 million.
Ben Strong warned that $136 million was too little for the System:
to hold, and in the latter part of May and in June, the New York
bank brought the System portfolio up from $136 million to $316
The prime rate on commercial paper which in mid-March was 4.13
percent, wait up to 4.25 in June.
Strong refused to raise the discount rate from 4 percent, as the
Federal Advisory Council wished, but in June he did sell $60 million,
reducing Government securities held by the System to about $250'
"When, however, the Open Market Investment Committee met in
July 1927, it noted that the slackening of business had caused a fall
in the commodity market. As a result the Federal Reserve Board
accepted its recommendation that the Committee buy $50 million
of Government securities. And in August 1927, 8 of the 12 Federal
Reserve banks lowered their discount rates from 4 to 3% percent.
In addition the Committee bought another $50 million of Government
securities, bringing the System’s special account up to $353 million
by August 31, 1927. (Minutes Open Market Committee, July 1927,
FRB File 333b.2.)
In September three other Reserve banks lowered their interest
rates. When the Chicago bank refused to go along, the Federal
Reserve Board, by a 4 to 3 vote, forced it to do so.
One of the dissenters, Charles S. Hamlin, a member of the Federal
Reserve Board from August 10,1914 to February 3,1936, remarked
that he doubted the power of the Board to force Chicago to a uni­
form interest rate “to help New York to help the English situation.”
(Wicker, supra, 113.)
Two historians of the period (Chandler, supra, 440, and Wicker,
supra, 109-110.) Note that Governor Strong initiated this easy
money policy in 1927 after Montagu Norman, the Governor of the'
Bank of England, Hiaimer Schacht, President of the German Reichsbank, and Charles Rist, Deputy Governor of the Bank of France
paid him a visit in July 1927 and urged lower rates in New York
on him. But Friedman and Schwartz in their work, “A Monetary
History of the United States,” supra, contend foreign considerations
were seldom important. Wicker argues there was a dip between
September and December 1926, but in July 1927 the wholesale price
index was rising. Wicker contends the easy money policy initiated

in July was to establish an international gold standard. He would
have you believe that this international policy just happened to
coincide with the goal of domestic stability.
_ 4
Reviewing the steps that the System made to combat the threatened
recessions of 1923-24 and 1926-27, one must conclude that the System
had made a major conceptual advance and had developed more
sophisticated tools to implement its policies.
It had enlarged the limited objective of accommodating business to
include responsibility for modifying the business cycle by making
credit more easily available during a period of recession, and less
easily available during a boom.
Having discovered, in the years 1922-23 the impact of open market
purchases and sales on the level of member bank reserves and market
rates, it could more effectively control the volume of credit than when
in 1920-21, it had relied heavily on the discount rate.
The knowledge which the System gained from the disaster of
1920-21 and its aftermath was set forth at length in its Annual
Report for 1923. The report contains a skillful analysis of criteria
for policy, but rejects the use of any single criteria—such as reserve
ratios, exchange rates or price index numbers as a, guide. It argues
that policy “is arid must be a matter of judgment, based on careful
examination of all available evidence of chaiiges in production* trade,
employment, prices and commodity stocks.
As noted above, the behavior of prices between 1923 and 1928
was similar to that of interest rates which is not surprising, since
interest rates contain an inflationary component and hence are most
likely to be stable when prices are.
The System claimed no influence over prices, however, and there
is no indication that any Reserve official, except Governor Strong
of the New York bank, saw price stability as a policy objective.
Even Governor Strong rejected the use of a specific level of prices
as a target, although such a concept had gained substantial support
outside the System, and was embodied in the so-called stabilization
bills of the period. Testifying against these measures, he a^ued that
the System could only gain in effectiveness if it were left free of
legislative entanglements. (Chandler, supra, 204, 246.)
The behavior of interest rates and prices, and the fact that the
System took credit for ending the recessions of 1923-24 and 1926-27
seem to indicate a commitment to countercyclical policy. Neverthe­
less, only a minority of Reserve officials favored such objectives and,
as events after his death in 1928 indicate^, Governor Strong was
probably the only official who had both the influence and the knowl­
edge necessary to conduct countercyclic operations.
The extent to which a countercyclic policy had been successful m
the years 1923-28 is thus perhaps more an indication of Strongs
economics and dominant position than it is evidence of an advance
in the overall level of understanding within the System, though
definitely, as analysis of the October 1922 Symposium shows, there
was increasing recognition of Federal Reserve responsibility for
economic events, particularly “the prevention of disaster,” as put
by Governor Norris.
The key to Strong’s success was the fact that the New York bank
had control over open market operations. Also he virtually represented

the United States in international financial matters, and his prestige
abroad tended to enhance his position at home.
The implementation of Governor Strong’s policies was, however,,
frequently impeded by pressures and demands from various factions
•withinthe System.
Reserve bank governors complained that the amount of assets pur­
chased by the System was inadequate in terms of their needs for
earnings, and threatened to ignore or dismantle the Open MarkH
Investment Committee. Secretary Mellon was the Committee’s pro­
tector but viewed its function with ambivalence. Like many within the
System, he valued the deflationary aspects of open market operations—
iai6ir u56xUi.ii6§5 in raising iiiOnts^y rales—1ml Xeareu tue Systeiirs power

to create more money. (See letter from Under Secretary of the Treas­
ury S. Parker Gilbert, Jr., to Deputy Governor J. H. Case of the New
York Bank, August 3,1923. FRB File 333b.l.)
Secretary Mellon insisted on the Board’s prerogatives in deter­
mining the maximum limitation of the System portfolio and saw to it
that the amount was kept low.
Only in the latter months of the 1924 and 1927 recessions were the
System’s holdings permitted to rise to $500 million. As a result, the
Committee frequently lacked sufficient assets to pursue a deflationary
policy as aggressively as Mellon desired.
However, his conflicting goals were no more self-defeating than
those of the Reserve bank governors. They frequently argued that
conditions were ripe for an increase in the discount rate while insisting
that they must have more earning assets to meet expenses.
^While the Committee advocated easy money as a response to reces­
sion, it had as little tolerance for low rates as a normal market condition
as any other faction in the System. In both 1924 and 1927, it acted
prematurely to reduce its portfolio in order to “firm up” rates. As a
result, both recoveries were quickly followed by slight slumps.
In 1925, however, the recovery was almost as energetic as it had
been in 1923. Gross national income in constant dollars increased 4*4
percent in 1925, and 5y2 percent in 1926, viewed on an annual basis.
Wicker, supra, 95).
The figures on unemployment are more revealing. As high as 11.9
percent in 1921, and up to 5.5 percent during the 1924 recession, un­
employment dropped to 1.9 percent in 1926, the lowest level for any
non-wartime period from 1907 to date. (Historical Statistics of the
United States, 73.)
The post-recession period in 1928 was different. It has been sug­
gested that the System maintained rates too high to avoid dampening
the overall economy, but too low to control the stock market. Actually,
they were attempting to do just the reverse—keep rates low enough to
stimulate the economy, but high enough to check the rate at which
funds flowed into the market.
As a result of this policy the amount of bank credit supplied, includ­
ing for speculative purposes, was restricted, thus laying the ground­
work for economic weakness.
But the policy did not prevent the 1928-29 stock market boom.
For though bank credit flowing into equities was reduced, there
was an even heavier flow of funds into the stock market from nonbank

The market boomed even higher, while the economy slowed signifi­
cantly in 1928, though there was a temporary recovery in 1929.
Numerous theses have been advanced to explain the 1929 stock
market crash, but it has proved easier to indict the Federal Reserve
System for its failure to alleviate the depression than to guess what
policies it might have pursued to prevent the financial debacle that
triggered it.
It would appear, however, that the ability of Reserve officials to
control interest rates during the period of prosperity had given them a
false sense of security.
After the searching analysis of 1922—prompted, perhaps, by the
painful experience which preceded it—no further effort was made to
explore the relationship between money and credit and economic
Worse, the successful monetary remedies of the 1920’s were a failure
when projected into the 1930’s. The maintenance of low interest rates
alone was not enough to stimulate the economy in the depression.

One of the architects of the monetary policy ofthe 1920’s was An­
drew W. Mellon, who served as Secretary of the Treasurv from 1921
to 1932. When he entered the office in 1921 the national debt stood
at $24 billion, nf which $10 billion represented uncollected war and
P^ecrete^nMdlonbXeved that a Hquidation of this debt was essen­
tial to cutting taxes and balancing the b u d g e t. (William L. Mellon,
“Judge Mellon’s Sons,” private printing, 1948,409.) And, essential to
KaWinp; the budget, was to abolish tax-exempt bonds to reduce the
taxes on wealthy taxpayers, and to encourage them to pay their taxes.
^Mellon^ on November 20, 1923, sent his plan for tax reform to the
House Ways and Means Committee.
In both Houses of Congress, the Democrats attacked Mellon s plan
as an aid to the rich, and burden on the poor. Basically, his plan rested
on the theory that:
The history of taxation shows that taxes which are inherently excessive are
not paid. The high rates inevitably put pressure upon the taxpayer to withdraw
his capital from productive business and invest it in tax-exempt securities, or to
find other lawful methods of avoiding the realization of taxable
W. Mellon, “Taxation: The People’s Business,” Macmillan Co., New York, 19J4,
13) *

His plan included a 25 percent reduction in tax on earned income; re­
duction of income surtax (excess profits tax) rates to no more than 25
percent at $100,000; repeal of miscellaneous taxes such as amusement
and telegraph taxes, and simplification of tax law by closing loopholes.
(Ibid, 54-55.)
, .
. .
The across-the-board earned income reduction was a concession to
the hue and cry of the Democrats, but the other points m “Mellon s
Plan,” as it became known, were points he brought with him in 1924.
Mellon’s plan passed the House, only to meet the DemocraticProoressive coalition in the Senate. Senator Robert Marion LaFollette,
Republican Progressive from Wisconsin (Representative 1885-1891;
Senator 1906-1925), joined with Congressman Nicholas Longworth
(Representative 1903-1913, 1915-1931, Majority Leader 1923-1925,
and Speaker 1925-1931) cosponsoring an alternate tax bill.
Reelection was coming up, and the 2 percent normal tax rate, as op­
posed to Mellon’s suggested 3 percent and the existing 4 percent,
sounded good to the politicians in the House. Mellon’s 25 percent surtax
was also rejected with a compromise of 3 7 taking its place.
Mellon’s bill lost, and the LaFollette-Longworth bill passed with a
large majority. (Harvey O’Connor, “Mellon’s Millions,” John Day Co.,
New York. 1933,1935.)
In the new act was a provision which raised the inheritance tax on
$10,000,000 estates from 25 percent to 40 percent. The Democratic-

Progressives had given the Conservative Republicans and Galvin
Coondge something to think about after the election.
Mellon learned quickly how he had to deal with the Congress which
was dominated by Democratic-Progressives.
On October 18, 1925, Mellon submitted a “suggested” tax reform
which included reductions for low-income brackets, something his first
suggestions did not. (O’Connor, supra, 140.) And, on February 26,
1926, when the new tax measure was signed, he smiled, knowing:
That the tax load of the rich and prosperous had ibeen cut $700,000,000 in the
past 2 years, the equivalent of $2,000,000 a day which was released, as he said,
for productive industry * * * The inheritance tax was cut from 40 percent to
20 percent, and the credit on state inheritance taxes was raised from 25 percent to
iSO percent. The capital stock tax was repealed. The gift tax was history. The
man with the million dollar income who had been paying $663,000 into the
Federal Treasury when Mellon assumed charge (in 1921), was (in 1926) asked
to pay a trifle under $200,000. (Ibid, 141.)

Up through the crash of 1929 Mellon was idolized by the business
Even though Europe was shakily paying its war debt essential to a
balanced budget in the United States and the tax cuts allowed by them,
Germany began to waiver under the tremendous drain on her economy
caused by the reparations exacted from her.
The European Allies were depending on Germany’s payments since,
for all intents and purposes, Germany’s prepayments to them were
simply being forwarded to the United States to pay off the Allied
debts which came to over $10 billion in 1919.
Since most of the international production was financed by credit,
which could only be repaid by profits from consumption, which in turn
depended on wage-earner purchases, a flaw at any level would bring
the entire house of cards down.
A flaw developed in agriculture.
Many of the food producing regions of Europe had received heavy
damage during the First World War.
Germany’s industrial production had been damaged, and money
that normally would have gone to capital reinvestment was leaving
the country as reparation payments or lost in the inflation caused by
a shortage of food.
Without this vitally needed capital, Germany had to borrow, usually
from the United States, in order to meet her reparation payments. It
would only be a matter of time until she either repudiated her debt from
anger or collapsed from the inability to pay because her industries
were under capitalized. (R. R. Palmer, “A History of the Modern
World,” Rev. Ed., Alfred Knopf, New York, 1964, 777-778.)
But Mellon and his businessmen supporters refused to anticipate this
.distinct possibility.
Mellon’s plan, as described above, was the final form of the carrot
which the Republicans dangled before the American people prior to
the election. Davis lost the election, and the Republicans picked up 4
seats in the Senate, more than 20 in the House, and then watched the
LaFollette-Longworth team tear their carrot to ribbons on the floor of
Bv 1927 opposition to Coolidge-style Republicanism’ was growing.
In the Congressional elections of November 1926 the Republicans suf­

fered setbacks in both Houses which placed them in the same position
they had held during the 66th Congress (1919-21).
The Presidential election of 1928 was no less exciting than the Con*
gressional election in 1926. Coolidge was hoping for another term, but
was too much the conservative to admit that nis ties with Harding
politics were wearingthin after 4 years.
The Progressive Republicans were disrupting the “Grand Old
Party,” and the party leaders felt that a new image was needed.
Certainly, the business interests supported Mellon, but the party
leaders were hesitant about placing such a rich American in the Presi­
dential race.
In the end, the Republican party leaders decided upon Secretary of
Commerce Hoover over Mellon, and over Coolidge who drifted more
and more into the role of “a friend of Mellon’s.” (Ibid, 301-303.)
Coolidge’s “I do not choose to run” allowed the Republicans to aban­
don him gracefully.
A last minute draft at the Kansas City Convention had been planned,
but was quashed by William Vare, the then Republican political boss
of Philadelphia who announced that his contingent would support
Mellon considered opposing him, but decided that support of Hoover
would be in his best interests, since Hoover had agreed to retain him
as Secretary of the Treasury to gain the support of big business.
(O’Connor, supra, 304.)
T he S enate C hallenges H oover’s H oldover


M ellon

Apparently the shift from Harding-Coolidge politics to Hoover
politics by the Republicans in 1928 was appropriate. Hoover’s coat­
tails brought 8 Senate seats and 30 House seats into the Republican
fold, thus expanding Republican control of both Houses of Congress—
from a mere majority of 1 seat in the Senate to a majority of 17 seats,
and an increase in Republican Representatives from 237 to 267.
But even with the majorities, it was not long after Hoover became
President that problems began to arise. On March 5,1929, the day after
the inauguration, the Senate passed a resolution challenging:
1. Whether the head of any department of the Government may legally hold
office as such after the expiration of the term of the President by whom he was
2. Whether in view of the provisions of the laws of the United States Andrew
W. Mellon may legally hold the office of Secretary of the Treasury reference
being made to Section 243 of title 5 of the Code of Laws of the United States of
America. . ” (U.S. Senate, S. Sept 7, part I, 71st Cong., 1st sess., “Eligibility
of Hon. Andrew W. Mellon, Secretary of the Treasury,” U.S. Government Print­
ing Office, Washington, D.C., 1.)

Section 243 will be quoted in full when the 1932 Mellon impeach­
ment hearings are discussed. Generally, it precludes anyone “directly
or indirectly concerned” with trade, ships, and real property from
becoming Secretanr of the Treasury.
The Senate Judiciary Committee directed the inquiry, and on May 7,
1929 delivered its printed majority and minority reports.
The majority report submitted by Senator Steiwer, Republican of
Oregon, ruled for Mellon on both points.

The other Members of the Senate Judiciary Committee signing the
majority report were Senators Overman (D-N.Car.), Deneen (R~-I1L),
Waterman (R-Colo.), Hastings (E-Del.), and Burton (R-Ohio).
Specifically referring to Section 243, tne report said :
It is a well-known fact that Mr. MeUon was appointed Secretary of the Treas­
ury by President Harding and was confirmed by the Senate in 1921, and that
he has held office for more than eight years, The question asked the Committee
is whether he may legally hold the office. This question we have answered in the
The question presented requires an interpretatioin of Section 243, the signifi­
cant language of which is as follows:
No person appointed to the office of Secretary of the Treasury. shall directly
or indirectly be concerned or interested in carrying on the business of trade or
With respect to a corporation this means that the Secretary of the Treasury
Shall not hold office as a director or as an officer and that he shall not by any
means either direct or indirect, participate in any activity in carrying on the
business of a corporation if the corporation is engaged in trade or commerce.
This, in our opinion, is a reasonable, proper, and correct interpretation of the
statute. (U.S. Senate, S. B. 7, part I, supra, 1.)
This interpretation is supported by the fact that numerous Secretaries of the
Treasury have owned stock in corporations engaged in trade. It is inconceivable
that all these Secretaries willfully violated the law, and equally inconceivable
that the Presidents under whom they served would have appointed men of known
ineligibility, or that the Senate would have confirmed ineligible appointees.
Obviously it has been thought in many official quarters that the section referred
to did not apply to mere ownership of corporate stock” (Ibid, 3.)

Significantly, the majority did not end their comments with this flat
declaration, but went on to state:
In addition, it is our opinion, upon the facts which the committee has con­
sidered, that Mr. Mellon does legally hold the office, and it is also oar opinion
that no contrary conclusion can properly be reached except through duly insti­
tuted criminal proceedings or impeachment proceedings originating in the House
of Representatives, (Ibid, 3).

The minority report submitted by Senator Norris, Republican of
Nebraska (other signatories were Senators Caraway (D-Ark.), Walsh
(D-Mont.), and Blaine (R-Wis.), contains a fascinating, detailed
examination of the holdover question, to which it devotes seven pages,
and points out that Cabinet officers have been held over without re­
confirmation on 110 occasions in our history, and concludes that such
practice is proper. (S. Rept. 7, part II, 71st Cong., 1st sesa, “Eligibility
of Hon. Andrew W. Mellon, Secretary of the Treasury,” Minority
Report, S. R* 2.)
ButUnlike the majority, the minority defines the issue of direct or
indirect interest in two questions:
(i) Is ownership of a substantial amount of stock by the Secretary of the
Treasury, in a corporation engaged in carrying on the business of trade or com­
merce, a violation of the statute (Section 243) ? (2) Is the ownership of a sub­
stantial amount of stock by the Secretary of the Treasury in a corporation own­
ing a sea vessel a violation of the statute? (And the minority concludes—both of
these questionsmust be answered in the affirmative). (Ibid, 8.)

Twenty pages of information are included in Hie Minority Report
detailing Secretary Mellon’s holdings and interests. Numerous addi­
tional submissions fill parts 3 through 7 of the 1929 Senate Report.
Since the majority of the Judiciary Committee found neither Mel­
lon’s holdover status nor his stock interests improper, and since
77-782— T6-------6

impeachment is properly raised initially only in the House, the issues
were dropped by the Senate.
Mellon was around 74 years old by the time the reports were filed,
and his criticism only lay smoldering, not extinguished as his sup­
porters hoped.
By mid-1929 the stock market speculation was heavy. The false pros­
perity brought about by the speculation was alarming members of
Congress and Government officials.
Rumors floated about that Mellon, as a member of the Federal
Reserve Board, had tried to force other members of the Board to
allow the discount rate to go up. (Andrew W. Mellon, supra 470.)
While he privately may have endorsed this position, publicly he denied
it. In March 1929 he reported no such division of opinion. (New York
Times, Mar. 17,1929,44.)
On Friday? March 15, 1929, the New York Times carried a front
page story with the caption “Mellon Advises Buying Of Bonds Now
fey Investors.” (New York Times, Mar. 15,1929 1.) In the story he is
quoted as saying by way of qualification:
This does not mean, said Mr. Mellon, “that many stocks are not good invest­
ments. Some, however, are too high in price to be good buys. For prudent investors
I would say, if making a suggestion, that now is the time to buy good bonds.”

We have the Secretary of the Treasury who happens to be a very
wealthy man, who also happens to be a member of the Federal Re­
serve Board, making a statement which, by itself, can be a little out
o f the ordinary. Yet speculation went on unchecked.
Mellon’s statement was made 1 month after Board warning against
heavy stock speculation which had obviously continued after the
Even the New York Times picked it up. On its editorial page on
March 16, 1929, it concluded that such a statement shows that the
Treasury and Federal Reserve plan to do nothing to quell speculation
other than to advise. (New York Times, Mar. 16. 1929, 18.) Interest
rates, margin rates, and discount rates remained unchanged.
Judging from what occurred in October 1929, the New York Times
was unfortunately correct.
T he D ecline


M ellon

The New York Times for Wednesday, January 1. 1980, carried an
article on its front page under the heading, “Mellon Predicts Busi­
ness Progress,” and subheadings. “He Sees ‘Ample Credit’ Available
in New Year and Revival Ahead in the Spring,” and (Secretary of
Commerce) Lament Concours in Prosperity Forecast * * *”
Mellon made a statement while on vacation off Nassau, Bahamas,
in which he predicted, “Sectional unemployment during the Winter,
but looked for a revival of activity in the Spring. Government finnances were sound, warranting the tax reduction program * * *”
(New York Times, Jan. 1,1930,1.) He also stated:
I see nothing, however, in the present situntion that is either menacing or
warrants pessimism. During the winter months there may be some slackness
or unemployment but hardly more than at this season each year.
In the credit situation the trend of the money is down. There is plenty of
credit available anti we have reason to expect that the rates for new capital in

building 'construction and expansion will be such as to facilitate the promotion
and accomplishment of newundertakings.
Statements from the executives of railroad, public utility and industrial con­
cerns during the President’s recent conference, were, almost without exception,
to the effect that ,their expenditures for new construction in 1930 will be as
much or more than In 1929. (Ibid, continued at 4.)

Mellon’s remarks quoted in the Times of January 1 were included
in full in the Thursday, January 2, 1930 issue under the caption
^Chronological Recordof the United States for 1929.” Nowhere was
“Black Thursday” mentioned. . (New York Times, Jan. 2, 1930, 30.)
Perhaps in hindsight we find this a tremendous oversight.
On January fL 1930. in an interview published in tlm Daily Princa-

tonian, Mellon elated that a Treasury surplus of $160 million should
be applied to tax reduction, rather than to debt reduction. He is quoted
Debt reduction and tax reduction should, of course, go hand in hand * * *.
This has been the case during all the years that I have been at the Treasury
and, I may say, it has been the historic policy of the Government since the very
early days. No other part of our financial policy has been more steadfastly
maintained than that providing for the prompt payment of the public debt.
(New York Times, Jan. 7,1930,64.)

But the public did not seem placated by such promises and opti­
mism. Mellon, who had emerged unscathed from countless inquiries
into his taxes, his businesses, and his fitness to hold office, no longer
seemed impervious to these attacks.
Critics who had been ignored before were being listened to in 1930.
J. H. Gray, Ph. D., a former President of the American Economic
Association assailed Mellon, former President Coolidge, and Prof.
Irving Fisher of Yale, at a luncheon of the League for Industrial
Democracy, a less than strictly capitalist organization. He said that
these three men were most responsible for “continuing and extending
the mania” of speculation.
With uncanny accuracy Gray predicted that rate and margin regu­
lation were too little, too late, that President Hoover’s public expendi­
tures would be ill-planned, undercapitalized, and insufficient to lesson
unemployment which would last for quite awhile.
He argued for a reduction in the “concentrated absentee ownership
and control of credit,” and the “more equitable proceeds of industry.”
While the Republicans in January 1930 criticized Dr. Gray’s sug­
gestions for correcting the faults leading to the stock exchange specu­
lation, including the Heretical suggestions of higher inheritance taxes,
more progressive income taxes, and general wealth redistribution, few
men today can say he was not more realistic about the 1930 economic
situation than Mellon, Hoover, and Coolidge. (New York Times,
Jan. 12,1930, 23.)
February 19*30 was also a bad month for Secretary Mellon.
Senator James T Walsh, Democrat, Montana, a man who could
safely be excluded from a list of Mellon’s admirers, was joined by Sen­
ator Norris of Nebraska in a 41 to 39 Senate vote to reduce the duty on
foreign aluminum, crude, and scrap, from 5 cents to 2 cents. Semi­
finished aluminum duties were reduced from 9 cents to
cents per
Senator Royal Samuel Copeland. Democrat, New York, also assailed
Mellon's Almnimmi Co. of America for putting “the people of the

country * * * at the mercy of this monster monopoly no matter what
we do* (New York Times, Feb. 18,1930,1 continued 3.)
February the House Banking and Currency Committee
held b r in g s on branch and group banking. Fortunately for Mellon,
the interest in Congress shifted to banking and left him alone for
In April 1930 the Times in an editorial said:
“ I n th© Hearts of His Enemies”—Secretary Mellon’s admirers have not always
erred on the side of moderation. Not content with doing justice to his high
qualifications for office and to the excellent use he has made of the pleasant fiscal
times in which his lines were cast, they have surrendered occasionally to the
temptation of describing him as a miracle worker*
But the feats of well-doing credited to Mr. Mellon by his friends shrink into
insignificance beside the prodigies of malevolence ascribed to him by his enemies.
In the way of tributes to his personality, it is of his foes that the Secretary of
the Treasury should be proudest. Consider, for instance, the compliment involved
in the fflmiUqr Brookhart theory that the reason for the breakdown of pro­
hibition is Andrew W. Mellon. The manner in which Mr. Mellon dictates our
power policies and our waterways policies and our tariff policies is impressive
enough. But it is nothing compared to the effectiveness with which he imposes
the practice of sabotage upon thousands and thousands of prohibition officers*
just crazy to enforce the law in countless communities madly clamoring to have
the law enforced.
And Mr. Mellon himself—bow does he respond when his friends praise him,
for making the sun shine, and Brookhart excoriates him for making the crops
fail? Rumor has it that on such occasions the Secretary of the Treasury sits
down as usual to dinner, treats himself to an extra long look at his favoriteRembrandts, and so to bed. (New York Times, Apr. 3,1980,28.)

And the congressional election of 1930 showed the trend away from,
the “Power Trust,” “Mellonism,” and big business. In Pennsylvania,.
Gifford Pinchot was elected Governor, signifying that more of the
State than just Yare’s Philadelphia was rebelling against the Mellon,
machine. (New York Times, Nov. 8,1930,3.)
Pinchot had spent years traveling through the rural parts of Penn­
sylvania claiming that Secretary Mellon was a distiller and as Secre­
tary of the Treasury obviously had a conflict, of interest, and by the1928 election, Mellon forces, weakened by the loss of Philadelphia toVare, and by the death of Senator Penrose, soon found the anti-Mellon:
factions even in Pittsburgh.
#The result of the hard fought election was a U.S. Senate investiga­
tion into Pennsylvania campaign practices which concluded with the
U.S. Senate denying Vare a seat in its chambers.
By 1930, the Mellon machine, attacked by Pinchot’s Bull MooseRepublicans and the Progressive Party, had'lost much of its power.
(O’Connor, supra, 259-261.)
Perhaps the heaviest blow came in 1931. Secretary Mellon left for
England to see his son, Paul, who was studying at Cambridge. When
he arrived, Ogden Mills was on the phone and informed him that theCredit-Austalt Bank in Vienna had failed. President Hoover directed
Mellon to contact the English leaders. The international debt settle­
ment was at stake with its direct effect on Mellon’s domestic fundingpolicies;
The European countries were hoping for a complete war debt can­
cellation, but Hoover and Mellon concluded that this was unacceptable
and suggested a 1-year moratorium. (Ibid, 473-75.)
After a series of conferences the European countries agreed to grant
Germany a 1-year grace period to allow her to straighten out her

finances, (Ibid, 479.) From history, we know that she failed to do so.
And it is significant to note that Mellon, who spoke optimistically
in public about the aftermath of the crash of 1929, believed privately
that the panic went beyond Wall Street, and would be as bad as the
hard times of 1873. (Ibid, 471.)
T h e I m p e a c h m e n t o f M e llo n

On January 6, 1932, Mr. Wright Patman, Representative from
'Texas, rose on the floor of the House and said:
Mr. Speaker. T rise to a cmestion of constitutional privilege. On my own
responsibility as a Member of this House. I impeach Andrew William Mellon,
Secretary of the Treasury of the United States, for high crimes and mis­
demeanors ♦ ♦ *. (U.S. Congress, Congressional Record, House, Jan. 6, 1932,

The specific charges which involved section 1003 of title 31 of the
United States Code, were substantially the same as those raised in the
Senate several years previous:
Restrictions Upon Secretary of Treasury.—No person appointed to the office
•of Secretary of the Treasury, or Treasurer, shaU directly or indiectly be con­
cerned or interested in carrying on the business of trade or commerce, or be
owner in whole or in part of any sea vessel, or purchase by himself, or another
in trust for him, any public lands or other public property, or be concerned in
the purchase or disposal of any public securities of any State, or of the United
States, or take or apply to his own use any emolument or gain for negotiating
or transacting any business in the Treasury Department, other than what shall
be allowed by law; and every person who offends against any of the prohibitions
of this section shall be deemed guilty of a high misdemeanor and forfeit to the
United States the penalty of $3,000, and shaU upon conviction be removed from
office, and forever thereafter be incapable of holding any office under the United
States; and if any other person than a public Prosecutor shall give information
of any such offense, upon whieh a prosecution and conviction shall be had, onehalf the aforesaid penalty of $3,000, when recovered, shaU be for the use of the
person giving such information. (31 U.S.C. 1003.)

The section says a Secretary of the Treasury may not directly or
indirectly be concerned or interested in a business or trade, own a sea
vessel, or use his office to promote his own business.
Mr. Patman in his charge before the House says that Mellon:
* * * is now and lias been since taking the oath of office as Secretary of the
Treasury of the United States the owner of a substantial interest in the form of
voting stock in more than three hundred corporations with resources aggregating
more than three thousand million dollars, being some of the largest corporations
on earth, and he and his family and dose business associates in many instances
own a majority of the stock of said corporations and, in some Instances, con­
stitute ownership of practically the entire outstanding capital stock
Congress Congressional Record, House, Jan. 6,1932, supra.)

Elaborating his charges, Mr. Patman said that in many of these
corporations Mellon and his family were either the largest or con­
trolling stockholders. He also charged that some of these corporations
owned sea vessels, giving Mellon an indirect interest in over 50 ships,
including the oil fleet of Gulf Refining Co.
As Secretary of Treasury, Mr. Patman pointed out, Mellon was in
charge of the Coast Guard, and tariff and customs collection, so the
possibility of conflict of interest was immense and obvious. (Ibid, 1400140i.)
The impeachment resolution was referred to the House Committee
on the Judiciary for action. The New York Times described Mr. Pat-

man’s reading: “Page boys moved like shadows about the chamber,
rushing for law and reference books” as Mr. Patman spoke to a silent
The Times indicated that an “attack” on Mellon had been expected,,
but the call for impeachment had not. (New York Times, Jan. 7,1932,
On January 7, 1932, Representative Sumners, Democrat, Texas,
chairman of the House Judiciary Committee, announced that the com­
mittee would indeed examine Mr. Patman’s charges saying, “It is too
serious a matter not to consider.” (New York Times, Jan. 8,1932.)
And while Mr. Patman’s charges were quite removed from the front
pages, a seemingly unrelated incident was reaching page 1.
The New York Times on its front page for January 13,1932 carried
a column on Secretary of State Henry Lewis Stimson’s testimony be­
fore the Senate Finance Committee concerning a then recent agree­
ment between Colombia and the National City Ct>. (New York Times,
Jan. 13,1932,1.)
Stimson was a remarkable man. A New York lawyer, senior partner
in Winthrop, Stimson, Putnam & Roberts* former partner of Elihu
Root, Stimson had run for Governor of New York, been Secretary of
War under Taft (1911-1912), Governor General of the Philippines
(1927-1929), Secretary, of State under Hoover (1929-1933), ending
his public career as Secretary of War under President Roosevelt
(1940-1945). Bom 1867, he died in 1950.
The article casually mentioned that National City was extending
the Colombian Government a $20 million line of credit. Concurrently,
the Barco Oil concession was being extended. The article also men­
tioned that Gulf Oil Co. and J. P. Morgan Co. had an interest in the
Barco concession. (Ibid.)
The article neglected to point out that Mellon had resigned his di­
rectorship in Gulf Oil when he became Secretary, that he and his fam­
ily had owned more than 80 percent of the outstanding stock in Gulf
which gave them an aggregate control over $617 million in assets in
Gulf Oil alone, and that in 1926 the Mellons had paid the previous
holder of the concession $1,500,000 for a 75-percent interest in the con­
cession. (O’Connor, supra, 195,422.)
It would take a few. more days of hearings at both Senate Finance
and House Judiciary before an even more critical connection between
the credit and the concession renewals would be established.
On January 13, 1932, a Wednesday, Secretary Mellon was telling
the House Ways and Means Committee that he now believed a tax in­
crease was necessary to balance the budget and spur the economy.
Mellon recommended that the tax be applied across the board to all
tax groups. He even agreed that the time had finally come to increase
tho estate tax, at least temporarily. (New York Times, Jan. 14,1932,
On that same morning, January 13, Mr. Mellon’s representatives Mr.
A. W- Gregg, and Mr. Walter W Sheppard, were sitting before the
House Judiciary Committee as it opened its proceedings.
Gregg had been General Counsel to IRS in 1925, and made a good
impression on Mellon. In 1927 ihe entered law practice in the city of
New York. His father had been a Congressman from Texas and Mr.

Mellon asked.him to represent him before the House Judiciary Committee on the impeachmenthearings.
Sheppard was a lawyer, from Georgia who had been secretary to
Congressman Lester (1893-1902), judge in the Georgia Superior Court
(1911-1927), and TJ.S. attorney for the southern district of Georgia
Mr. Patman, “the gentleman from Texas,” as the Committee mem­
bers referred to him, reiterated his charges against Mellon, and began
supplying the supporting documentation (New York Times, Jan. 14r
Mr. Patman’s exhibits began with a letter dated April 18,1929, sent
by Secretary Mellon to Senator Reed of the. Senate Judiciary Com­
mittee during the hearings held in 1929, concerning the same charges^
raised here and the holdover charge.
In pertinent part it read:
Before I became Secretary of the Treasury I sold every share of stock which I
owned in any national bank, trust Company, or, other banking institution, and I.
have not since, theni owned, nor dp I now own any stock in such corporations. I
owned then and I now own a substantial amount of stock in the Gulf Oil Corpora­
tion, the Aluminum Co. of America, the Standard Steel Car Co., and other busi­
ness corporations, but in every case my holding is very much less than a majority
of the voting stock of such company. (XLS. Congress, Hearings on H. Res. 92,
Charges of Hon. Wright Patman against the Secretary of the Treasury, J a n u a ry "
13, 14, 15, 18, 19, 1932, Govrenment Printing Office (sited infra as Impeach*
ment Hearings), 9.)

The questions in the impeachment hearing quickly became defined.
Does the holding of stock merely for investment purposes make Mel­
lon “indirectly concerned” in the carrying on of that business? And, is
“control” of a company legally understood to rest with Mellon only
if Mellon owns 51 percent or more of the stock? (Ibid, 11.)
Mr. Patman’s task was to show beyond a reasonable doubt that Mel­
lon held stock in these corporations and was more than casually inter­
ested in their business.
Mr. Patman also had to convince the committee that a minority hoiding in a company, for example 15 percent, could give that stockholder
control of a company if the rest of the company’s stock was widely
scattered, or if it were owned by relatives and close friends of the
To illustrate that Mellon was indeed interested in the conduct of
Alcoa while he was Secretary, Mr. Patman next introduced a deposi­
tion taken by an attorney named Whipple in connection with a case
heard in 1927 and 1928 involving a challenge to the last will and testa­
ment of James Buchanan Duke, founder of the Aluminium Co. of
Canada, president of the American Tobacco Co., and founder of Duke
University. Born in 1856, he died in 1925.
In the deposition, Mellon states that he resigned as a director of
Alcoa when he became Secretary, but that his brother, “R.B.,” had con­
tinued as a director, that he and his brother were very close in their
financial relationships, and that each owned more than 15 percent of
the outstanding stock of Alcoa.
Mellon said he left the management of Alcoa to Arthur Vining
Davis, president of Alcoa (1962-1967), who became very wealthy
and powerful in both Alcoal and Aluminium of Canada. Mellon testi­
fied that Davis contacted him from time to time on major policy deci-

sions; one such decision was the possibility of a merger with James
Duke’s Aluminium Co. of Canada. (Ibid. 14-15.)
Mellon, in the deposition, says he met Mr. Duke for the first time in
1922 in Washington, D.C. through Mr. Davis. The next time he saw
Mr. Duke was in 1925, a month after Mr. Davis had informed Mellon
that a merger was in its final stages.
In Mellon’s words, Davis “said that Mr. Duke would like to come
to Washington and talk this (merger) business over in Washington.”
(Ibid, 17.) The committee was so amazed at this bit of deposition that
Mr. Patman read it to them four times.
Later in the testimony, Mr. Patman quoted a passage from the
deposition in which Mellon fully admitted that he was approached by
Davis as the final decisionmaker. (Ibid, 20.)
Although later in the deposition Mellon says he signed the merger
agreement, the final agreement lacks his signature. At that point Mr.
Patman dosed his showing that Mellon was actively engaged in trade
or commerce through Alcoa, and moved on to sea vessels. (Ibid, 24.)
The issue raised under the sea vessel question was whether owner­
ship of stock in a corporation owning or leasing ships constituted the
carrying on of trade or business under the statute.
Mr. Patman answered it by saying, “For anyone to contend that
the owner of one-half of the stock of a company that owns a sea vessel
is not an owner, in part, of that sea vessel, it occurs to me would cer­
tainly be illogical * * *” (Ibid, 26.)
Some House Judiciary Committee members began to pressure for a
resolution of the legal definitions and parameters, and Mr. Patman
QBut I thought I would withhold argument on that until these gentlemen (Mel*
Ion’s representatives) snake their legal argument; and after they make their
legal argument I think I should; he permitted to answer it.

Discussion of the legal arguments was continued:
•Mr. B a c h m a n . Mr. Chairman, is it not important to have that question decided
before the record is crowded with a lot of matters that hare no application?
iMr. L a G u a r d ia . I submit, Mr. Chairman, that that is & matter that this com­
mittee will have to decide—if stock ownership in a company, which, in turn, owns
or operates a ship is an ownership in part by that stockholder in a vessel; that
Is a question of law that we will have to determine.
Mr. M io h e n e b . I might suggest this, Mr. Chairman: That we want to get at
•the facts, after alL That there is not any contention as to the ownership of this
stock. I have been hoping that counsel might save the necessity of taking the
time of the committee to prove a self-evident fact. 'Now, I do not want to be put
in the position of embarrassing counsel in any way; but if there are facts which
can be conceded without prejudice, it is to the best interest of everybody that that
be done.
(Mr. Gbbgg. I suggested that in the beginning. We concede that Mr. Mellon owns
common stock in the Aluminum Co. of America and the Gulf Oil Corporation.
We do not concede that he owns control of the Gulf Oil Corporation or the
Aluminum Co. of America. (Emphasis added). (Impeachment hearings, supra,

Mr. Gregg then conceded to Mr. LaGuardia of New York that some
of the companies mentioned owned ships, but the issue remained
whether such stock ownership gave Mellon control. The committee
considered deciding the issue before all the facts were presented, but
finally allowed Mr. Patman to continue. (Ibid.)

According to Mr. Patman, A. W. and R. B. Mellon, along with, two
other associates, jointly owned a dosed corporation known as the
Koppers Co. of America. This company was trading with Russia, while
at the same time Mellon, as Secretary of the Treasury, was supervis­
ing customs, tariffs, and the Coast Guard. Americans were upset over
Communist “convict made goods,” but a Mellon company was trad­
ing with them.
Again the objection was raised that no criminal action was done.
Mr. Patman again pointed out that no criminal action on the part
of Mellon is charged, but only that he is holding office in violation
of a statute designed to eliminate such a temptation. (Ibid, 29-30.)
On the second day of the hearings, Thursday, January 14,1932, the
New York Times carried an article on the previous day’s hearing.
Committee Chairman Sumners was laughingly quoted as saying “only
a pauper” could hold Mellon’s office and that he might try for it
himself if he was “not afraid of being killed in the crush.” (New York
Times, Jan. 14,1932,8.)
The article generally characterized the first day of hearings as a re­
submission of old tired charges against Mellon. And the editorial page
for the same day criticized Mellon, and Hoover for allowing budget
deficits to occur but points out that some war debt payments willDe
coming in shortly to lessen the drain on the tax receipts. (Ibid, 20,
col. 2.)
On that second day Mr. Patman spent much of the time explaining
the details of the charged indiscretions involving Alcoa, and Mellon
directly in his office affairs.
The use of aluminum increased during his term in the construction
of public buildings, and an in-house publication was begun at Treasury
in the Federal Architect’s Office. Many of its pictures contained
aluminum-fronted buildings. (Impeachment hearings, supra, 36-39.)
A more serious charge of tampering with his own tax reports and
refunds was also entered on the second day, most of this information
coming from the Couzens committee’s examination of the Bureau of
Internal Revenue. (Ibid, 43.)
Then Mr. Patman brought up some very topical material. #
Secretary of State Stimson was denying any wrongdoing m the
Barco Oil concession in front of the Senate Finance Committee, while
Mr. Patman was putting information in the record before the House
Judiciary Committee that some Colombians claimed to have been
present when Mellon reached a decision with Colombia’s President
Olaya on the concession contingent upon a loan. (Ibid, 44, New York
Times, Jan. 15,1932,1.)
For the first time in 2 days the whole House Committee seemed to
take the charges seriously.
Mr. Patman’s charges were being collaterally supported in a sepa­
rate committee hearing.
Documents submitted by witnesses in the Senate Finance Committee
to refute Stimson’s claims of “no wrongdoing” forced Stimson to
explain away State Department involvement as a disinterested attempt
to solve a difficult situation, yet some of the Colombian press were
critical of the move by Olaya, and continued to supply Mr. Patman
and the Senate Finance staff with contrary information. (Ibid,
O’Connor, supra, 202-206.)

On the third day of the hearing, Friday, January 15,1932, Mellon0
counsel, Mr. A. W. Gregg, gave a statement in answer to the charges.
He argued that the statutes involved should be narrowly construes
because they had not been used in the past and a narrow reading
would be more appropriate since there was no precedent or interpre­
tation available.
By arguing that only Mellon’s holdings and not those of his brother,
family, or close associates are to be considered, and by arguing that
it takes 51 percent of the stock in a company to control it, he maintains
that Mellon obviously falls outside the statute. (Impeachment hear­
ings, supra, 53-54.)
While conceding that Mellon had tax refunds of $91,000, Gregg
carefully pointed out that the Joint Committee on Taxation was asked
to review them to make sure they were proper. (Ibid, 61.)
And as for the architectural magazine, its editor in a memorandum
states that it is a private publication, that it is published by an associa­
tion of Federal architects, that it accepts advertising only from mate­
rials of a class and not from contractors, and the Treasury address is
only to facilitate the editor’s mail delivery. (Ibid, 66.)
The Koppers Co. facts were also modified by Gregg. It seems that
technical assistance was being exported in the form of engineers, but
that Koppers was not directly involved. (Ibid, 68.)
But when it came to explaining away the Barco concession, Gregg
had a little trouble. Mellon made a statement which Gregg quoted at
the hearing:
>Mr. Mellon said he met President Olaya at one of the usual social functions,
and of course conversed with him, but such conversation was general, and
respecting financial and other conditions in Colombia.
Mr. Mellon had no conversation with President Olaya that had to do with the
so-called Barco concession, nor the Gulf Oil Corporation, nor with any suggestion
whatever, aUeged or implied, as to any support or assistance on the part of the
^Government with respect to Colombia Obtaining credit.
Mr. Mellon has never had any conversation with officials of our State Depart­
ment concerning the Colombia loan, nor has he had any conversation with bankers
with respect to this loan. (Ibid, 68-69.)

The Chairman then asked:
Did Mr. Mellon say whether he had discussed that with any of the officials of
the company that procured that concession?
Mr. G e e g g . May I ask you to repeat your question, Mr. Chairman?
The C h a ir m a n . I did not catch entirely the statement made by Mr. MeUon.
Did lie state that he did not discuss with any of the officials of the oil company
the procuring of this concession, or that was associated in any degree with the
renewal of the loan, or whatever it was?
* * * did Mr. Mellon discuss with some other person the renewing of this
concession and this loan? Mr. MeUon may have discussed it with some one else
'connected with the company, and that other person may have discussed it with
the President or someone else connected with the Colombian Government. Does
your statement there exclude that possibility?
M r. G r e g g . We discussed the entire matter fully yesterday, and he never men­
tioned having discussed it with any member of the company. I do not doubt that
the Barco concession was mentioned by one of the officers of the company to
Mr. Mellon. But any suggestion that Mr. MeUon should see the President of
Colombia, or any suggestion by Mr. Mellon that any officer of the company should
see the President of Colombia, is what he meant to deny by that statement.
Mr. O liv e r . Do you mean, Mr. Gregg, then, that Mr. Mellon was never con­
sulted by the Gulf Oil Corporation officials with regard to the Barco concession,
worth about $2 billion?
Mr. G r e g g . N o , sir; I did not say that at all. That is what I was very careful
not to say. (Ibid, 68-6:9.)

When asked whether he thought the granting of the loan influenced
the granting of the concession, Gregg replied that he had no opinion,
and that he did not think the Barco issue was properly before the
committee. (Ibid, 70.)
He then went on to discuss the two issues of law: Whether mere
ownership of stock disqualified Melon from holding office; and
whether Mellon engaged in the operations or business of his companies,
regardless of stock ownership.
He explained that as a matter of law a large block of stock, as long
as it was less than 50 percent of the outstanding stock, does not give a
single holder ownership control.
When pressed by Mr. Celler of New York whether a large block,
80 percent or even 20 percent, might give the holder control if other
stockholders were less organized, Gregg responded:
Mr. G r e g g . It would give them control over the election of directors and of­
ficers, and over the very few things that have to come before the stockholders,
such as a sale of the assets of the corporation, or dissolution, consolidation, or
merger. But while the corporation is operating a 99 percent ownership is not any
better, as a matter of law, then a 1 percent ownership.
Mr. C e lle r . Except that if they have the power to elect directors, and then
they have that minority interest which is unified, they have the power to control
the operations of the company?
Mr. G re g g . That is very true. They have the power to elect directors. But
after the directors are elected they have no power whatever over them, whether
they have 99 per cent or 1 per cent of the stock. (Ibid, 71.)

Mr. Gregg then used Senate Report No. 7,71st congress, 1st session,
discussed above as the May 7. 1929 report, to demonstrate that mere
ownership of stock is not disqualifying for Mellon. (Ibid, 147,149.)
Little real argument can be made on that point.
Obviously a narrow construction of section 243 would indicate that
stock ownership amounting to less than 51 percent of the outstanding
stock would indeed be technically a noncontrolling interest. And, as
far as the conflicting charges of decisionmaking and influencing in the
Alcoa and Barco areas, technically Mellon’s word must be taken as
true absent some concrete evidence to the contrary. But some startling
facts come to light when the technical is abandoned for the reality of
Mellon’s affairs.
William Larimer Mellon, nephew of Andrew, was a close business
associate and advisor of Andrew during his life. In a privately printed
biography, “Judge Mellon’s Sons,” printed in 1948, William describes
Andrew Mellon’s life from Andrew’s eyes. In a chapter entitled “My
Brother and I,” William describes the relationship between Andrew
W., and brother, Richard Beatty Mellon.
As demonstrated in the book, the brothers were very close. For
example, when Richard B.’s adventure in Colorado ended in 1887 and
he returned to Pittsburgh, Andrew took
* * ♦ this brother into the bank as full partner. There was never a scratch
of pen to bind this bargain. It was almost as if in business they became a single
identity ♦ * *.
As two alloyed metals sometimes combine into a single metal stronger ana
more useful than either used separately, so these partners seemed to compliment
each other and together became something greater than either. (Ibid, 141.)

In referring to a prospective oil lease he was examining, William
mentions casually that he met a man he knew at the site who “was a

field agent for the Bridgewater Gas Co. which was controlled by A. Wand Dick.” (W. L. Mellon, supra, 129.)
From that point on, William Larimer Mellon’s book continually
refers to “A. W. and Dick” as an inseparable pair.
O’Connor in his 1933 book, “Mellon’s Millions,” included several
appendices showing how interlocked the Mellon family and, especially
Andrew W. and Richard B. were in their business ventures. Appendix
6 contains a partial listing of the Mellon family’s holdings, and some
of the more interesting ones have been reproduced here:
Assets, 1931 controlled
Pennsylvania Water Co_________________________________
Monongahela Light & Power ....................................................................................
Ligonier Valley Railroad________________________________
Brooklyn Borough Gas_________________________________
Gulf Oil C o r p ..;.____________________________________
Koppers Gas & Coke...........................................................................................................
A LC O A .........................................................................................................................................
Aluminum Ltd. (Canada) .............................................................................................
Duke-Price Power Co. (Canada)...................................................................................



Mellon assets
10 ,2 10 ,14 *
2 7,74 9 ,4 3 *

* Harvey 0 'Connor, Mellon’s Millions, appendix 6, p. 422. (New York: John Day Co., 1933).

Several companies in which the Mellons held substantial stockwere
omitted so the above list does not include many companies with higher
Mellon-controlled percentages.
The financial interests were equally impressive. O’Connor reported
on 24 banks, some in the Mellbank Corp. chain whose total resources
were $796,120,446 in 1930.
The Mellons controlled $551,760,677 with their stock ownership
which in every case but one was over 49 percent. (Ibid, app. 7, 428429.)
It is small wonder that Mr. Gregg was pushing to a narrow inter­
pretation of “interest” and “control” in section 243.
Gregg tried to leave the discussion of “control,” and moved on togive his suggestion for an interpretation of the words “interested di­
rectly and indirectly.”
He referred to the case of United States v. Delaware <&Hudson Co.
(213 U.S. 366) in which the defendant railroad owned stock in a coal
mining company and transported that coal to market.
The United States charged that the coal fell under the Hepburn Act
which made it illegal for a commercial carrier to be “interested di­
rectly or indirectly” in a producer whose commodities it carried.
The Supreme Court ruled in favor of the defendants holding that
where ownership of stock by a carrier which does not cause the carrier
to discriminate against competitors of the producer does not amount
to a “direct or indirect interest.” (Ibid, 98.)
The analogy was clear. I f railroads can own coal mine stock and
ship coal in which they have a small interest, Mellon can own stock in
companies in which he has a legal or equitable interest. I f it can be
shown that he had more, Mellon had to leave office.
Gregg countered the Alcoa charges by submitting affidavits from
Arthur Davis, chairman of the board of Alcoa, and Mellon himself,
dated May 1929 during the Senate hearings in which both men de-

dared that Mellon had in reality acted the role of disinterested minor­
ity stockholder in the transactions discussed by the Senate and later
the House committees. (Ibid, 151.)
"While Gregg had been discounting Mr. Patman’s charges and dis­
missing the Barco concession, the Senate Judiciary Committee was
questioning Francis White, Assistant Secretary of State, on that
White refused to answer any committee questions in which Mellon’s
name was used, especially after he had admitted thatthe State De­
partment had only become involved when the concession was trans­
ferred to the Gulf Oil Corp. in 1928. (Ibid, 151.)
Colombian President Olaya was quoted as saying in 1928 that a
failure to review loans would make further economic dealings difficult.
He said also that he and Mellon had only generally talked about Co­
lombia’s future. (New York Times, Jan. 16,1932,38.)
In retrospect it seems hard to believe that a man whose family
owned a substantial amount of stock in a company (Gulf Oil) which
had a substantial interest (83 percent) in an oil concession (the Barco)
would be able to restrain himself from discussing specifics when meet­
ing socially the President (Olaya) of the country (Colombia) who
had the power to grant or deny that concession.
But he must be given the tjenefit of the doubt in dose questions like
this one for as Gregg pointed out, his holding office was challenged no
fewer than five times m the House and Senate during his service and
he was not removed. (Ibid, 72.)
Mr. Gregg resumed his statement to the committee on January 18,
1932, the 4th day of the impeachment hearing. He referred to a pros­
pectus of the Union Gulf Corp. which Mr. Patman had put in evidence
by saying that the corporation had been loaned some securities to be
used as collateral for a bond issue, that some of these had come from
Mr. Mdlon, but that such a transaction is simply a personal loan for
consideration, and does not amount to “doing business.” (Ibid, 153.)
Gregg then dropped the discussion and started to go on to other
issues, but Chairman Sumners stopped him.
This exchange followed:
* * * would yon mind addressing yourself, In your discussion of the law, to
this point:
This statute to which yon refer seems to be an exercise of police power of the
Federal Government seeking to protect itself. And while the courts may draw
distinctions, as between ownership direct and as stockholders, they would, per­
haps, appeal more to the learning of lawyers than to the commonsense of the
average person.
Take, for example, 99 percent ownership of stock in a corporation. And a stat­
ute that prohibits a person engaged in the business of trade or commerce from
holding a certain office. Does it seem to yon to be a sensible construction of the
statute to say that a man who owns 99 percent of a business can escape the re­
straint of the statute by incorporating? To make it a little more clear, let us
suppose that he is a private owner of a business, that he owns it all; and he sells
10 percent of it ; and then he and the person to whom he sells the 10 percent pro­
ceed to incorporate: Is there such magic In the act of incorporation as to make
him then a proper person to hold office as against the statute?
Mr. G b eg g . I think there are two answers, Mr. Chairman, to that: The ilrst
is that it would depend upon whether he was active after the incorporation in
the business that is being conducted.
_The C
' . Well, at that point, is it to be assumed that a man who holds
99 percent of a corporation, while he may not be active in managing the corpo­
h a i r m a n

ration, will not be active in managing those who manage the corporation, will
he not?
Mr. G b e g g . I would say that with that stock ownership it would be likely,
yes * * *. In the ordinary partnership, the partners are active in the business,
carrying it on; they really run the business. The corporation may be just a pure
investment. It is a question of fact whether it is a pure investment, or whether
in a given case the party continues in the business. (Ibid, 156.)

Gregg concluded his argument by reemphasizing that Mellon held
the stock purely for investment purposes, was disinterested in the com­
panies—even though he had founded many of them and his family’s
banks had loans outstanding to some of them—and added that Mellon
had not attended a stockholder’s meeting since becoming Secretary of
the Treasury. Gregg did state, in response to a question, that Mellon's
shares were voted by proxy. (Ibid, 159.)
When Mr. Patman resumed his statement he immediately went to
the point of law in the Delaware and Hudson case, and pointed out
that the issue there was the legislative intent of the statute, not conflict
of interest under section 243.
The railroad case has the purpose of keeping a railroad from own­
ing and shipping coal from its own mine to the detriment of competi­
tors. It was not for the purpose of preventing an abuse of a public
office. (Ibid, 180.) Today the railroad case would fall under the anti­
trust vertical merger theory enunciated most clearly in United States
v. Dupont (353 U.S. 586) in 1957. But in 1932 the concept’ was cer­
tainly undeveloped, and it is easy to see what the legislature was then
intending to do in regard to railroads.
Mr. Patman also pointed out that Alexander Hamilton, the first
Secretary of Treasury, did indeed own stock—one and one-half shares
in a London, England bank; five shares of a company selling land in
the Ohio territory—but that 72 years went by before another Secre­
tary of Treasury owned stock.
Secretary McAdoo owned around $10,000, and ranked among the
largest, holdings of any Secretary.
As Mr. Patman remarked, £{Why. Mr. Mellon’s net income from
the stocks he owns will amount to as much in 3 hour’s time as the total
gross amount of all the stocks that were held by all the Secretaries of
the Treasury before his time.” (Ibid, 182-183.)
The Barco concession was brought up once more by Mr. Patman who
drew the inference that the circumstances of Mr. Mellon speaking gen­
erally at a dinner party to the President of Colombia who immediately
returns to his country and changes a long-standing policy toward a
lar^e oil concession is just too much of a coincidence. (Ibid, 187.)
The committee then adjourned until the next day, Tuesday. Janu­
ary 19,1932, at which time Mr. Patman gave his closing remarks.
After suggesting that the Judiciary Committee Dress with the Sen­
ate Finance Committee to force Stimson’s State Department to turn
over the documents relative to Barco. Mr. Patman ur.<?ed that the
House Committee report to the House Committee of the Whole that a
full impeachment examination be made.
At 11 a.m., January 19, the committee went into executive session.
With the public hearings finished, the committee members began
examining the information given them. Although no official report was
made, there is a suggestion that the executive session resulted in a deci­
sion to pursue the matter further.

Part 2 of the impeachment hearings includes several pieces of corre­
spondence dated subsequent to January 19,1932.
But the House Judiciary Committee never reached a decision, for
on February 3,1932, President Hoover announced—
The appointment of Andrew W. Mellon, Secretary of the T r e a s u r y to be
Ambassador to Great Britain, and Mr. Mellon’s acceptance of the post. (New York
Times, Feb. 4,1932,1.)

The reason given was the economic situation in Europe.
The New York Times in a remarkable piece of objective reporting
On a number of occasions this old (1789 sec. 243) law has been involved by Mr.
Mellon’s enemies in Congress to secure his removal. There is even now such a
question raised, the matter being before a Congressional committee in impeach­
ment proceedings brought by Representative Patman, Democrat, of Texas.
These attacks never appeared to worry Mr. Mellon, however, and one of his
favorite jokes was relative to the reports of his resignation. (Ibid.)

In one of the interviews after his appointment, Mellon was asked
about his job in Washington. He replied:
It is quite interesting. The building program was one of the most interesting
part of my work here. All of this centered (sic) in the Treasury. The responsi­
bility is on the Secretary for the determination of plans and composition of the
buildings and their location. (Emphasis added.) (New York Times, Feb. 5,

On February 11,1932, after several days of running European press
quotes praising Mellon and the new possibility of war debt cancella­
tion, the New York Times ran a column stating that the House
Judiciary Committee after a 2-hour session had decided to drop the
impeachment investigation.
Chairman Sumners summed up the move by saying that an impeach­
ment is an ouster proceeding and there was no ionger any one to
oust. (New York Times, Feb. 11,1932,1.)
Senator Norris, no great.admirer of Mellon, on the Senate floor,
paid him a backhanded compliment on his—
Demotion to an ambassadorship * * * Mr. Mellon has had an honor greater
than has come to any other man on earth; he has had three different Presidents
serve under him. I cannot help but say “Poor Andy” after he has been in com­
mand of the political forces of three presidents, to see him pushed off the throne.

For several months stories rose on both sides of the Atlantic that
Mellon’s mission would be to rescue Europe from the war debt burden.
It never happened.
When he was sworn in as Ambassador on March 13,1932,11 days
before his 77th year, he said the words, “I do (accept the post),” and
added, “That isn’t a marriage ceremony, it’s a divorce.” (New York
Times, Feb. 14,1932,24.)
Whether he said it in jest or whether in anger or reflection, the
statement truly marked a change in our history.
Whether Mr. Patman’s charges forced Hoover to remove him, or
whether Hoover wished to make a change on his own, may mean little.
Mellon came into the Treasury touted as the man who would
straighten up the country’s finances once and for all. He left it when
the finances had begun their long slide.
It would take another rich man, Roosevelt, several years to pull us
out. An age had definitely come to an end.

The so-called “bonus” for veterans of World War I was one of the
most controversial issues facing the Congress during the 1930’s, and,
ultimately, one of Wright Patman’s greatest achievements.
The problem of payment of adjusted-service certificates first arose
when the Selective Service System adopted during World War I led
to a reevaluation of the traditional pension plans for veterans. De­
signed by Julian W. Mack’s Commission and approved by President
Wilson and 'Secretary of Treasury McAdoo, a new program was
adopted by Congress as the War Risk Insurance A.ct of 1917.
The Bill provided $15 per month for each soldier, compensation of
$30 per month for disabilities, free hospitalization and rehabilitation,
and war risk insurance. Each GI was required to purchase this insur­
ance up to $10,000. Premiums averaged $6.60 per month and were
deducted from the servicemen’s pay.
Four million veterans paid the Government $400 million. Each
soldier was required to pay for altering and mending his clothing and
shoes, his barber bills, and bills at canteens for tobacco and incidentals.
Anything that was left went to payment on a Liberty bond which was
required to avoid the appellation of a “slacker.” _
The 2 million veterans who returned to the United States after the
war were given a discharge with 2 months of pay or $60. The Congress, with good reason, felt some obligation out of political self-inter­
est or humanity to compensate the soldiers for dislocations caused by
the war. The veteran entered the war and received $1 a day, while the
civilian earned $20 a day in the shipyards.
The men who had served their country came home to find their jobs
g o n e , while the rest of the country was prosperous.
Some 7,000 World War I contractors had theiir pay adjusted includ­
ing the Du Ponts who made a profit of a quarter of a billion dollars
off the war. Billions of dollars were payed to railroad owners and
war contractors. Federal employees who received up to $2,500 per year
were entitled to adjusted pay of $1,440 each. Foreign countries re­
ceived $19 billion from the United States.
Despite the obvious economic injustices facing veterans, there was
no great movement in the country to compensate the former soldiers
after World War I.
In 1921, TTnrding repulsed efforts by veterans to pass favorable leg­
islation by merely opposing such action.
However, the veterans movement did gain some momentum even
during this early period. In 1922, with the election campaign clearly
in their minds, Republican leaders of Congress ordered consideration
of veterans problems. Congress authorized the issuing of service cer­
tificates that could be redeemed immediately or held for 20 years. How­
ever, the Congress could not override President Harding s veto of the
( 86)

bill that he characterized as special interest legislation which would
increase the national debt by one-sixth.
In 1924 Coolidge vetoed a measure providing veterans with paidup insurance and allowing borrowing of up to 25 percent of its value.
With the help of the American Legion’s lobby, Congress was able to
override Coolidge’s veto.
The World War Adjusted Compensation Act of 1924 provided ad­
justed compensation at the rate of $1.25 a day for services overseas, and
$1 a day for home service rendered from April 5,1917 to July 1,1919.
Payment was only due in excess of 60 days because each soldier had
received $60 at the time of discharge. If the amount due was $50 or less
the Government paid the soldier in cash.
In excess of $50 he received from the U.S. Veterans’ Bureau an ad­
justed compensation certificate computed in the manner stated above—
$1 or $1.25 a day. Twenty-five percent of the total due was added by
the Government, and, in addition, an amount equal to approximately
4 percent interest on the actual amount due for 20 years. This bill
clearly made the payment of veterans a contract obligation and not a
The 1924 bill was inadequate and unfair in compensating the vet­
erans. Instead of dating the adjusted compensation certificates back
to the time when the services were rendered, Congress dated the cer­
tificates as of 1925. Thus, the veterans lost 7% years of interest, the
entrance of the United States in the war having started in 1917.
At the rate of $1 to $1.25 a day, with a reasonable rate of interest,
the ex-soldiers were entitled to 100 percent of the face value of the
adjusted-service certificates. The injustice of this situation is illustrated
by the examination of tax refunds.
After 10 or 11 years the Treasury Department decided that the re­
funds were justified. The refunds were not dated 1925, but 1917 and
1918 during the war when the applicants claimed to have overpaid
their income taxes and with 6 percent interest from that time which
the Government confirmed to be a reasonable rate of interest.
The veteran had to pay an insurance charge. In case he died his de­
pendents would receive tne face value of the certificate as of 1945. The
cost of carrying the insurance as of 1931 was $76.5 million.
The adjusted-service compensation legislation of 1924 is found to be
more unfair by comparison with other countries. In some instances the
foreign bonuses and adjusted compensation amounted to $7,209 each.
The reason Congress did not pay the veterans in 1924 was that
Andrew Mellon as Secretary of the Treasury convinced Congress that
there existed a deficit greater than $300 million. He said in 1924, “We
are going to have a deficit around $347 million during this fiscal year.”
Congress, therefore, believed that payment of the veterans was eco­
nomically unfeasible. In reality, the Government experienced a surplus
of greater than $600 million. The propriety of this billion -dollar
“error” is questionable to say the least. It is hard to believe that a man
of Andrew Mellon’s intelligence could have made such a tremendous
blunder accidentally.
Instead of immediate payment to veterans, Mellon suggested to the
Congress that the veterans wait until 1945 when a large part of the
debt owed to the ex-soldiers would be consumed by compound in­
terest. Mellon’s suggestion was embodied in the World War Adjusted

Compensation. Act of 1924. Thus, Mellon, as usual, obtained what he
The man who saw through MeUon’s shenanigans, and correctly per­
ceived the veterans problems as intolerable, was Congressman Wright
Patman of Texas. Patman led the movement for veterans compensa­
tion from 1929 when he came to Congress to the resolution of pay­
ment to veterans in 1936.
On May 28,1929, Wright Patman introduced the first bill, H.R. 3493,
providing for immediate payment to veterans of the face value of their
adj usted-service certificates. When arguing for his bill on the floor of
the House of Representatives, Patman pointed out that as of June
1929 nearly 100 percent of the veterans of World War I had borrowed
on their certificates. While receiving 4 percent interest on these certifi­
cates, the ex-soldiers had to pay 6 percent interest compounded an­
nually for his own money loaned to him.
As Mr. Patman correctly advocates, the 1924 Act prevents veterans
from receiving any money in sufficient quantity to be real assistance
to them. A veteran who holds approximately the average value of an
adjusted-service certificate, that is, $1,014.11, if he borrows to the limit
of the law to 1945 would receive $475.72 in loans, while the bank or
Government, the one carrying the loan, would receive $478.28. The cash
settlement would amount to $46 in 1945. This situation, as Mr. Pat­
man perceived it, was unbearable. The veteran lost nearly half of the
money owed him to the banks. The Government would pay the vet­
eran with $475.72 in loans, $478.28 deducted for interest, and $46 in
cash. Thus, the total would be $1,000.
Wright Patman in 1929 began his long battle to rectify the 1924
act. He called for the raising of the interest paid to veterans from 4 to
6 percent. The Congressman from Texas reasoned that if a veteran
was charged 6 percent on his own money that it was justified to com­
pensate the ex-soldier by compounding annually the value of the cer­
tificates by 6 percent.
Another argument utilized by Wright Patman was that the Secre­
tary of Treasury, Andrew Mellon, refunded millions to the steel
corporations with interest at 6 percent. Mr. Patman adovocated dating
the certificates from January 1, 1918 so the veterans would not lose
all that interest. Also, Mr. Patman called for immediate payment of
the full face value of the adjusted-service compensation certificates.
Mr. Patman recognized the dire financial needs of the veterans which
would require payment in a lump sum of money with a reasonable rate
of interest dated from the time the services were rendered. Many of the
veterans were paying 10 percent interest on their homes if they were
fortunate enough to afford a house.
Mr. Patman’s bill, H.R. 3493, was sent to the Committee on Ways
and Means.
Wriffht Patman’s eloquence in espousing the veterans cause set off
heated debates on the floor of the .House that lasted until 1936. At this
early stage of debate, manv in Congress argued that the veterans cer­
tificates should not be readjusted along the lines that Mr. Patman advo­
cated, because all other citizens were being hurt bv the Depression just
as much, if not more, than the veterans of World War I. However.
Wrieht Patman and a few others realized that the veterans were
suffering disproportionately due to dislocations caused by the war.

Besides pointing out the various economic disadvantages facing
veterans, as compared to the rest of the populace, Patman, the Con­
gressman from Texarkana, made an effective argument before the
House in January 1931 'by observing that the Secretary of the Depart­
ment of Agriculture adjusted the pay of veterans who worked on roads
during the war according to the difference in pay between civilian and
military workers. Also, the pay was made as of 1918.
In 1931 Mr. Patman had his hands full with opponents in the House
and from the “Wall Streeters.” However, a recurring figure who
worked against Patman’s proposed adjustment of the 1924 Act was
Andrew Mellon. Mellon stated that he did not believe the veterans
should be paid in full at that time because it would be “a temporary
stimulation of an artificial character.” However, Mr. Patman force­
fully argued that this was exactly what the country needed so des­
perately during the Depression.
In prder to get consumers to buy more, they must be granted more
purchasing power. With consumers buying more, they should, theoreti­
cally, stimulate business. With more money in the economy employ­
ment would be created. This stimulation must be of an artificial nature
since greater purchasing power will not come about naturally in a de­
pression and the Government must intervene.
Therefore, Congressman Patman concludes that Mellon, unknow­
ingly, gave the best argument for payment of the full face value of the
adjusted-service certificates, that isj the argument that the veterans
“bonus” would be “a temporary stimulation of an artificial character.”
This artificial stimulation, Mr/Patman reasons, would lead to a natural
prosperity. Even if this prosperity is temporary, Mr. Patman points
out that it is better than no prosperity at all.
Another of Mr. Mellon’s objections to the Patman plan was that it
would “divert savings into purchases for consumption.” This was at
the discretion of the owner of the money and it would have been dif­
ficult, if not impossible, for Mr. Mellon to predict accurately how the
consumer in aggregate would divide his savings and consumption.
AJso. it is striking that Mr. Mellon did not worry about the pattern of
spending by war creditors.
Congressman Blanton of Texas, a supporter of Mr. Patman’s battle
for veterans, accentuated the irony of Mellon’s opposition to the veter­
ans—that “Billionaire Mellon of the Aluminum Trust and the U.S.
Treasury,” as Mr. Blanton characterized him before the House, op­
posed aiding the veterans allegedly because payment would “hurt busi­
ness” and “unsettle the bond market.”
However. Blanton observed, Mellon did not think of those arguments
when the railroads got $1.6 billion in backpay, and war ^contractors
received more than $3 billion. Blanton stated that Mellon didn’t utilize
his argument when the Treasury refunded millions of dollars in taxes
to other’s, including the Aluminum Trust. He pointed out that Mellon
was as far out in his prediction that payment to veterans would hurt
business as he was in the forecast of the budget of 1929. Thus, Blanton
concludes, payment to veterans would stimulate business, rather than
hurt it.
Mr. Mellon’s lobbying against the Patman proposal made it difficult
for the Congressman from Texas to even get a hearing for his bill. In
January 1931 Mr. Patman filed a petition asking that the Ways and

Means Committee be instructed to report his bill concerning veterans
payments within 15 days. The committee had had before it Mr. Pat­
man’s bill since May 28,1929. Mr. Patman needed 218 Members to sign
his petition. In this petition filed with the Clerk of the House on
December 9,1930, Mr. Patman was merely asking for consideration of
the matter by the Ways and Means Committee.
In early January the Congressman from Texarkana had half or
309 of the’ necessary signatures. The chairman of the. Wavs and Means
Committee, Mr. Hawley, called a meeting for consideration of a bill
that Mellon wanted passed in January 1931.
On January 17. 1931 Mr. Patman emphasized that no increase in
taxes was necessary to pav the veterans. The war debt had been reduced
$10 billion in 10 years—$7 billion faster than Congress said it should
be reduced. His idea was to divert payment from the war debt to the
other war debt—the adjusted service certificates.
Faced with Mr. Patman’s persuasive arguments for granting the
veterans what was justly due, Mellon became desperate in his attempt
to defeat consideration of legislation calling for payment of the ad­
justed-service certificates of World War I veterans in cash.
Mr. Hawley of Oregon as chairman of Ways and Means had control
over consideration of the Patman bill. Being recognized as Mellon’s
“supporter,” Hawley avoided the tremendous demand by veterans to
consider the Patman bill by leaving Washington. One of the great
mysteries in January 1931 was the location of Chairman Hawley. How­
ever, the Mellonite leaders began to fear the voting power of veterans
and their sympathizers. Following his return from his secret hiding
place, Chairman Hawley called a meeting of the Committee on Ways
and Means. The object of the meeting was not to consider veterans
benefits, but to succumb to the desires of Andrew Mellon for legislation
enabling him to increase the public debt, if he deemed it necessary.
Congressman John Gamer of Texas moved at this meeting to con­
sider the several bills calling for cash payment of adjusted certificates
held by ex-servicemen. However, Chairman Hawley prevented Garner
from making this motion. The ruling of the chairman was sustained.
Hawley was able to carry every Mellonite with him—every antiMellpnite voted with Gamer. Thus, Patman’s attempts to solve the
veterans problems were frustrated by Mellon and his Republican
sympathizers in Congress.
Mr. Mellon drew up a bill of his own during January 1931. His bill
called for the issuing of $8 billion more of Government bonds.
Mr. Patman revealed on the floor of the House that 4y2 million
veterans and others had been clamoring for a hearing on payment of
adiusted-service certificates. None of them had had a hearing on this
However, with the committee in session only 1 day, the Secretary of
the Treasury received a hearing on Mr. Mellon’s bill. The reason, Mr.
Patman pointed out, that Mellon wanted to issue $8 billion in bonds
at his discretion was that the interest rate was cheap at that time,
and this was the time to pay off the U.S. debts. However, the debt was
being retired too rapidly as Mr. Patman emphasized.
Nearly everyone agreed with the above statement except Mellon and
Undersecretary Mills. Mr. Patman called for a diversion for a few
years from the war debt to the adjusted-service certificates.

In February 1931, Mr. Gamer proposed an alternative bill calling
for permitting the veteran to borrow 50 percent of the face value of
the certificate at 4-percent interest. Mr. Patman’s principal objection
to this plan was that it did not provide for real payment, and it also
charged interest on the loans which he regarded as too much of a
burden for the veteran.
Another alternative was the Connery bill. His bill provided that, if
the veteran did not want the money they could have a 4-percent bond,
but they should be given a settlement based upon the face value; that
would not cause all the bonds to go onto the market at one time.
To this bill Mr. Patman responded more favorably, and appeared in
the Congressional Record to completely approve of it.
In February 1931 Mr. Patman came out in favor of H.R. 10574,
introduced by Republican Chairman Hawley, calling for an increase
of the limitation on borrowing from 25 percent to 50 percent. Though
Mr. Patman objected strenuously to the provision of cnarging interest
on loans to veterans, the Congressman from Texarkana apparently
believed that this was the best that could realistically be done for the
veterans. Mellon, Mills, and numerous bankers, had appeared before
the Committee on Ways and Means to urge rejection of any plan to
increase the loan value, or cash the certificates.
On February 16,1931, with many believing this compromise measure
to be the only thing feasible at that time, the Hawley bill came up in
the House and passed by a vote of 363 to 39. However, on
February 26,1931 President Hoover vetoed the bill. The House and
Senate were able to override his veto by votes of 328 for to 79 igainst,
and 76 for to 17 against, respectively.
Mr. Patman announced immediately after the bill became law on
February 27, 1931 that he would continue to fight for full payment
of certificates without the payment of any interest on loans that
veterans obtained.
Mr. Patman introduced H.R. 1, a bill to provide for immediate
payment to veterans of the face value of their adjusted-service cer­
tificates. He continued his battle for passage of this legislation by
debating on the floor of the House—he argued that the 3,600,000
veterans holding these certificates were entitled to payment on Octo­
ber 1, 1931.
Characteristic of Patman, the Congressman from Texarkana argued
that the plain people who did not have the resources of newspapers
and radio at their disposal were the ones to benefit from this bill.
He emphasized again that the plain people were being exploited by
the Government’s liquidation of its debt to veterans by compound
Another proposal of Mr. Patman’s was that payment bv foreign
nations to the United States on the war debt should be used to retire
the adjusted certificates in cash. Mr. Mellon visited Europe in the
summer of 1931, and it was evident from subsequent events that he
promised foreign debtors that they would never have to pay their
debts to the United States.
This had a dual purpose for Mellon, that is, destruction of the argu­
ment for cash liquidation of the certificates, and the large contribution
to the Treasury deficit—$247 billion a year—which he could utilize to
argue against Wright Patman.

Iii early January 1932 Mr. Patman introduced H.R. 7726 which was
also a bill to provide for the immediate payment to veterans of the face
value of their adjusted-service certificates. This went to the Commit­
tee on Ways and Means.
For H.R. 1 and H.R. 7726, Mr. Patman argued that no bond issue
was required for full payment-^-$2.2 bililon was required to pay the
remainder due on all outstanding certificates. Money was being ac
cumulated in the Treasury yearly for the purpose of paying the cer­
tificates in 1945. To those who insisted that all currency be backed
by 40 percent gold, Mr. Patman assured them that the United States
had sufficient idle gold in the Treasury to back the amount of currency
proposed to be issued if Congress so desired. Two and one-half billion
dollars could be issued on the idle gold.
During the spring of 1932 Mr. Patman repeated many of his previous
arguments in favor of full payment, that is, the increase in purchasing
power, the justification for dating the certificates as of 1918, the
injustice of charging interest on veterans loans, et cetera.
Despite all of Wright Patman’s persuasion, H.R. 1 was reported
adversely by the Ways and Means Committee. This, however, did not
deter Mr. Patman. On May 10.1932 he introduced House Resolution
220 to make H.R. 1 as amended by H.R. 7726 a special order of
On May 19 Mr. Patman filed a motion to discharge the Rules Com­
mittee from further consideration of House Resolution 220. On June
14. 1932. H.R. 1 was taken up in the House in accordance with Mr.
Patman’s petition. This called for payment of ex-servicemen by
Treasurv notes. Senator Robert L. Owen’s plan called for the flotation
of a bond issue for the amount of the adjusted-service certificates. This
bond would be held bv the Federal Reserve Svstem unti] the dollar
had reduced itself to 2 percent below the standard it maintained in
At that time the Federal Reserve Board would be authorized to
to sell or dispose of as many bonds as would keep the d o lla r at a
stabilized price. No interest on the bonds would be paid until they
were sold. Both the Patman and the Owen plans were reported un­
favorably by the Ways and Means Committee.
While Congress was considering the Patman proposals at a snail’s
pace, the veterans were getting restless—they were being severely hurt
by the depression. Their frustration led them to organize the bonus
expeditionary force in Mav and June of 1932 in order to march on
Washington. By the middle of June. 15,000 were camped out in the
District of Columbia. The effect of BEF was felt in Congress, Mr.
Patman ,<rot H.R. 1.passed in the House bv a vote o f 211 to 176. How­
ever. on June 17 the Senators, claiming that they did not want to be
intimidated by BEF, defeated the Patman measure by a vote of 18
yeas, to 62 nays.
Despite this setback, most of the BEF stayed in Washington. Some
of the demonstrators occupied Federal buildings and tension mounted
between the authorities and the veterans. Two veterans were killed.
From orders of the President, the Armv. under Douglas MacArthur,
moved in to completely remove the BEF from the Capital. Their
shanties were destroyed, and the men and their families were, forced
out of the Nation’s capital. The people of the United States looked

on the treatment of the veterans as a disgrace—this incident would
be .remembered in the November Presidential election.
On July 13,1932, Mr. Patman introduced H.R. 12957 to provide for
immediate payment to needy veterans of the face value of their ad­
justed-service certificates. Mr. Patman’s reasoning was that the need
was so great that the bill had a chance of getting through the Congress
quickly. At least, thought Congressman Patman, it was worth a trial
before the next session of Congress; however, it failed to get consid­
In the election of 1932 a Republican President with extremely con­
servative credentials was defeated by a Democrat who many labeled
as radical, namely, Franklin D. Roosevelt. However, Roosevelt was
not particularly liberal in his attitude toward veterans. In the early
part of his campaign, F. D. R. made himself clear as to his conserva­
tism on this issue.
On April 22, 1932 in Albany, N.Y., the Democratic Presidential
candidate stated: “I do not see how, as a matter of practical sense, a
government running behind $2 billion annually can consider the an­
ticipation of bonus payments until it has a balanced budget not only
on paper, but with a surplus in the Treasury.”
Again, on October 19 in an address at Pittsburgh, Roosevelt reiter­
ated, “Last April my views on the subject (bonus) were widely pub­
lished and have been subsequently quoted. No one for political
purposes or otherwise has the right in the absence of explicit statement
from me to assume that my views have changed. They have not.” Thus,
F. D. R. gave forewarnings of his future rejection of veterans legis­
Despite Roosevelt’s proclamations, Wright Patman renewed his
battle for the veterans with vigor in the 1933 session of the 73d Con­
gress. Mr. Patman lambasted the press, the radio, screen and stage
which the National Economy League had at its disposal, as well as
millions of dollars to distribute false information concerning, veterans’
One of the greatest lies employed by the league was the contention
that foreign countries paid their veterans less than the United States.
With the support of the war contractors, the league helped stifle Pat­
man’s efforts over the years to aid the veterans.
On April 27,1933, Mr. Patman filed a petition to discharge the Ways
and Means Committee from consideration of H.R. 1 so as to get im­
mediate consideration by the House. Mr. Patman, however, did not
receive the 145 required signatures until February 20, ,1934.
On March 12,1934, Mr. Patman got H.R. 1 passed in the House by
a vote of 295 for to 125 against.
Mr. Patman was at pains to explicate the method of paying the
veterans. He pointed out that the U.S. Treasury had $8,550 billion in
assets—$5.5 billion was in circulation. Therefore, one could earmark
$2 billion for veterans and still have $1 billion in untouched gold, not
to mention the silver reserve of $720 million. Eight billion dollars in
gold is sufficient for a $20 billion issuance on a 40 percent gold reserve
basis. Mr. Patman’s plan was to issue $2 billion which would have 60
percent more gold behind it than any Federal Reserve note.
Since anv of the 12 Federal Reserve banks could order printing
of money simply by depositing debt with the U.S. Government, Mr.

Patman saw no reason why the veterans couldn’t do the same with
their certificates.
Despite Mr. Patman’s reiteration of earlier arguments for H.R. 1,
the bill came up in the Senate, and was passed over.
In 1935 the main debate centered on the alternative of passing the
Patman legislation or the Vinson bill. H.R. 3896, the Vinson bill,
called for full payment by bonds, while Patman’s bill called for an
issuance of currencies.
The American Legion had Congressman Vinson of Kentucky offer
H.R. 3896 on January 14,1935. Henry Morganthau, the Secretary of
the Treasury, stated that this bill would not only require more bonds
but more taxes. Mr. Vinson, who had labored in the past for two of
Mr. Patman’s bills H.R. 7T26 and H.R. 1, now introduced a bill which
one Congressman characterized as the “banker’s delight.”
In 1935, the showdown between the Vinson and Patman bills oc­
curred. On January 24,1935,19 of the 25 members of the Ways and
Means Committee favored the Patman bill, and six were opposed to
any bill. On that day, as stated previously, the Vinson bill was intro­
duced which took away eight of the Patman bill supporters. The
committee then stood 11 for the Patman bill, 8 for the Vinson bill,
and 6 against any bill.
Cooperation between the Vinson bill supporters and those opposed
to any bill led to a favorable report from the committee—14 to 11. In
other words, the opponents of any legislation dictated the favorable
report on the Vinson bill by reason of the wedge being driven through
the forces of the proponents.
The supporters of the Vinson bill in the House were 120 who f avored
a full payment bill and 84 who opposed full payment, making a total
of 204. Among this number were 82 percent of i02 Republicans—93%
percent of all Members of the House opposed to any bill—and 98 per­
cent of the supporters of the Tvdings bill that would have given the
holder of a $1,000 certificate who had borrowed at every chance the
sum of $154 in full payment.
The Vinson bill never received more than 120 votes in the House.
The bill did receive nearly total support from the Republican Mem­
bers of the House and those who opposed any bill at all concerning
veterans benefits.
In the Committee on Ways and Means the Patman bill received 61
percent of the support from the committee who favored any bill. Yet,
the bill received 39 percent of the support—the Vinson bill—received
a favorable report. The Patman bill received 631/& percent of all votes
in the House of the Members who favored any bill—it prevailed over
the Vinson bill by only three votes.
Of the 204 voting for the Vinson bill, in preference to the Patman
bill, 84 of them were against any bill and voted against the bill in final
On March 22,1935, the vote on bill H.R. 3896, as substituted by the
Patman bill H.R. 1, carried 319 for to 90 against. On May 1 H.R. i was
taken up in the Senate and passed Mav 7 by a vote of 55 veas to 33 nays.
On May 22,1935, President Roosevelt vetoed the bill and delivered
his veto message in person to a joint session of Congress. Immediately
after the President’s message, the bill passed in the House over the
President’s veto by a vote of 322 for and 98 against. The next day.

May 23, the Senate sustained the veto—there were 54 yeas and 40 nays
which was nine votes short of two-thirds.
Facing the desperate needs of the veterans, the forces behind the
various bills began to collaborate. On January 7. 1936, Mr. Vinson
introduced H.R. 9870 to provide for immediate pavment of World
War I adjusted-service certificates, and for the cancellation of unpaid
interest accrued on loans secured by such certificates. This bill became
known as the Yinson-Patman-McCormack bill.
On January 10 the House passed the bill 356 for to 59 against.
On January 17 the Senate took up H.R. 9870 and 3 days later passed
the bill 74 to i6.
On January 24 the President vetoed the bill. That same day the
House overrode the President’s veto 326 to 61.
On January 27 the Senate passed the bill over the President’s veto
76 to 19—it became Public Law 425.
Thus, the battle ended with Patman victorious. After all those years
of frustrations, Congressman Wright Patman never lost hope despite
all the power behind his opponents, that is, Andrew Mellon, the Wall
Street bankers, and Presidents of the United States.
This fight over the veterans adjusted-service certificates was a fore­
shadowing of the future challenges to big business and Wall Street in
the name of public interest.
In this incident, as in the future, Wright Patman showed himself
to be a man of supreme courage with the interests of the people
always uppermost in his mind.

v m . THE BANKING ACT OF 1933
The depression, which began on October 29, 1929, did not reach
bottom until the summer of 1933, and as we have seen, the Federal
Reserve Board took little or no action to stem the tide either before or
after “Black Thursday.”
Elected in November 1932, Franklin Delano Roosevelt could not
take office until after the lameduck session of the 72d Congress in
March 1933. With the inauguration of Roosevelt came the bank
holiday. Banks closed from coast to coast, many never to reopen.
Congress, however, did not wait on the new President to investigate
the stock market.
As early as June 1932 during the 72d Congress which had begun in
1931, and ended in March 1933, the Senate authorized its Banking
Committee to investigate stock exchange practices.
To do so, it retained Ferdinand Pecora of New York City who, for
some 17 months from January 1933 until July 1934 during both the
72d and 73d Congresses, conducted one of the most exhaustive and
spectacular investigations of Wall Street.
Ferdinand Pecora was born in Italy and came to the United States
when he was 5 years old. He studied law at New York Law School and
was admitted to the New York Bar in 1911. In the 1912 campaign he
was a Bull Mooser and supported Theodore Roosevelt. In 1916 he
became a Wilson Democrat. From 1918 to 1930 he was an assistant dis­
trict attorney in Manhattan, and from 1922. chief assistant.
As indicated, from 1933 to 1934 he was counsel for the Senate Bank­
ing Subcommittee on Stock Exchange Practices. In June 1934
President Roosevelt appointed him to the Securities and Exchange
Commission, from which he resigned in January 1935 to accept an
appointment by Governor Lehman to become a Justice of the Supreme
Court of the State of New York. Thereafter, he was nominated by
both parties to a 14-year term. He was a political independent, and
in 1933 ran for district attorney of New York County on Joseph
McKee’s anti-Tammany ticket. He died on December 8,1971.
Judge Pecora wrote an interesting book about his investigation
(“Wall Street Under Oath: The Story of Our Money Changers,” 1939,
Simon and Schuster. New York, reprinted 1968 and 1973 by Augustus
M. Kelley, publishers Clifton, N.J.). He dedicated it to the Senators
on the subcommittee he represented during the 72d and 73d Congresses,
namely: the two chairmen, Duncan H. Fletcher, Democrat, Florida
(1909-36), and Peter Norbeck, his successor, Republican, South
Dakota (1921-36), Edward P. Costigan, Democrat, Colorado (193137). and James Couzens, Republican, Michigan (1922-36).
The Pecora investigation was as revealing as the Pujo investigation
of 1912. J. P. Morgan, Jr., was Pecora’s star witness, as his father was
for Samuel Untermyer, the Pujo committee’s counsel. The Pecora
hearings will always be remembered because an advertising agent for

a circus put a midget on J. P. Morgan, Jivs lap. (The New York
magazine, Oct. 29,1973, pp. 38^43, and picture at p. 39: “The Estab­
lishment Bank Faces Life” by Andrew Tobias. Hearings Senate Bank­
ing and Currency Subcommittee on Stock Exchange Practices on
Senate Resolutions 56 and 84. May 23,24, and 25,1933, part I.)
In 1912 the Pujo committee discovered that J. P. Morgan and Co.,
including their Philadelphia house called Drexel and Co., held on
November 1, 1912, deposits aggregating $162 million. It also found
that Morgan partners held 72 directorships in 47 of the largest
Comnienting on these disclosures of the Pujo committee ( ‘Other
People’s Money: And How the Bankers Use It,” 1913,1914, McClure
publications, and 1914 Frederick A. Stokes Co.), Louis Dembitz
Brandeis (then a Boston lawyer), pointed out that Morgan’s power
came from “other people’s money” deposited with the Morgan firm and
because of their many interlocking directorates, particularly with
In 1933, over 20 years later, Pecora found (Pecora, supra, 14-15)
that J. P Morgan and Co. held deposits at the end of 1927 of over
$1/2 billion and, even at the end of the depression year 1932, of $340
million. Pecora called it a great reservoir of “other people’s money”
subject to the will of one man, J. P. Morgan.
Moreover, Pecora found that the Morgan partners held 20 director­
ships in 15 great banks, and trust companies, with total assets of over
$3.8 billion, 12 directorships in 10 great railroads with assets over
$3.4 billion, 19 in some 13 public utilities with assets over $6 billion,
six in insurance companies with assets over $300 million, and 55 in
some 38 industries with assets over $6 billion. A total of 126 director­
ship^ in 89 corporations with assets over $20 billion. (Pecora, supra,
In 1929, at the height of what Pecora called “the New Era frenzy,”
J. P. Morgan and Co. held itself out “for the first time not only (as)
commercial bankers and investment bankers, but corporate promoters.”
(Tobias, supra, 21.)
As such in marketing securities, Morgan had certain preferred lists
of 500 names of prominent people to whom he offered shares at cost
(John J. Raskob, John W Davis, Charles E. Mitchell; Albert H. Wiggin, Myron C. Taylor, Sosthenes Behn, Calvin Coolidge, Charles Lindberg, ITewton D. Baker. William Gibbs McAdoo, and William Woodin,
Fv D. R.’s Secretary of the Treasury, among others).
Buying at say $20 a share, the iriend of Morgan could sell when
the issue came out at the issue price of $35 or, as was frequently the
case, soon thereafter at. say, $50 if it sold at a premium.
To be on a Morgan preferred list was like receiving manna from
As Judge Pecora says in his book, the strange thing about all this
is that the Morgan partners to a man saw nothing wrong with it
though “in effect, it was the offer of a gift of very substantial dimen­
sions.” (Pecora, supra, 27.)
For instance, Morgan offered John J. Raskob 2,000 shares of Alle­
ghany. Corp. at $20, when it was selling over-the-counter at $35.
Raskob:immediately sent his check for $40,000 with a note in which

lie expressed the “hope the future holds opportunities for me to recip­
rocate.” (Pecora, supra, 32-33.)
When Senator Couzens asked (Pecora, supra, 34) George Whitney
about this, saying he had never neard of anybody quite so altruistic,
Whitney replied:
It is not a question of altruism, it is a question of doing a legitimate, straight
forward security and banking business. (Pecora, supra, 34.)

The bad effect of this testimony on the American people is difficult
to exaggerate.
The House of Morgan, a bomb scarred small building at the corner
of Wall and Broad Streets (Tobias, supra, 38), across from the Stock
Exchange and the Subtreasury where George Washington was in­
augurated, looking up to Broadway and the Trinity Church, was the
epitome of respectability.
A bomb was thrown at the Morgan building in 1920. It killed 40
people, broke the glass in every window of the Equitable Trust Build­
ing at 37 Wall Street, and almost “brought down the glass dome of
the New York Stock Exchange.”
Today the Morgan empire continues. J. P Morgan & Co. is a hold­
ing company. (Tobias, supra, 38.) Its former security business is done
by Morgan Stanley, and its banking business is done by its wholly
owned subsidiary, Morgan Guaranty Trust Co., of which we will say
more later.
Another star witness for Pecora was Charles E. Mitchell, president
of both the National City Bank and its security affiliate, the National
City Co.
Perhaps the most damaging testimony of Mitchell related to the
sale in 1927 and 1928 by National City Co. of three issues of Pern bonds
totaling $90 million.
For a long time National City had considered becoming Peru’s
banker by consolidating, into one package, all Peru’s national debt.
The only difficulty was that every time National City looked into the
matter it received adverse information about Peru.
For instance, there lay on the shelves of English 'bankers defaulted
Peru bonds. The London Times spoke of Peru’s frequent unobservance
of her undertakings,” her “broken pledges,” and her “flagrant disre­
gard of guarantees,” which made Treasury obligations “almost im­
possible to collect.” (Pecora, supra, 101.)
For 6 years National City resisted financing Peru, but National City
Co.’s salesmen from coast to coast wanted bonds to sell, and in 1927
National City threw caution to the winds and brought out what Pecora
describes as “a sort of exploratory Peruvian issue ox $15 million” which
was “floated with ease.” (Pecora, supra, 101.) It followed with two
other issues* one for $50 million, the other for $25 million, making $90
million in all. Some of the details of the financing are worth noting.
It should be added that as late as July 1927, vice president Durrell
of National City Bank wrote to president Mitchell pointing out that
two factors would retard Peru’s economic development.
First, its very large Indian population which lives “in primitive
conditions and used no manufactured products” ; and, second, the
ownership of the nation’s principal sources of wealth by absentee own­
ers. Nevertheless, National City went ahead with the sale.

Tho bonds were sold at 911 /2 and 96y2, the bankers receiving a spread
of 5 points, or $4.5 million. Interest on the first $15 million issue was at
7 percent, and at 6 percent on the other two. J. & W Seligman was
associated with National City as underwriter of the issues, National
City itself making $680,000. In obtaining the $50 million issue the
bankers paid Juan Leguia, the son of the then president of Peru,
In 1931 the three issues of $90 million Peruvian bonds went into
default. Today only about $485,000 of the bonds remain outstanding.
In 1944 bondholders were offered 15 percent of principal, and no inter­
est. In desperation in 1947 and 1952 they accepte ' bonds maturing in
1997 with 3 percent interest.
This was m sharp contrast to the bonds they bought which were to
mature in 1959,1960, and 1961. In 1933 the bonds were selling at 8 and
7, and one time at 4%.
The Foreign Bondholders Protective Council, Inc. in its report for
the years 1946-49 has this to say about Peru:
The conduct of Peru in connection with her foreign debt has seemed to our
Council so misguided and costly to her credit standing that it should be briefly
reviewed here again as an example of what a government which borrows abroad
ought not to do. In 1044, almost the whole of the Peruvian foreign debt * ♦ * had
remained in complete default for almost fifteen years. Only one issue * * * secured
by pledge of guano fertilizer sale receipts in an unusually inescapable form, was
being served. The principal of debt in default alone aggregated about $85 million
and about 3 million sterUng. The interest in default had grown to be nearly as
large as the principal. Peru has always exported large amounts of sugar, cotton
and copper and her foreign debt was not especially large as measured against
her foreign trade, her national budget or debt owed abroad by such neighbors as
Colombia or Chile. Peru’s continued neglect of it was willful, and not forced upon
her. P. VI.

Despite this sordid financial record, American commercial banks
are continuing to invest in Peru, lured by 13 percent interest.
The Wells Fargo Bank of San Francisco had recently led a group
of 67 banks to loan Peru $100 million, and its unsecured loans to Peru
today are said to be over $49 million. Like the defaulted issues of 1927
and 1928, this loan was oversubscribed.
Chase Manhattan contemplated a $200 million loan to Peru by
a syndicate of banks the world over. Of this amount Chase had
expected to take $30 million. Chase, besides this, had given Peru a line
of credit of about $25 million. Chase has over $49 million of unsecured
loans to Peru, Citibank, over $188 million.
These loans may all be paid at 13 percent interest, but we can only
judge the future by the past. The 1927 and 1928 issues are not paid yet
and, meanwhile, Peru has confiscated properties of Exxon, H. J. Heinz,
Cargill, General Mills, W R. Grace, Cerro, and I.T. & T.
An agreement has recently been negotiated by a vice president of
Manufacturers Trust Co. under which all the American companies
(except Exxon), whose properties have been confiscated, will receive
some payment.
Peru was able to make payment with a loan from First National of
Franklin National Bank, now in the hands of the Federal Deposit
Insurance Corporation, held over $500 million of foreign loans which
FDIC has been unable to sell except at large discount.

Franklin’s $300 million consists of loans to some 45 different foreign
countries, Its loans to Peru total $14.5 million: $1 million in the abovementioned Wells Fargo $100 million loan; $8^£ million in a similar
$76 million loan by a. syndicate of banks led by Morgan-Guaranty; and,
$5 million in a similar $130 million loan by a bank syndicate led by
Manufacturers Hanover.
Are these loans that commercial banks should make * Are trust and
pension funds used ?
One would have thought that the exposure by Pecora in 1933 would
have warned our commercial banks against being lured by high inter­
est into making speculative loans in Peru. But alas, despite a congres­
sional policy (Gonzalez amendment, 22 U.S.C. 283R, Public Law 92246, Mar. 10, 1972) against investing in Peru so long as pur dispute
about their claiming a 200-mile limit and arresting our tuna fishermen
remains unsettled, our American banks continue to invest in Peru.
The Congress in 1916 and 1919 passed laws permitting our banks to
conduct foreign financial operations abroad by whollj owned subsidi­
aries incorporatedunder state or national law. Until recently, there
were very few such subsidiaries.
On the false assumption that the Glass-Steagall Act of 1933 does not
forbid it, the Federal Reserve Board has permitted American; banks
to engage in the securities business overseas through subsidiary
Thus, we have American banks with security affiliates overseas that
the Glass-Steagall Act prohibits their having anywhere.
Today, while there are only 6 so-called State agreement corpora­
tions, there are over 100 national, or Edge Act subsidiaries, and their
numbers are increasing.
Moreover, the banks, ignoring Glass-Steagall, are flagrantly loaning
foreign countries directly, and under the guise of “a loan,” under­
writing and bringing out syndicate bank loans such as the $100 million
loan to Peru by Wells Fargo.
As a loan in the Eurodollar market, neither the SEC nor the banking
agencies regulate it.
These loans are dangerous and undesirable and convert our com­
mercial bankers into investment bankers—-the very thing GlassSteagall was passed to prevent.
Moreover, it is bound to involve the use not only of deposits, but
pension and trust funds. It is commercial banks using other people’s
money as investment bankers.
In 1933 the above testimony of Charles E. Mitchell, together with
that of Hugh B. Baker and Victor Schopperte (hearings, Senate
Banking Subcommittee on Stock Exchange Practices, S. Res. 84 and
239, Feb. 21,22,23,24,27,28, and March 1,2,1933,72d Cong. 2d sess.)
with respect to the sale of $90 million of Peru bonds, sent shock waves
through Wall Street, and had as devastating effect on the coimtry
then, as the Watergate testimony has today. And, for the same reason,
lack of confidence.
National Citv was then, and is now, one of the Nation’s largest and
best banks. It shocked the conscience of every American to see such a
lending financial institution unloading on an unsuspecting public
these Peru bonds.

What is equally incomprehensible is that commercial bankers today
continue to do in Peru a speculative investment banking business
which yesterday Congress forbade even for banks at home.
Still another colorful witness, called by Pecora, was the famous
Otto H. Kahn of Messrs. Kuhn, Loeb & Co., Morgan’s principal
He and others from Kuhn, Loeb (County, Larsen, Lee, Taplin, and
Buttenwieser) testified on June 27, 28, 29 and 30, and July 5, 1983.
(Hearings, Senate Banking Subcommittee on Stock Exchange Prac­
tices, S. Res. 56, 84, and 97,73d Cong., 1st sess.)
Kahn’s testimony before Pecora, as his later testimony before U.S.
District Judge Harold Medina in the Investment Bankers antitrust
case, is notable for his description of Kuhn, Loeb’s “show window”
Indeed, as Pecora tells it, Otto Kahn was the “principal apologist”
for the investment banking business and “no suaver, more fluent, and
more diplomatic advocate could be conceived.” (Pecora, supra, 45.)
He assured the committee that a firm such as Kuhn, Loeb would never
descend to bidding competitively for an issue. Whatever saving to the
company would be at the expense of losing the invaluable advice of »•
private investment banker, such as Kuhn, Loeb.
Mr. Kahn explained it’s the difference between buying an expensive
and inexpensive suit of clothes. The one from the cheap tailor keeps
you warm, but “the other tailor puts the experience and the reputation
of making good suits into it, and you go to him.” (Pecora, supra, 46.)
And Otto Kahn assured Pecora that Kuhn, Loeb had high moral
standards. He would never any more underbid Morgan to get an issue
“than Paul D. Gravath would attempt to get a law case away from
John W Davis by going to the latter’s client and offering his services
at a lesser fee.”
As for large profits, Kahn states that the investment banker takes the
risk of selling the issue he buys. Although dire catastrophies are rare,
when the investment banker buys an issue he must sell it, or. keep it.
In sharp contrast to Richard E. Whitney and other stock exchange
officials, Otto H. Kahn condemned short* selling, and he was even
sympathetic to the ideals of Franklin Roosevelt’s New Deal. He was
refreshing as a witness.
But like Morgan, Kuhn Loeb was a powerful firm. Whereas Morgan
had $*/*>billion of deposits, Kuhn Loeb had only $89 million. Its capital
was $25 million against Morgan’s $118 million. Its 11 partners held
65 directorships in 48 corporations, whereas Morgan partners held
many more. But between 1927 and 1931, Kuhn. Loeb as “merchants of
securities” originated over $1.6 billion of bonds—according to Pecora
“a stupendous total for a single house in half a decade.” (Pecora, supra,
In the fall the Pecora investigation kept going. Dillon Read was
fortunately called to testify during the world’s series, a great achieve­
ment of its counsel, John Cahill.
But after the series was over came Albert Wiggin, and other Chase
Bank officers. Their testimony was not good. In loans to the Fox Film
Co., Chase stood to lose $50 million at one time. Even though in the
end Chase gained, Albert Wiggin paid $2 million to settle stockholders
claims, and certain of his colleagues had to pay an additional $500,000.

Albert H. Wiggin was a self-made man. Bom in Medfield, Mass.
on February 21, 1868, he died at the age of 83 on May 21, 1951. The
Chase Bank which he came to in 1904 was his life. He became president
and firm a n of the board (1904-1933). He saw it grow from a capital
of $1 million, a surplus of $1 million, and deposits of $54 million in
1904, to a capital of $148 million, a surplus of $148 million, and deposits
of over $2 billion in 1930 after its merger with the Equitable Trust Co.
of New York.
Chase was then one of the largest banks in the world. Wiggm was
a powerful figure in Wall Street, and a director of Armour, American
Express Co., American Woolen, American Locomotive, BRT, IRT
International Paper, Lawyers’ Title, Mack Trucks, Underwood, Otis
Elevator, Western Union, and Westinghouse, to mention just a few—
some 59 corporations in all.
Even the national bank examiners remarked that in Chase “the
national banking system has a great standard bearer,” and they added
that Wiggin was “the most popular banker in Wall Street.” (Pecora,
supra, 133-34.)
Needless to say, Peeora’s investigation of Chase made “a shocking
disclosure of low standards in high places.” (Pecora, supra, 135.)
In 1928 Wiggin had a salary of $175,000; in 1929, $218,750; and in
1931, $250,000. In 1932 he took a cut to $220,300. At the same time he
was denouncing high wages and asking labor to accept moderate salary
reductions. (Pecora, supra, 142-43.)
But these figures only cover Wiggin’s “regular” salary. Chase gave
him and other top officers bonuses. In 1928 Wiggin’s bonus was
$100,000, in 1929 another $100,000, and in 1930, $75,000. Besides this
Chase Securities gave Wiggin an annual bonus which some years went
up to $75,000.
Also, his 59 corporate directorships paid him handsomely. Armour
paid him $40,000, Brooklyn Rapid Transit $20,000, American Express
$2,000. Every little bit from his 59 corporations added up to a tidv
sum of its own. Needless to say, many of these corporations received
1arge loans from Chase.
These salaries, as lucrative as they were, were just a drop in the
bucket to his total income from salaries and his personal family
corporations. For instance, in 1928 Wiggin had an income of $0.8
million on which he paid only $962,000 in taxes.
In 1929 Wiggin’s total income was $3.8 million. Even in the depres­
sion years 1928-32 Wiggin had a net income of $8.6 million.
Blit his income from his family corporations was disgraceful. In all
he had six corporations, three were hopeful tax dodges and Canadian:
the other three were Shermar, Murlyn, & Clingstone. The name Shermar was compounded from the first syllables of “ Sherburne” and
“Marjorie,” Mr. Wiggin’s daughter and son-in-law. “Murlyn” and
“Clingstone.” came in a similar way from the name of another
daughter. (Pecora, supra, 147-48).
Through these six corporations Wiggin speculated in the stock
market, especially in Chase Bank stock. He saw no impropriety in so
doing. His efforts he said were to stabilize or make a market for the
stock. But actually Chase stock rose from 575 on September 21,1927.
the day these stock pools were started, to 1,415 when the stock was
split 5 to 1.

Shortly before the bubble burst the new stock was at 283. In 1933
it was 17%, or 89 for the old stock. (Pecora, supra, 150-51.)
Curiously, the bank’s own corporation, Metpotan, made only $159,000
for the whole 5 years. But Wiggin’s personal corporations, over the
same period, made $10,425,000,65 times as much. (Pecora, supra, 152.)
Some profit of Wiggin’s personal corporations came from being
“cut in” by Metpotan, but ‘The vast bulk of the money came * * *
from transactions in which neither the bank nor any of its affiliates
shared a penny of profit.” (Pecora, supra, 152.)
Of this profit $4,008,538 was reaped between September 19, 1929
and December 11, 1929 “in the very midst of the great Wall Street
crash.” Pecora tells it in one line:
Mr. Wiggin made all that money by selling Chase National Bank stock short.”
(Pecora, supra, 153.)

While a leading member of the famous bankers consortium organized
to stabilize the market after the crash, Wiggin was selling his own
bank’s stock short. When he covered his short sales on December 11,
1929 he made a profit of over $4 million. (Pecora, supra, 154.)
Prior to its merger with the Equitable Trust Co. of New York,
Wiggin had been the controlling stockholder of Chase. After the
merger with Equitable, however, control passed to John D. Rockefeller,
Jr., and Chase became a Rockefeller bank.
With Rockefeller control, Mr. Rockefeller, Jr.’s brother-in-law,
Winthrop W* Aldrich (Harvard AB 1907 and L.L.B. 1910, born in
Providence, R.I., on November 1885, died Feb. 24,1974), then a leading
practicing lawyer representing the Equitable Trust Co., became
president of Chase.
In 1933 Pecora tells us that Aldrich “fairly out-Heroded Herod.”
(Hamlet, act III, scene 2, line 4, Hamlet’s speech to the players.) His
whole attitude was “as severely high-minded and as militantly imbued
with the necessity for correcting banking abuses, as Mr. Wiggin’s was
skeptical and unbending.” (Pecora, supra, 137.)
Apparently the creation by National City of National City Co.,
and by Chase of Chase Securities was illegal, and a violation of the
National Banking Act. In 1911 at the request of then Attorney General
George W. Wickersham, and President William Howard Taft, the
Solicitor General, Frederick W Lehmann, so ruled in an opinion never
made public, or acted upon. (Pecora, supra, 80.)
Under the National City arrangement, three trustees held the stock
of National City Co. in trust for stockholders of National City Bank.
In Chase’s case, the voting trust was held superfluous, and each stock­
holder of the Chase National Bank was simultaneously an equal share­
holder in Chase Securities.
Chase’s attorneys who organized the company in 1917 never heard
of Lehmann’s opinion. Pecora says that since National City “had got­
ten away with it,” Chase decided it “ would not be left behind.”
(Pecora, supra, 137-39.)
You can see from what is detailed above that the country was out­
raged at the disclosures of the Pecora investigation, and that legisla­
tion to correct the abuses was in order.
Reform came when Chase, under its new president, Winthrop W.
Aldrich, liquidated its security affiliates and repudiated Wiggin’s
77- 752— 76------- 8

policies. From November 23 to December 7, 1933, Chase and its of­
ficials testified, the star witness being Winthrop W. Aldrich. (Hear­
ings, Senate Banking on S. Res. 56 and 84, part 8, before Subcommittee
on Stock Exchange Practices, 3975-97.)
AJdrich began by spotting the problem—how to legislate to prevent
a repetition of the mistakes and abuses incident to the conduct “of
both commercial and investment banking.” And he added that no one
who is familiar with the testimony can fail “to be impressed by the
necessity of change.” (Hearings, supra, 3975.)
In Aldrich’s mind, many of the abuses revealed by Pecora’s investi­
gation “had arisen from failure to discern that commercial and invest­
ment banking are two fields essentially different in nature.” (Hearings,
supra, 3977.)
Aldrich was merely repeating what Brandeis said after the Pujo
investigation, namely, that the temptation of large profits was so great
that commercial banks designed to make temporary loans to business
concerns were invading the realm of the investment banker, and by
interlocking directorates subjecting corporations to their will,:(Bran­
deis, supra, 26-27.)
In a public statement on March 8, 1933 as chairman of the board
and executive head of the Chase National Bank, Aldrich had called
for five reforms:
1. Any corporation or partnership that takes deposits should be subject to the
same regulations as commercial banks.
2. No business dealing with securities should be permitted to take deposits
even under regulation.
3. No one should be an officer or director of a commercial bank if he deals in
securities and vice versa, no commercial banker should be an officer or director
of a securities firm.
4. Boards of directors of commercial banks "should be Umited in number so
as to be sufficiently small to enable the members to be actually cognizant of the
affairs of their banks.”
5. Commercial banks should not be permitted to underwrite securities except
securities of the United States Government and of states, territories, municipali­
ties and certain other public bodies in the United States. (Hearings, siipra, 3077.)

In accordance with these principles Aldrich was able to tell the
Senators that on May 16, 1933 the stockholders of the bank had au­
thorized the discontinuance of the securities business by the bank’s
affiliates. Chase Securities was in the process of liquidation.
The bond department of its affiliate Chase Harris Forbes, Inc. the
bank took over. This part deals with Federal, State and municipal
bonds, securities proper for national banks. The stockholders also voted
to reduce the board of directors from 72 to 36 members. (Hearings,
supra, 3978.)
Aldrich freely acknowledged that there are “sincere differences of
opinion as to the wisdom of these changes.” But he pointed put that
“the overlapping of interest as between commercial banking and in­
vestment banking was not a new one,” and that the Pujo committee
report on February 28,1913 “had pointed out the desirability for such
changes.” (Hearings, supra, 3978.)
In Aldrich’s view, investment banking is “a self-contained enter­
prise” which should not be destroyed or superseded by any govern­
mental agency^but which should be allowed ‘‘to operate with as little
restriction as is commensurate with due protection of the investing

Likewise, separating investment banking from any direct interest
in commercial banking ought to improve normal investment banking.
(Hearings, supra, 3978.)
The system itself, Aldrich testified, which permitted “overlapping
of function and interlocking of interests” is responsible “ for much
that the public now condemns.” Both commercial and investment banks
had been taking deposits and doing an investment business so that “it
was not unnatural that officers of commercial banks should at times
fail to appreciate the distinction.”
Aldrich then takes pains to point out to the subcommittee; that
commercial banks, as “an essential and integral part of the monetary
and credit machinery of the Nation” are in a different category, from
the unregulated investment banker. While it has an obligation to make
a fair return on capital, the commercial bank must be able “to meet its
deposit liabilities on demand.” (Hearings, supra, 3978-79.)
It must not seek excessive profits by taking undue credit risks and it cannot
wisely tie up its funds in long-term credits however safe they may be. Its primary
credit function is performed by lending money for short periods to finance selfliquidating commercial transactions largely in the movement of goods arid crops
through the various stages of production and distribution; and in the lnaking
of short-term loans against good collateral. The commercial bank cannot safely
make loans to a borrower who lacks, capital of his own or who cannot in the
normal course of his business repay the loan within a reasonable period of time.
It is within this, framework that the commercial bank renders sound and con­
structive service to the industry, trade and agriculture of the country.” (Hear­
ings, supra, 3979.)

The investment banker also renders a valuable service to industry,
trade and agriculture but he does it “by meeting long-term needs, pro­
viding funds for plant and equipment or for permanent working
capital.” This involves his taking “speculative risks of a sort unsuit­
able to the commercial bank.” Moreover, Aldrich points out that with
every new issue “he takes the risk that the public may riot readily
absorb the new securities which he brings out and that his own capital
may 'be tied up for a long period of time.”
It is this last distinction which in Aldrich’s mind—
Emphasizes the wisdom of the legislation (Glass-Steagall) forbidding invest­
ment bankers from taking deposits.” (Hearings, supra, 3979.)

Despite its different character, Aldrich acknowledged there were
points of contact between the commercial and investment bankers. For
instance, Aldrich said it was proper for a commercial bank to lend to
investment bankers, on short term, funds necessary to carry a new
issue of securities while it is in die process of being marketed.
But he warns that such a loan should be secured by collateral, care­
fully scrutinized and, in making such a loan which performs a«nessen­
tial service, the commercial bank “should be absolutely free from inter­
est in the issue, and immunized from possible influence arising from
interlocking interests with the investment bankers participating in it.”
(Hearings, supra, 3979.)
Likewise, when the commercial banker has a customer who needs
long-term working capital, it is quite proper for him to refer that party
to an investment banker* However, in so doing, it is critical that the
investment banker be able to use his own good judgment “as to the wis­
dom of issuing the credit” and the “conditions” of it. There should not

be pressure by the commercial bank arising out of any dual financial
interest. (Hearings, supra, 3980.)
At this point in reading his statement. Senator Couzens asked Mr.
Aldrich what he thought about the Federal Reserve Board.
Aldrich answered as follows:
Well, Senator Couzens, that question is a very difficult one, too. I should like to
make my answer to that in the form of a general answer. I think the manner in
which the Federal Reserve System functioned during the period of 10 years prior
to 1030 was most unfortunate, because of the fact that a money market situation
war, created which, I think, is very largely responsible for the difficulties of
bankers that occurred. (Hearings, supra, 3981.)

In a second section of his statement Aldrich discussed changes
needed in the Glass-Steagall legislation which had been passed in June
Although, the Glass-Steagall bill quite rightly recognizes the need
to separate commercial from investment banking and “the public is
likewise under the impression that the act effectively accomplished
that purpose”, Aldrich states that both careful analysis of the act and
observation of its operation shows the need for its amendment.
Glass-Steagall or the Banking Act of 1933, to Aldrich, when read
with Clayton 8, establishes this congressional policy:
1. Divorcement of commercial from investment banking;
2. No interlocking between commercial and investment banking;
3. No. interlocking among commercial banks in the same community; and
4. Enforcement of the legislation is not to affect adversely national banks or
member banks of the Federal Reserve.

It is true, says Aldrich, that the Banking Act of 1933 requires: (p
divorcement of commercial from investment banldng: (2) prohibits
firms in the securities business from taking deposits; and (3) forbids
any firm but one subject to Federal or State regulation from receiving
But Aldrich points out that the Glass-Steagall legislation, (sec. 8 of
the Clayton Act and provisions of secs. 32 and 33 of the Banking Act
of 1933) in its present form, leaves wide open the opportunity for an
interlocking of management on the one hand between investment bank­
ers and commercial banks, both national and State, and between com­
mercial banks themselves, so long as they are not national ba-nks; and,
for an individual who may actually be engaged in the securities busi­
ness through a corporation (so long as he is not a director or officer
of the corporation doing such business but employs other people for
those offices) to act as a director of a commercial bank without even
the necessity of obtaining a permit from the Federal Reserve Board.
(Hearings, supra, 3982.)
Stated another way, Aldrich testified that as then drawn regula­
tions L and R, series 1933, and Clayton 8:
1. Allows any individual—investment banker or otherwise—to act as a director,
officer, or employee of any number of commercial banks, so long as no one
of them is a national bank.
2. It allows any individual to act as a director, officer, or employee of a na­
tional bank as well as of two other banks—if the Federal Reserve Board issues
a permit therefor.
3. It allows a member of a partnership engaged in the investment banking
business or an officer or director of a corporation engaged in such business to act
as a director, officer, or employee of any member bank, provided only that he
obtains a permit therefor from the Federal Reserve Board.

4. It allows anyone engaged in the securities business as a controlling stock­
holder in an investment banking corporation—so long as he does not. act as a
director or officer of such corporation—to act as a director, officer, or employee
of any bank without the necessity of a permit from the Federal Reserve Board.
(Hearings, supra, 3983.)

Then Mr. Aldrich points out that the Federal Reserve Board has
ruled that member banks can avoid certain prohibitions in Clayton 8
against interlocking directorates by obtaining permision from the Fed­
eral Reserve Board. (Hearings, supra, 3983.)
Attacking the wisdom of allowing the Federal Reserve Board to dis­
pense with the protections of Clayton 8, Aldrich said:
The fact is that under the present law any of the prohibitions contained in sec­
tion 32 of the Banking Act and sections 8 and 8-A of the Clayton Act, can actu­
ally within certain limitations be avoided with the permission of the Federal
Reserve Board. The Federal Reserve Board must only determine that such ex­
ceptions as it makes are in its judgment “compatible with the public interests
To state the situation in another relation: The Banking Act of 1933 in section
21(a) (1) prohibits unconditionally an investment banker from at the same time
engaging in commercial banking. No provision is contained in this section of the
act even permitting the Federal Reserve Board to authorize an avoidance of
this prohibition, and yet section 32 of the same act. as indicated above, permits
the Federal Reserve Board to authorize indirectly an evasion of this prohibition
by permitting an interlocking directorate between an investment banker and a
commercial bank.
The foregoing observations are not to be interpreted as criticism of the Federal
Reserve Board; nor to imply that the Federal Reserve Board will not proceed
conscientiously in discharging the duties imposed upon it by law. The point
here made is that the necessities of so vital a situation should not be subject,
once Congress has determined public policy, to the discretion of the Federal
Reserve Board or of any other authority. It is only natural—as was pointed out
when the Kern amendment was first added to section 8 of the Clayton Act
whereby the Federal Reserve Board was given power by permit to excuse from
the prohibitions against certain interlocking directorates—that if the Federal
Reserve Board is given such power the Federal Reserve Board will interpret
this as a mandate from the Congress to exercise such power. The fact is that
Congress having acted to prohibit certain relationships, presumably because in
its judgment they were contrary to the public interest, has apparently delegated
the power to the Federal Reserve Board to determine whether Congress was it­
self right. I submit that Congress was wise in its legislative purpose, and that
its wisdom in that regard should be expressed in mandatory rather than per­
missive terms.
To accomplish the purpose and intent of the Congress to effect a complete ter­
mination of interlocking directorates between commercial banks and investment
bankers, I urge that the Banking Act of 1933 should be amended by incorporat­
ing in the National Bank Act a provision expressly disqualifying anyone en­
gaged, directly or indirectly, in the investment banking business from acting as
a director or officer of a national bank. (Hearings, supra, 3984.)

All of this caused Aldrich to recommend that the entire subject of
the qualification of directors, officers, and employees of both State and
national banks be comprehensively covered by the elimination of the
provisions in sections 31, 32, and 33 of the Banking Act of 1933, and
revision of Clayton 8.
Aldrich also pointed out, that while a director of a national bank
may, with permission of the Federal Reserve Board, act as a director
of two banks which make loans secured by collateral, the director of
a national bank may not, even with Federal Reserve permission, serve
as a director of a corporation which, as an incidental matter, “makes
loans secured by stock and bond collateral” (Hearings, supra, 3985.)
To do this adequately, Aldrich cautioned there are many definitions
of investment banking, and the legislation should be drawn with care.

In a third section of his statetment, Aldrich pleaded with the com­
mittee for legislation blocking these loopholes:
A. All loans above a certain minimum by an executive officer of a State or
Federal bank should be reported to the board of directors. As then drawn, an
executive officer has to report his loan to the chairman, but there is no indica­
tion what the chairman should do with the information or what he is to do if he
himself needs a loan.
B. Because banking experience has conclusively demonstrated the undesir­
ability of participation by bank officers in transactions of this kind, the act
should specifically prohibit executive officers of member banks from participating
directly or indirectly in syndicates offering securities or trading accounts, or
pools of any kind.
C. Above all, the legislation should prohibit executive officers and directors
of the Federal Reserve banks from participating directly or indirectly in syn­
dicates offering securities, or in trading accounts or pools, because banking
experience has conclusively demonstrated its undesirability.
D. The act should require an executive officer of a member bank to report
to his board of directors every case where he has an outside interest and what
pay he receives. Directors should know his outside interests.
E. Because banks sometimes make policy loans to officers of depositor banks
and corporations or to financial agents of important people or firms, the Congress
should require that such loans made for policy reasons should be reported to
the board of directors. Such a provision might have the effect of discouraging
applications of this sort and force the borrower to go to another bank where
his loan can stand on its own merits.

In a fourth section of his statement, Aldrich suggested a redefinition
of “affiliates” which have to file reports in view of the many corpora­
tions then controlled by banks because of bad loans and in the process
of liquidation* Along the same, line he asked the subcommittee to
remove from Glass-Steagall the provision requiring divorce of
securities affiliates within 1 year. More time was said to be needed.
In the fifth and last section of his statement to the subcommittee,
Mr, Aldrich made certain general remarks:
First, he warned that in legislating the Congress should remember
that “the whole mechanism of trade is as delicate as it is complicated.”
(Hearings, supra, 3990.)
Second, granted banks and bankers “were responsible for specific
acts and for certain abuses,” in Aldrich's opinion they were not respon­
sible for “the great excess of member bank reserves”—1922-28 when
deposits of commercial banks increased by $13.5 billion, while loans
and investments increased by $14.5 billion.
Naturally this great increase in commercial bank credit, unneeded
by commerce, flowed into capital uses firenerating an immense specula­
tion in real estate and securities. While the bankers took improperly
secured mortgages, unseasoned high yield, narrow-market bonds or
loans against securities inadequately margined and diversified* they
“did not create the general money-market situation.” (Hearings, supra,
The fair inference from the Aldrich statement is that the principal
culprit for the 1929-32 Great Depression was, as we have said, the
Federal Reserve System.
As .he finished, Pecora asked Aldrich about an investment banker
who has a controlling stock interest in a commercial bank. Mr. Aldrich
conceded he had overlooked that case, and the legislation should, (Hearings, sunra. 3992-3993.)
P^ora,next asked Aldrich “ whether or not a commercial bank should
be pennitted to act in a; trust Capacity.” (Hearing^ supra, 3993.)

Aldrich replied that he had given it serious thought. His informa­
tion jvas that it is impossible to support a trust company standing
alone in a,small community, so State banks were given trust powers
and, then: in larger communities, national banks were given trust
powers to meet the competition of State trust companies. (Hearings,
supra, 3993-3994.)
At this point Senator Couzens interjected that he objected to a
commercial bank acting as a trustee in other than small communities.
His point was that with the elimination of bank affiliates the use of
trust companies should grow. (Hearings, supra, 3995-3996.)
Rather'.than divorce the trust business from commercial banking,
Aldrich suggested there might be other ways. The only embarrassment
Chase has experienced he said, was making bank loans when the bank
was trustee for the debtor company, and the indenture of trust con­
tained negative pledge covenants the loan conceivably might violate.
(Hearings, supra, 3996.)
Though he does not identify the issue, the loans about which he
spoke were loans to the Insull companies in Chicago.
Reading this brilliant Aldrich statement, one goes back to the Bible.
Solomon said he had seen all the things that were done under the Sun,
and all was vanity and vexation of spirit.
Allowing commercial banks to act as trustees asks for trouble. Yet.
this istheway we have allowed the banking business to develop.
Senator Couzens in 1933 was as right as rain that the trust business
should be divorced from the commercial banking business. The only
mistake Couzens made was thinking such an inherent conflict of inter­
est should’be allowed to exist in either large or small communities.
Despite all Aldrich said in this great statement, when Penn Central
recently failed, what did we find ?
Asi of December 31. 1969, Morgan Guaranty Trust Co. shared with
Penn Central two interlocked directors. These interlocked directors
sat on the Morgan Guaranty board of directors even though Penn
Central owed Morgan Guaranty $91 million, and Morgan Guaranty
owned a great deal of Penn Central stock. What happened ?
The very thing Winthrop W Aldrich had pointed out in 1933 came
to pass.
By the end of 1969, Morgan Guaranty held $1.1 million shares of
Penn Central stock, 200,000 for its own account, 850,000 in pension
trusts administered by its trust department.
In 1970, prior to May 28,1970, Morgan Guaranty sold all its own
200.000 shares and, thereafter, between May 29.1970. and the date of
bankruptcy, June 21, 1970, sold 371,000 shares from its pension trust
Likewise, as of December 31. 1969, the chairman of the board of
directors of the Penn Central was on the Chase Manhattan board,
evert though Penn Central owed Chase $7.8 million, and it owned 436,000 shares of Penn Central stock.
Tri tfie filial 2 months before bankruptcy in 1970, Chasie sold 554,715
of its 63.0,000 shares of Penn Central stock.
In addition, the chief financial officer of Penn Central was a director
of the Provident National Bank of Philadelphia even though it held
$57'inP)xM-in Conditional sales agreements on the railroad.

Furthermore, as Senator Lloyd M. Bentsen’s Senate Finance Sub­
committee on Financial Markets in the 93d Congress, first session,
recently disclosed, Morgan Guaranty, at the end of 1972, held the
following: $2 billion IBM, $1.1 billion Kodak, $651 million Avon,
$605 million Sears, $596 million Xerox, $370 million Disney, $242
million Polaroid, and $20 million Procter &Gamble.
While Samuel R. Callaway, Morgan Guaranty’s executive vice
president said he did not really know. Senator Bentsen said it was
his understanding that Morgan Guaranty is “the largest stockholder
in the world” (subcommittee, 93d Cong., 1st sess., hearings July 24,
25, and 26,1973, part 1,76, and see Tobias, supra, 41), almost as power­
ful as a “government” (Hearings, supra, 67.)
As Senator Bentsen pointed out in an address to the U.S. Senate
on December 20, 1973 (Congressional Record No. 201, vol. 119), this
gives an institutional investor, such as Morgan Guaranty, a tremendous
leverage in the stock market.
In 1963 Senator Bentsen stated that 35 percent of the trading was
done by institutional investors, whereas, today, the figure is 70 per­
cent. For instance, Morgan Guaranty’s eight-man investment com­
mittee manages $21 billion worth of common stock.
Individual investors have declined by 800,000, and one large bank’s
trust department has invested more than 60 percent of its total com­
mon stocks in just 20 issues, another 20 percent of its discretionary
stock market investments in just two issues, and still another 15 per­
cent in just two issues.
It is the thought of Senator Bentsen that when one institution owns
more than 10 percent of a company, it no longer is just an investor—
it is an owner. (Congressional Record, supra, 119.) He, therefore,
would limit the amount of stock one bank trust company could hold
in one company.
One can agree with Senator Bentsen’s position but one might ask, in
view of Penn Central, whether the time has not come to divorce trust
departments completely from State and Federal banks?
In fairness, it must be said that if Morgan Guaranty from 1961 to
June 30, 1973, earned 9.5 percent on its “Commingled Pension Trust
Fund,” it did pretty well. (Tobias, supra, 42.)
But the fact remains its large portfolio is confined to so-called
premium stocks, and only 8 to 15 percent turnover in a year. This
means that 85 or 90 percent of Morgan’s $26 billion trust investments
are frozen as a matter of policy. (Tobias, supra, 43.)
It is not good, and it is dangerous. Senator Bentsen is right to want
to do something to correct it.
However, Senator Bentsen’s study of Morgan Guaranty broke out
even more fundamental errors in our banking system.
Consider in the light of the Aldrich statement what Morgan
Guaranty does and ask yourself whether, regardless of its technical
validity," it is in the public interest that a great bank such as Morgan
Guaranty should be allowed to act as it does ?
1. Its "corporate research department gives financial advice on
capital structures and mergers.
2. Its financial services department is said to have completed more
acquisitions in 1973 than any firm except Lazard Freres and Goldman

3. It is underwriting public bonds.
4. It has established “J. P- Morgan Interfunding” to make loans up
to 20 years instead of the 6- or 7-term commercial bank loans.
5. Nor is Morgan Guaranty as separate from Morgan Stanley as
one would think.
. .
(а) Morgan Stanley is underwriter on a $150 million debenture
issue of Morgan Guaranty ?
(б) Morgan Guaranty manages Morgan Stanley’s pension and
profit-sharing plans; and
(e) Jointly with Morgan Guaranty, Morgan Stanley owned Morgan
and Cie, International, S.A. based in Paris; for some years even
though it recently decided to sell its interest to Morgan Stanley;
(d) When Morgan Guaranty acquired a foreign company in 1973
for Consolidated Foods, naturally it put the long-term financing
through Morgan and Cie; and,
(e) Significantly, Morgan Stanley, between 1968 and 1972 acted
as underwriter in at least 21 of the 30 industrial companies in which
Morgan Guaranty has positions; and
6. In England, a Morgan Guaranty Edge Act Corporation is in a
joint venture with Household Finance. (Tobias, supra, 40-41.)
Consider also, that in 1972—10 American banks made a substantial
part of their 1972 income from foreign financial operations:

Bank of America N.T. and S.A., S.F...
First National City Bank, N.Y......... .............
Chase Manhattan Bank N.A. N.Y...............
Morgan Guaranty Trust Co., N.Y..................
Bankers Trust Co., N.Y.. ------— ------ Continental Illinois N.B. and Tr. Co., Chicago.
First National Bank of Chicago, Chicago.
Marine-Midland Bank, N.Y.
First National Bank, Boston.




More particularly, consider how these banks made their foreign
For instance, among the many foreign holdings of the Chase Man­
hattan Bank, the Bank of America, and First National City are stock
interests in foreign banks the world over.
Does not this recital take you back to both the Pujo and Pecora
investigations ? Is it not history repeating itself ?
It is no small wonder then that a Morgan Guaranty financial man
remarked that Morgan Guaranty was getting into “all the things an
investment banker gets into” except “domestic corporate underwrit­
ing.” (Tobias, supra, 40.)
As mentioned earlier, this is a violation of the spirit, if not the let­
ter of the Glass-Steagall Act, that ordered our commercial banks to
divest themselves of their security affiliates.
So we have lived to see Morgan Stanley and Morgan Guaranty di­
vorced at home by Glass-Steagall, together again at Paris in Morgan
and Cie despite all the excesses brought out in both the Pujo and
Pecora investigations.
And, in England, we see Morgan Guaranty in business with House­
hold Finance.
None of these activities would have taken place if the Federal Re­
serve Board had done its duty.

It was a tragedy, of course, that Aldrich testified when he did in
the late fall of 1933. Congress passed, and the President signed, the
Glass-Steagall Act on June 16,1933.
Neither the Senate nor the House, nor the President, had thie bene­
fit of Aldrich’s suggestions. Aldrich was ahead of his time, is were
tJntermyer and Pujo. And, as Pecora said, this great Wall Street
banker “advocated more radical proposals than Congress itself
However, Glass-Steagall did accomplish certain reforms.
First, and foremost, the reform so long urged from the 61st Con­
gress (1909-11) to the 72d (1931-33), governmental insurance of
bank deposits finally came to pass in the Glass-Steagall Act of the
73d Congress on June 16,1933, as section 12B of the Federal Reserve
Act. This was of course temporary legislation which did not become
permanent until the Banking Act o f 1935. (Chapter 335, 49 Stat.
435. Public Law 66,73d Cong. (H.R. 5661). Approved June 16,1933.)
The management of the Federal Deposit Insurance Corporation
created by Glass-Steagall is vested in a hoard of directors consisting
of the Comptroller of the Currency, and two civilians appointed by
the President from different political parties for 6-year terms.
As Senator Lister Hill, of Alabama, so wisely said., there had been
no banking legislation comparable in importance to it since the pas­
sage of the Federal Reserve Act in 1913. Hill called it “the shadow of
a great rock in a weary land.” (LXXY Political Science Quarterly
181. No. 2, June 1960.)
Second, hopefully, as a result of the awful disclosures during Pecora’s investigation of the banks, Glass-Steagall had forever forbidden
national and member banks to have security affiliates such as National
City Co. and Chase Securities, and American banks that accept de­
posits from engaging in the securities business any place. Sections
20 and 21.)
Third, for the first time the Open Market Committee was given
statutory recognition and was told to meet in Washington, D.C., at
least four times a year, and to have as many members as there are
Federal Reserve districts, each Reserve bank to select its own mem­
ber. (Section 8.)
Fourth, it contained provisions with respect to loans by bank offi­
cers, and a provision prohibiting directors of national and member
banks from being officers, or directors, of any concern engaged in the
securities business. (Sections 12,32, and 33.)
Fifth, member banks were prohibited, henceforth from paying in­
terest “on any deposits payable bn demand.’’ (Section ll-(b);)
There were flaws in the Banking Law of 1933, as Winthrop W
Aldrich took great pains to point out in his statement to the Subcom­
mittee later in the year. But whether one agrees with the ’policy of
each, these five so-called reforms are significant.
As Aldrich said, the act represents policy decisions by the'Coiigress,
and should be followed meticulously by the Federal Reserve.

When Franklin Delano Roosevelt looked around for a man to head
the Federal Reserve Board, he selected Marriner Stoddard Eccles.
At about the time of the Battle of Gettysburg, the Eccles family
immigrated to the United States from Scotland. There they had be­
come Mormons, and the Perpetual Immigration Fund of the Mor­
mon Church paid for their passage to Great Salt Lake City, Utah.
In 1885, 5 years before the prohibition of plural marriages by the
Mormon Church, Marriner Eccles’ father, David, married Ellen Stod­
dard who bore him nine children. However, David, at 28 had pre­
viously married Bertha .Jensen by whom he had_ 12 children.
(“Beckoning Frontiers: Public and Personal Recollections,” by Mar­
riner S. Eccles, edited by Sidney Hyman, Alfred A. Knopf, New
York, N.Y 1951,7,8, and 20-21.)
Marriner Eccles had grown up in Utah, and became a successful
banker. At the invitation of Stuart Chase when he came to lecture at
the University of Utah, Marriner Eccles had agreed to visit Professor
Rex Tugwell at Columbia University when he went east to testify be­
fore the Senate Finance Committee, along with some 200 others dur­
ing February 1933.
Tugwell recommended Eccles to Henry Morgenthau when he be­
came Secretary of the Treasury, and in January 1934 Eccles came to
Washington as Morgenthau’s advisor on monetary matters planning
to remain until June 1935. (Eccles, supra, 113-114,165.)
When Eugene Black resigned in June 1934 as Governor of the Fed­
eral Reserve Board, Roosevelt, on the recommendation of Morgen­
thau, selected Marriner Eccles as his successor announcing the
appointment on November 10,1934. (Eccles, supra, 165,175.)
Before agreeing to take the job, Eccles, who was a millionaire and
did not need the salary, outlined in a memorandum—memo given to
President Roosevelt on November 3,1934, which is on file! at the Na­
tional Archives Library at Hyde Park, N.Y.—to President Roosevelt
the following fundamental changes he wanted to see at Federal
First,, because the available supply of money determined fluctua­
tions in production, employment, and the national income, there must
be at Reserve a conscious control and management of the monetary
mechanism. The depression was intensified during 1929-34 because
Reserve contracted, instead of expanding, the money supply.
Second, to recover from the depression we must rely on' increased
governmental and private expenditures, but Federal Reserve, by
monetary control, must assure support for such emergency financing
as is involved in the recovery program.
Third, monetary control is a critical need for the future: (a) to
assure that recpvery does not bring inflation; and (b) that it is not
followed by another depression.

Fourth, to do the needed job: (1) the Federal Reserve Board should
have complete control of all open-market operations; and (2) the
Governors of the Federal Reserve banks should be appointed annually
by the Board of Directors of each district Reserve oank but “subject
to the approval of the Federal Reserve Board.”
Fifth, in the past, banker interest, as represented by the individual
Reserve bank Governors, has prevailed over the public interest as rep­
resented by the Board due to the higher salaries paid the bank Gover­
nors, and the failure of the Board to play an effective role. As a result,
the Board has not commanded the respect and prestige to which it is
entitled, and membership has not been as highly desired as it should
be to attract the necessary talent.
Its lack of authority to initiate open-market policy, and the com­
plete independence of the district bank Governors, combine to give
the Board a minor role.
Sixth, the party that can buy and sell securities in the open-market
controls both the banking system and the money supply. At present the
district Federal Reserve banks have this power. All the Board can do
is approve or disapprove. From 1930 to 1933 this power has been in tine
12 bank Governors. At present these 12 have this power. They are the
ones responsible for the policy Reserve pursued during the depression.
These Governors have “a narrow banking rather than a broad social
point of view.” They are a cumbersome body that functioned badly in
the past and we need in the future to concentrate control in “a small
policy formulating body.”
Seventh, the “Governors,” not even mentioned in the Federal Re­
serve Act control its policies, and to give the Board the power to ap­
prove the appointment by the district banks of the Governors would
lessen the possibility of friction and enhance Board prestige.
Eighth, adoption of these suggestions would make Federal Reserve
“a real central bank capable of energetic and positive action without
calling for a drastic revision of the whole Federal Reserve Act.”
As mentioned previously, the Banking Act of 1933, for the first time,
created by statute a Federal Open Market Committee consisting of one
member from each Federal Reserve district designated annually by the
Board of Directors of the particular Federal Reserve district bank.
The committee was to meet in Washington, D.C.
Under this arrangement there was no place for the Federal Reserve
Board. It was responsible for the open-market operations but could not
initiate them. It could only approve or disapprove. And any Federal
Reserve district bank that refused to participate in open-market opera­
tions was free to do so.
In other words, as Eccles says, before decision on open-market opera­
tions “there had to be a complete meeting of minds between the Gov­
ernors of the 12 Reserve banks, and the 108 directors of all those banks,
plus the Federal Reserve Board in Washington.” (Eccles, supra, 170.)
In Eccles’ view there was dire need “to broaden the types of paper
eligible for discount at the Federal Reserve banks.” Restricting the
paper to “short-term commercial loans and investments,” in Eccles’
opinion “hamstrung the operation of the Federal Reserve System” and
the banking system “would die of atrophy.” In October 1934 eligible
paper “amounted to only slightly more than $2 billion” and banks could
not live on that little interest. (Eccles, supra 171.)

Back of the ideas presented to President Roosevelt by Eccles was
his desire to allow banks to discount both short- and long-term paper
“making all sound assets liquid by permitting them to be rediscounted
at the Reserve banks.”
To carry out this reform, Eccles wanted the explicit definition of
“eligible paper” removed from the act, and “sound assets” substituted.
(Eccles, supra, 173-174.)
Eccles also wanted the separate office of Chairman of the Board of
each district Federal Reserve bank abolished and its functions merged
with that of the Governor. But in addition he wanted the Governor
approved by the Federal Reserve Board. (Eccles, supra, 174.)
Eccles, needless to say, was enthusiastic for his reforms. However,
President Roosevelt in appointing him either purposely or indvertently neglected to clear it with Senator Glass. This put Carter Glass in
opposition not only to Eccles personally, but also to his hoped-for
reforms. In this opposition Glass was joined by George L. Harrison,
successor to Ben Strong as Governor of the powerful New York dis­
trict Reserve bank. (Eccles, supra, 178-179.)
Glass was chairman of Appropriations. He took that post at the re­
quest of the leadership to prevent its going to Senator Kenneth D.
McKellar, Democrat of Tennessee (Representative (1911-17) and
Senator. (1917-53)), as the Democrats organized the 1933 Congress.
Logically, Glass should have taken Senate Banking, but the leader­
ship permitted him to name Senator Duncan U. Fletcher of Florida
as chairman.
Eccles says this meant that Glass surrendered the chairmanship of
Senate Banking “in name only.”
Actual power in important banking matters remained with Glass to
whose subcommittee Fletcher referred all vital banking matters.
The Glass subcommittee was a strong one. Robert J. Bulkley of Ohio
(who had been on House Banking and Currency with Glass when the
Federal Reserve Act was enacted). William Gibbs McAdoo (Woodrow
Wilson’s son-in-law who, like Glass, had been Secretary of the Treasury
in the Wilson administration), James F. Byrnes, Democrat of South
Carolina (1930-41), John Hollis Bankhead II, of Alabama (father of
Tallulah and brother of William Brockman Bankhead), Speaker of
the House (1930-46), Peter Norbeck of South Dakota, John G. Town­
send, Jr., Republican of Delaware (1928-41), and James Couzens of
Nevertheless, Eccles says that “Glass rode herd over them all, and
came very close to binding the subcommittee to the service of his per­
sonal pique.” (Eccles, supra, 180-181.)
Fortunately, insofar as his proposed amendments were concerned,
Eccles was in a much better position in the House where Henry B.
Steagall, Democrat of Alabama, was chairman of House Banking. The
ranking Democratic member was T. Alan Goldsborough of Maryland.
Steagall referred the banldng bill of 1935 to his full committee, whereas
Fletcher referred it to the Glass subcommittee of Senate Banking.
(Eccles, supra, 181.)
Besides, Governor Harrison of the New York district Federal Re­
serve bank (who had married Mrs. Cary Grayson on the death of Ad­
miral Grayson, Woodrow Wilson’s personal physician) the Democratic
national committeman from Utah, contacted Senator Glass giving
Eccles a bad press.

It seeins one of Eccles Utah banks had refused the committeeman a
loan. The loan was refused because the bank thought him “an un­
reliable character.” (Eccles, supra, 179-180.)
Their judgment was apparently confirmed because Eccles states that
at a later date this fellow was convicted of rape. (Eccles, supra, 179180.)
For 3 months Glass pigeonholed Eccles’ nomination in his subcom­
mittee, It was not until April 15,1935, that Glass called up the Eccles
nomination. His excuse was the pressure of his duties on Senate Appro­
priations. The first meeting on his nomination lasted an hour and pro­
duced 15 pages of testimony: the second lasted 10 minutes, adding two
letters to the record.
As Eccles saw it, Glass’ scheme to get rid of him was merely to recite
his business connections and then “in short, sharp shock,” cut his head
off. (Eccles, supra, 202-203.)
It was said that three Senators on the subcommittee were in favor of
the Eccles nomination; two opposed.
The deciding votes were those of McAdoo and Couzens. George Creel,
a friend of Eccles, assured him that McAdoo would vote for Eccles,
but as luck would have it, McAdoo missed the meeting and left his
proxy with Glass who voted it against the confirmation of Eccles.
The 3-3 deadlock was broken when Couzens voted for Eccles. It seems
Couzens was a close friend of Senator Charles.L. McNary, Republican
of Oregon (1917-42). McNary knew the Eccles family well from their
logging operations in Oregon, and he assured Couzens that Eccles “was
neither the dangerous radical nor the knave he had been made out to
be.” (Eccles, supra, 204.)
The full Senate Banking Committee unanimously confirmed the
Eccles nomination, and on April 25, 1935, the Senate confirmed him
with but one dissenting vote, that of Carter Glass. (Eccles, supra,
Unfortunately, long before his nomination was called up, Eccles
had to worry about amending the Federal Reserve Act to enable him
to do a job for President Roosevelt if and when he was confirmed.
Roosevelt was to launch a $4 billion work relief program. Federal
Reserve, as then constituted might block it, so Eccles was forced to
go before House Banking to press his Federal Reserve amendments
before his confirmation. This did not endear him to Glass. (Eccles,
supra, 187.)
In this critical period, F.D.R. was a great help to Marriner S.
Eccles. At lunch on the south portico of the White House, Roosevelt
said to him when his spirits were at their lowest: “You know Mar­
riner, when I appointed you a member of the Federal Reserve Board,
it never occurred to me that a Mormon had to be confirmed.” (Eccles,
supra, 188.)
As early as September 28,1934, just as the fall congressional cam­
paign opened, the Advisory Council of the Federal Reserve System
consisting of one member from each of the 12 Federal Reserve dis­
tricts, “issued a public statement demanding, among other things, a
prompt balancing of the budget.” (Eccles, supra, 188.) Needless to
say this was the last thing either F.D.R. or Eccles wanted said.
Few people of course knew that the Federal Advisory Council was
merely a group of private bankers who, under the Federal Reserve

Act, were privileged to advise with the Federal Reserve Board. Peo­
ple thought they were an organ of Government free to speak for the
Eccles took the position he would deny the Advisory Council access
to the. Federal Reserve staff until the Council first showed statements
to the Board so that in the event of a disagreement two statements
could he released, one for the Council, the other for the Board.
(Eccles, supra, 188-190.)
After a stormy session, the Council accepted the Eccles position
with face-saving verbal changes. (Eccles, supra, 188-190.)
Another obstacle Eccles faced at Reserve was a so-called Commit­
tee on Legislative Program for the Federal Reserve System. It was
responsible for initiating legislation affecting the Federal Reserve
System. Yet, except for one Board member, all the committee rep­
resented the viewpoint of the private banker. It was not the vehicle
for Eccles to use to promote the program he and F.D.R. had in mind.
George L. Harrison, Governor of the New York Federal Reserve Bank
headed this committee, and Eccles promptly told him his first task
would be to liquidate it. (Eccles, supra, 191-192.)
When Eccles told his Board about his legislative program, blessed
by F.D.R., the Board accepted the report of Harrison’s committee and
discharged it.
In its place a new legislative committee was created to work with
Eccles consisting of E. A. Goldenweiser, Director of the Division of
Research and Statistics of the Federal Reserve Board, Chester Mor­
rill, Secretary of the Board (1931-51), Walter Wyatt, General Coun­
sel (1922-46), and Lauclilin Currie, Assistant Director of Research
and Statistics (1934-44). (Eccles, supra, 193.)
However, it never rains but it pours and. once again, both the ad­
ministration and Eccles made a mistake in dealing with Senator Car­
ter Glass.
Early in 1934 Eccles went to see Glass, and promised him that as
soon as the proposed banking bill of 1935 was cleared with the admin­
istration’s Interdepartmental Banking Committee, of which Henry
Morgenthan, Jr., as Secretary of the Treasury (1934-45) was chair­
man, he would “discuss the bill with him before personally discussing
it with anyone else.” (Eccles, supra, 195.)
As luck would have it, the Federal Reserve portions of the bill were
not completed and approved by the Interdepartmental Committee
until a day before the bill was sent to the House and Senate.
Before Eccles personally received a copy, the bill was at the Capitol.
(Eccles, supra, 195.)
Eccles at once phoned Glass and explained what happened. Need­
less to say Glass was offended and “intimated” that Eccles was lying
to him. It was a bad way to begin, and Eccles then knew it. He says
at that time he did not register on how important Glass was, and how
important it was to work with him. Eccles puts it this way—“I was
still a stranger in Europe.” (Eccles, supra, 195-196.)
On February 5, 1935, Steagall introduced the banking bill in the
House, and the next day Senator Fletcher introduced it in the Senate.
Like Gaul, the bill was divided in three parts: Title I related to the
Federal Deposit Insurance Corporation; title II covered the amend'
ments to the Federal Reserve Act upon which Eccles and Roosevelt

had agreed: and, title III were needed technical amendments to the
banking laws.
Obviously to President Roosevelt and Eccles, title II of the bill was
a must.
On the other hand, the banks very much wanted title I and title III.
Title I “liberalized” the rate and nature of FDIC assessments to the
advantage of the banks, and buried among the technical changes in
title III was a provision giving bankers who had not paid their loans
to their banks until July 1935 to do so. The 1933 act provided that if
they did not pay by July 1,1933 they were to be fired. (Eccles, supra,
Eccles doesn’t say so, but one infers it was his and Roosevelt’s strategy to tie title I and III of the bill which the bankers so much desired
to title II which they bitterly opposed.
Once again Eccles was a greenhorn Mormon on the Potomac. While
he did discuss the proposed bill, and give his Federal Reserve Board
a memorandum to study which he discussed with them a week later,
he neglected to give each member a copy of the bill before it was
It was impossible to do so as Morgenthau sent it to Congress before
even Eccles saw it. (Eccles, supra, 197.)
To make matters worse, Leo T Crowley, head of FDIC and J* F T
O’Connor, the then Comptroller of the Currency, both resented hav­
ing their matters in title I and title III tied to the Federal Reserve
amendments in title II. Accordingly, when testifying before Glass’
subcommittee both men “disassociated themselves from title II in
very opening remarks.”
As Eccles confesses, “coming in the wake of his failure to send him a
copy of the banking bill in its final form, Glass saw in the Crowley
and O’Connor statements further proof of a foul conspiracy of which
Eccles was the chief architect.” (Eccles. supra, 198.)
To help matters along, Joseph H. Frost, a class A Director of the
Federal Reserve Bank of Dallas (1931-36), and a member of the ad­
visory council testified that it was his information that “no member
of the Federal Reserve Board saw the bill until it was introduced in
the House and Senate, and printed.” (Eccles, supra, 198.)
While none of the members of the Federal Reserve Board objected
to the proposed amendments in title II when the Board discussed
thorn, two, namely. George R. James, and Adolph C Miller, said they
had reservations, and both testified before the Senate subcommittee
“where in some respects they opposed the measure.” On the other
hand, Charles S. Hamlin of the Board defended title II. (Eccles,
supra, 198-199.)
There was great pressure to break out title II from titles I and III.
but Eccles resisted.
At one point the bankers sent word to E. G. Bennett, Eccles’ close
friend, a fellow Mormon from Utah and the Republican member of
the FDIC Board, that if Eccles would take title II out of the bill he
would be quickly confirmed as head of the Federal Reserve Board.
Eccles’ reply to Bennett was to tell his “banker friends to go to hell”
as the proposed changes in title II had to be made with or without
Eccles as Governor. (Eccles, supra, 199.)

No one could have had a more difficult time beginning his job than
Eccles. Before confirmation he had to guide his bill through House
Banking and Currency hearings that began February 21, 1935, and
ran until April 8, 1935. The Glass subcommittee began hearings on
April 19. (Eccles, supra, 200.)
However, prior to that, on April 5,1935, after a 3-month delay, Glass
called for hearings on Eccles’ confirmation, and it was not until
April 25,1935, that Senate Banking and Currency reported the nom­
ination favorably, and the Senate confirmed the appointment. (Eccles,
supra, 204.)
In comparison with the Senate, the House hearings on the bill were
a breeze, Steagall, and Goldsborough of the House committee worked
closely with Eccles, and while they had a number of changes, Eccles
was able to accept them all enthusiastically. (Eccles, supra, 200.)
A New York University economics professor, Walter E. Spahr, who
was Secretary of the Economists National Committee on Monetary
Policy, submitted a statement signed by 67 economics professors in
opposition to title II.
Unfortunately for Professor Spahr, Congressman Goldsborough
“was committed to the principle of a central bank” and “in dealing with
Spahr’s testimony, riddled him in a manner as embarrassing as it was
remorseless.” (Eccles, supra, 200.) In all, 23 witnesses testified before
House Banking, but very few opposed title II. (Eccles, supra, 200.)
On February 12, 1935, a few days before title II went to the Hill,
Eccles spoke before the American Bankers Association in convention
assembled at Pass Christian, Mississippi. There the bankers created a
five-man committee to be located in Washington, D.C., and act as
liaison between the bankers and the administration while the banking
bill was before the Congress. Its members were: Rudolph S. Hecht,
ABA president; Robert V. Fleming. Riggs National Bank in Wash­
ington, D.C., first vice president of ABA; Tom K. Smith, Boatmen’s
National Bank, St. Louis, second vice president of ABA, and Winthrop
W- Aldrich of the Chase National Bank in New York. (Eccles, supra,
At Pass Christian Eccles was much encouraged from his discussions
with this five-man committee. They seemed to him to go “a long way in
endorsing the changes in the Reserve System that were being pro­
posed.” Their only reservation was to the draft formula in the bill for
the Open Market Committee. Later at a meeting in Augusta, Ga., the
recommendations of this five-man committee were approved by the
executive council of ABA.
However, Eccles found out that these five bankers were “generals
without troops.” Moreover, the five split into two groups when “Aidrich, who had signed the statement of recommendations, placed him­
self in the van of the banker-attack on title II during the Senate
_Eccles said he was “dumbfounded” by the contradiction in Aldrich’s
Individually, Eccles could convince the bankers of the need for
changes in the Federal Reserve System “but when they returned to
their own camp they went native again, and accepted the party line.”
(Eccles, supra, 201-202.)
Aldrich, so great before Pecora, had feet of clay in 1935.

But, despite Aldrich et al., the House Banking and Currency Com­
mittee reported out the banking bill with title II unscathed on April 19,
1935, and, by a vote of 271 to 110, the bill won the approval of the
House of Representatives on May 9, 1935. (Eccles, supra, 202.)
The House bill was then at the mercy of the Glass subcommittee in
the Senate.
_ ...
There some 60 witnesses testified, among them, Winthrop W. Aidrich of Chase National; James P. Warburg of Kuhn, Loeb; Profes­
sors Edwin W. Kemmerer of Princeton, Henry Parker Wills of
Columbia, and Oliver M. W Sprague of Harvard; James A. Perkins
of National City; Owen D. Young of General Electric; Frank A.
Vanderlip, a former president of National City Bank; John B. Byrne
of the Connecticut Bankers Association; Elwyn Evans of the clearing­
house banks in Wilmington, Del.; William L. Sweet of the TJ.S.
Chamber of Commerce; Edward Eagle Brown, president of First
National, Chicago, and H. Grady Langford, president of the Georgia
Bankers Association.
The common thread in the testimony of all of them was that title II
was not needed, and the existing Federal Reserve System “was working
quite well.” (Eccles, supra, 205—
As Eccles repeatedly notes in his memoirs, this whole thing was
history repeating itself.
Aldrich’s father, Nelson Aldrich, Frank Vanderlip, and Paul War­
burg had fought Glass, Owen, and Wilson in 1913. Then they did
everything they could to delay and defeat the Federal Reserve Act.
Here they were in 1935 doing their best to delay and defeat Eccles’
and Roosevelt’s amendments to the Federal Reserve Act! But this
time Carter Glass was in the camp of the bankers. Woodrow Wilson
was Glass’ President. Franklin Delano Roosevelt was not.
It was May 10, the day after the House of Representatives passed
the bill that Eccles was finally called as witness by the Glass sub­
committee. (Eccles, supra, 207.)
By the time Eccles was called, Warburg, Young, and the others were
saying over and over again that there was no need for the legislation,
that it would convert Reserve from a system of regional banks to one
central bank and subject it to political control. (Eccles, supra, 207-210.)
While waiting for Glass to call him as a witness (which he did on
May 10,1935), Eccles received an invitation to speak before the annual
convention of the Pennsylvania Bankers Association on May 5,1935.
Eccles accepted. His speech there is a good introduction to his Senate
testimony. (Eccles, supra, 210.)
With that directness for which he became noted, Eccles told the
Pennsylvania bankers that since they made their living investing
money left with them by their customers, their function was “a private
business function” and they have “no power individually to influence
the volume of money that is created.” (Eccles, supra, 210-211.)
On the other hand Eccles said that “the regulation of changes in
the total volume of money is a public function.”
Continuing, Eccles said:
You are told that since the Reserve banks deal with your money you should
have some say in its investments. But this argument will not stand examination.
When the Reserve banks buy securities they do not do so with existing money;

they create new money for the purpose, and this increases your reserves and
your deposits. When they sell securities you lose deposits and reserve funds.
The Reserve banks, in other words, are not agencies for the investment of member-bank funds; they actually create and destroy money. Neither are openmarket operations a regional or local matter. Their effect cannot be confined to
a single district, but is nationwide and affects all classes. (Eccles, supra, 211.)

Really, Eccles said, what the bankers would like is to put the banking
system so firmly under their control that the Government will have
to terminate its spending for social welfare. Then the bankers would
balance the budget. But a moment’s reflection ought to convince any
self-respecting banker that “this is the most dangerous and irresponsi­
ble argument that any group of bankers could present.”
Congress has power not only to appropriate money but to raise it.
To attempt to hinder the Government in raising funds to carry out
the programs passed by the Congress “is to invite disaster for the
banking system.”
For those who disapprove governmental policies, the only avenue
open is the ballot. (Eccles, supra, 211.)
What Eccles said he wanted in the 1935 Banking Act was a specific
direction by the Congress to Reserve to use its powers over the
country’s monetary system “to promote conditions conducive to busi­
ness stability.” (Eccles, supra, 212.)
Moreover, Eccles told the Senate subcommittee that when the Fed­
eral Reserve Act was enacted in 1913, the House Banking and Cur­
rency Committee declared that supervising the banking system was “a
governmental function” and Woodrow Wilson agreed, saying that the
control “must be public, not private” so that banks are “the instru­
ments, not the masters of individual enterprise and initiative.”
(Eccles, supra, 212-213.)
Marriner S. Eccles, however, conceded that monetary policy alone
was insufficient to prevent “booms and depression.” It was, he said,
dependent upon “a properly managed plan of Government expendi­
tures,” and “a system of taxation conducive to a more equitable dis­
tribution of income.” Then monetary policy can “regulate the volume
of money” efficiently. It becomes the machinery that carries out the
legislative purposes. (Eccles, supra, 214.)
Early in his testimony Eccles dealt with the Warburg-Aldrich argu­
ment that would delay passage of title II “until a committee of experts
had a chance to study the whole question.”
Eccles met the argument head on. The differences of opinion, he
said, could not be resolved by study because they “represent funda­
mental differences of approacn to economic problems.” (Eccles, supra,
What it amounts to, said Eccles, is that the proponents of the bill
“ are irrevocably convinced of the necessity of public control of
national monetary and credit policies.” Divergent points of view can­
not be reconciled by argument, nor can they be clarified by future
study. Believing, as they do, that control should be left with the pri­
vate banks that own the Federal Reserve System leaves the opponents
of the bill in deadly opposition to the proponents who will not settle
for less than public control. The Congress has to decide one way or the
other. (Eccles, supra, 216.)
Unfortunately, action by the Senate subcommittee was delayed. It
was graduation time. Carter Glass was on the road collecting honorary

degrees from universities. Trustees of these universities wanted to see
title II defeated. This led Eccles to observe they were trying “to kill
the banking bill by degrees.” (Eccles, supra, 217.)
But Eccles says one thing caused the bankers who were university
trustees to pause “in their eulogies of Glass’ statesmanship” and take
“a look at the calendar.” July 1 was fast approaching and, if bank
officer loans were to be extended, Congress had to act before July 1.
Efforts to split title II from titles I and III had failed, and the
bankers had to have title III, but to get it they had to take titles I
and II. A final effort for the bankers to divorce title II from titles I
and III was made by Jesse Jones, joined by Leo Crowley of FIDC,
and J. F. T. O’Connor, the Comptroller of the Currency. (Eccles,
supra, 217.)
Glass was, of course, willing to accommodate the bankers but he was
not in a position to do so as the House had passed Eccles’ bill vir­
tually intact. As long as the House demanded title II, Glass was
As a compromise, the bankers proposed at the end of June 1935
that the whole Banking Act go over to the next Congress, and in the
meantime they should be relieved of all the burdensome provisions in
the existing winking laws from which titles II and III would relieve
Eccles would have no part of this compromise as he and the pro­
ponents would be in a much worse position to achieve their reforms if
the bill went over to the Congress of 1936. (Eccles, supra, 218.)
Steagall knew the heat was on him so he refused any phone calls,
but Eccles contacted Goldsborough who was as firm against the bank­
ers’ compromise as Eccles.
Goldsborough and Eccles then sat down together and proposed a
compromise of their own. Under it the present banking laws were
extended 60 days. This would give the Congress the time it needed to
complete action on the banking bill of 1935.
Eccles carried the compromise to President Roosevelt at the White
House. F.D.R. leaned over, picked up the phone and called Steagall
who, of course, accepted the call. Roosevelt then told Steagall that
under no circumstances was he to consent to split title II from the bill.
Rather, President Roosevelt said, he was to make a counterproposal
along the lines of the Goldsborough-Eccles compromise. Needless to
say. Steagall went along, and the Senate bowed to the House. (Eccles,
supra, 218-219.)
The Senate gave the bankers the 60-day extension for which the
Eccles-Goldsborough compromise provided before the July 1 deadline,
but thereafter it passed the Senate subcommittee’s version of title II
which the Senate Banking Committee had reported out on July 2,
1935. This shifted the battle arena to the Conference Committee.
Conference committees usually bring agency representatives with
Glass had Judge L. E. Birdzell of the FDIC and Gloyd Await,
Deputy Comptroller of the Currency with him but refused to allow
Walter Wyatt, General Counsel of the Federal Reserve Board to
attend. Wyatt became persona non grata to Glass when he wrote an
opinion letter to the effect that Eccles’ connection with the Eccles

Investment Co., did not disqualify him from becoming a member of
the Federal Reserve Board. (Eccles, supra, 220.)
This forced Eccles and Wyatt to work through Await, the Deputy
Comptroller. In retrospect Eccles counted this a blessing as it caused
Representative Goldsborough “to assume personal responsibility” and
to enter into even closer working relations with him. (Eccles, supra*

Eccles’ battle plan with Alan Goldsborough was to give Glass as
many points as they safely could but to stick fast “to the first five
basic provisions in the House bill.”
They hoped Glass would be happy if he won “a majority of individ­
ual points” and think he had won “a decisive victory,” little realizing
that “the fewer points on which Goldsborough had his way had a
combined importance that was at least equal to the sum of Glass.’
individual gains.” (Eccles, supra, 220-221.)
At one point Alan Goldsborough fell out with Glass who main­
tained that Goldsborough had insulted him and demanded an apology
that Goldsborough declined to give. Eccles saw title II go up in smoke,
and urged Alan Goldsborough to apologize.
The next day, to save the legislation, Goldsborough made a public
apology to Glass on the House floor in such a “back-handed” way
that few people understood it. Goldsborough thought he had not
apologized at all but Glass accepted it as adequate and the conference
went on. (Eccles, supra, 221.)
As predicted. Glass claimed his Senate committee “rewrote the
whole of title II” so that Eccles believes their battle plan succeeded*
In this Eccles saw no purpose in disenchanting Glass as in his opinion
the bill was “workable,” set up a far more effective central banking
mechanism and, what is most important, “established the authority
of the Federal Reserve Board as the central source of direction for th»
Reserve System.” (Eccles, supra, 221-222.)
First, the bill changed a lot of names. Instead of the “Federal Reserve
Board” as in the 1913 act, the Board became the “Board of Governors
of the Federal Reserve System.”
Effective February 1, 1936, the Board was reduced from eight to
seven members, each to be appointed by the President and confirmed
by the Senate.
Eccles, you will recall, had wanted the Board reduced to five, and
the House bill had left the Board unchanged with six appointive mem­
bers and the Secretary of the Treasury and the Comptroller of the
Currency as ex officio members. (Eccles, supra, 222.)
In the Senate, Carter Glass told his subcommittee that while he
“would not say in an offensive way that I dominated the Board, * * *
I, at least had a considerable influence with the action of the Board.”
(Eccles, supra, 216.)
Furthermore, as we have seen, whatever Glass did, Andrew Mellon
did dominate the Federal Reserve Board.
The Senate subcommittee agreed with Glass that “the Secretary of
the Treasury has had too much influence upon the Board” and they
voted to reduce the Board to seven and eliminate his ex officio member­
ship. (Eccles, supra, 222.)

But when Morgenthau heard that he was to lose his job but that the
Comptroller of the Currency, ranking as a mere bureau chief in Treas­
ury was to hold his, Morgenthau demanded that the Comptroller be
removed also. Glass complied making Eccles very happy. (Eccles,
supra, 222.)
The House version of the bill struck out the requirement that m
selecting Federal Reserve members, the President should have due
regard to a fair representation of the financial, agricultural, industrial,
and commercial interests and the geographical divisions of the coun­
try. It substituted a requirement that members should be well qualified
by education and experience to participate in the formation of national
economic and monetary policies.
The House change failed to survive the conference.
Another House change that lost in the Conference Committee was a
provision raising the salaries of Board members to those paid the
Cabinet. This involved a raise from the $12,000 salary specified in the
1918 act to $15,000.
Under the final bill appointments were to be scheduled for periods
of from 2 to 14 years so that not more than one would expire in any 2year period. And, after the first group of appointees had run their
cycle, each member would hold office for 14 years unless removed by the
President for cause. (Eccles, supra, 223.)
The President was directed to name one member of the Board of
Governors as chairman and another as vice chairman, each for 4-year
terms. The chairman was to be the Board’s active executive officer.
(Eccles, supra, 223.)
Second, the 1935 act provided that in each of the 12 Reserve district
banks there should be a president and a first vice president. Heretofore
these officers had been known as Governors. While appointed for terms
of 5 years by the Boards of Directors of the banks, henceforth ap­
pointments were to be subject to the approval of the Federal Reserve
In this connection Eccles lost a fight to separate the functions of
Reserve bank chairman from Federal Reserve agent, but Eccles
achieved the same result and a saving of $300,000 by appointing
chairmen on an honorary basis.
“In each district bank there continued to be a governmental em­
ployee who acted as Federal Reserve agent.” (Eccles, supra, 224.)
Third, by the banking bill of 1935, effective March 1,1936, the old
Federal Open Market Committee given statutory recognition in the
banking bill of 1933 and composed of the 12 Governors of the Federal
Reserve district banks, was changed in membership to consist of the
7 members of the Federal Reserve Board, and 5 representatives of the
Federal Reserve district banks selected annually by the Boards of Di­
rectors of the Federal Reserve district banks, one by Boston and New
York, one by Philadelphia and Cleveland, one by Richmond, Atlanta,
and Dallas, one by Chicago and St. Louis, and one by Minneapolis,
Kansas City and San Francisco.
Meetings were to be held in Washington, D.C- at least four times
a year on the call of the Chairman of the Federal Reserve Board or
any three committee members. (Eccles, supra, 224-225.)
Eccles fought this provision. He wanted the Open Market Com­
mittee to consist of Federal Reserve Board members only. In the

House bill the committee consisted of Federal Reserve members alone.
There was a provision, however, under which the Federal Reserve
Board would consult with five representatives annually selected by
the Federal Reserve banks, but axter consultation the Open Market
Committee was free to do what it pleased. Its policy was to be binding
on all the Federal Reserve banks. (Eccles. supra, 225.)
Nevertheless, Eccles was reasonably happy with the provision as
it was written into the banking bill of 1935. Under it, ‘no Federal
Reserve bank would be permitted to decline to engage in open-market
operations.” Authority and responsibility was centralized in the
Records were to be taken of every vote and annually reported to the
Congress. And there were seven Federal Reserve Board members, as
against five from the banks. (Eccles, supra, 225.)
Fourth, by the Banking Act of 1935 the Federal Reserve Board was
authorized to increase or decrease demand and time requirements for
balances member banks are required to keep. A vote of four of the
seven Board members was needed.
However, despite Eccles’ plea to put no limit on the Board’s right
to change reserve requirements, Glass put in a provision that no
change in reserve requirements could decrease reserves then required
by law to be kept, nor increase them more than twice the present rate.
Of course this was a considerable improvement as the old act, while
it permitted the Board to raise or lower reserve requirements, pre­
vented the Board from doing so except “during an emergency.” on a
vote of five members and with the President’s approval. (Eccles,
supra, 226.)
Fifth, by the Banking Act of 1935 Reserve was required every 14
days with the approval of the Board of Governors to establish the
discount rate. Eccles comments the provision stems from “Senator
Glass’ skimpy knowledge of what the procedure entailed in practical
terms.” (Eccies, supra, 226.)
Sixth, in the banking bill of 1935, Eccles succeeded, over Glass’
opposition, in inserting a provision permitting loans by any Federal
Resrerve bank pursuant to regulations of the Board of Governors of
the Federal Reserve Board “on any satisfactory as well as eligible
paper to any member bank.”
The House bill had used the phrase “sound assets” but under the
old act loans were restricted to “eligible paper,” and member bank
loans were difficult, if not impossible to make otherwise. (Eccles, supra,
Seventh, another provision in the banking bill of 1935 liberalized
loans by commercial banks for longer terms. This permitted easier
real estate loans, removing the restriction that the real estate had to
be in the area where a national bank is located, and removing other
restrictions as to the kind of loan that could be made. (Eccles, supra,
Eighth, the new banking bill of 1935 provided that the Federal
Reserve could admit to membership “a State bank with impaired
capital.” The Board could waive admission requirements of State
banks with deposits of $1 million before July 1, 1942, so as to allow
them to gain admission into the FDIC.

likewise, admission of other banks with impaired capital was waived
when part of their capital was in preferred stock or when they had
outstanding capital notes or debentures eligible for purchase by the
Reconstruction Finance Corporation. (Eccles, supra, 227-228.)
Finally, Eccles maintains the Banking Act of 1935 “introduced
technical changes” which “relieved the new Board of Governors of
much administrative detail and enabled it to concentrate more readily
on important policy questions.” (Eccles, supra, 228.)
However, Eccles weeps for his loss of the statement in the House bill
requiring the Federal Reserve Board:
To exercise such powers as it possesses in such manner as to promote conditions
conductive to business stability and to mitigate by its influence unstabilizing
fluctuations in the general level of production, trade, prices, and employment so
far as may be possible within the scope of monetary action and credit adminis­
tration. (Eccles, supra, 228.)

As Eccles says, if Glass had allowed this statement to stand, it would
“let the people of the country know what to expect of monetary man­
agement” and yet leave “the Federal Reserve Board discretion as to
the choice of means.” What Eccles asked for in 1935 was but a preview
of what ultimately became the declaration of national policy that Con­
gress in the Employment Act of 1946 set down for the Government as
a whole. (Eccles, supra, 228.)
On August 23,1935, President Roosevelt approved the Banking Act
of 1935 (H.R. 7617 as amended by the Conference Committee) pre­
senting pens to the men who played a major part in getting the new
legislation enacted.
Eccles comments that a wag remarked that F.D.R. should have
given Glass, one of the authors of the Banking Act of 1913 creating
the Federal Reserve System “an eraser instead.” (Eccles, supra,
So the banking bill of 1935 was enacted.
You can see that like the two acts that preceded it, the banking bill
of 1933 and the banking bill of 1913, the 1935 act was a good one.
By and large there was nothing wrong in any of this legislation that
competent administration would not cure.
But, as we saw with the 1913 act, it was improperly administered.
The same has also been true of both the 1933 and 1935 acts.
Suffice it to say that as we have seen the banking bill of 1938 required
completely new appointments of the Federal Reserve Board. This
meant, in Eccles’ case, another Senate confirmation. But this time he
did not make the mistakes he had made when first nominated.
Hearing rumors that Glass would seek to block his nomination,
early in September Eccles saw Roosevelt at Hyde Park who at once
released a statement that on February 1,1936, he would appoint Marriner S. Eccles for a term commencing that date. This silenced the
rumors but, of course, confirmation lay ahead. (Eccles, supra, 231-232.)
Eccles could not go to Glass who continued hostile to him. Yet not
only Eccles but all his Board had to run the gauntlet of the Glass
Subcommittee of Senate Banking.
The resourceful Eccles was equal to the task. What he did was to
prepare a list of names of men acceptable to Roosevelt and him, but
also acceptable to Glass. He gave this list to F.D.R. and persuaded

him to show it to Glass and tell him that he, Roosevelt, would first
pick the first four names from it, and then Glass could pick three.
Eccles’ gamble was that Glass would choose the three men Roosevelt
and he hoped he would. It worked out just as Eccles thought. Carter
Glass selected Joseph A. Broderick who had been superintendent of
banks for the State of New York, and Ronald Ransom of the Atlanta
Federal Reserve Bank. (Eccles, supra, 238-289.)
Roosevelt, however, had a dreadful time.
Vice President Gamer came to him and asked him to appoint a man
neither he nor Eccles wanted, namely, Ralph Morrison. Reluctantly,
Roosevelt appointed Morrison, but, fortunately, he left in 2 months.
(Eccles, supra, 245-246.)
Roosevelt wanted to appoint to the Board his two old friends who
were on the old Board, namely, Charles S. Hamlin, age 74, and Adolph
C. Miller, age 70.
While Eccles was understanding about F.D.R.’s having to appoint
Gamer’s protege Morrison, even though he believed him not to be
qualified for the job, he felt both Hamlin and Miller were too old for
the job and, to appoint one, would hurt the other.
On the other hand Eccles was prepared to hire both for the Board,
and did, Hamlin as special counsel, and Miller as chairman of the
Building Committee, so that he could be on hand for advice on Reserve
Roosevelt was still determined to appoint one or both. Eccles, as
only he could, talked Roosevelt out of it. (Eccles, supra, 236-238.)
There was one younger member of the old Board, M. S. Szymczak
of Chicago who was with the Chicago Federal Reserve Bank or whom
Eccles thought highly. Roosevelt appointed him. (Eccles, supra, 245247.)
A little later, Roosevelt appointed Chester Davis who had been head
of the triple A (Agricultural Adjustment Association). With Eccles,
Davis made the seventh member.
The new Federal Reserve Board of Marriner S. Eccles was off and

During the Roosevelt administration Marriner S. Eccles was a most
eloquent, and influential spokesman for the coordination of Reserve
and administration policies. He strongly felt, and often stated, that
the monetary power of the Nation must not be wielded by bankers,
but by men representing the public interest.
As Chairman of the Federal Reserve Board during the Roosevelt
administration, Eccles greatly influenced the monetary policy of the
Nation. However, when on the death of Roosevelt, Truman became
President, Eccles no longer wielded such influence at the White House.
In disagreement with practically all the major policy decisions of
the Truman administration, Eccles began to back off from his position
that Reserve was never meant to be independent of the administration.
Faced with the unfortunate choice of following the policies of Treas­
ury and doing what he believed was harmful to the Nation, or claim­
ing the independence of Reserve so that he might carry out the policy
he believed best for the Nation, Eccles was forced to cnoose the latteiv
Eccles’ influence during the Truman administration declined. He
lost the chairmanship at Reserve, and Treasury/Reserve relations
When he resigned from the Board in July of 1951, Treasury and Re­
serve had reached an “accord.” If this was a victory for Eccles in his
new posture as defender of Reserve’s independence, it was, at best,
a pyrrhic victory.
In 1950 Eccles wrote of Roosevelt:
Throughout his Presidency I usually found myself In agreement with Roose­
velt’s social objectives, although I often disagreed with his ideas as to the way
they could be achieved. But whether I agreed or disagreed, whether I bad mod­
erate, slight, or no influence whatsoever on his particular decisions, I always
felt we were working on the same team. (Bedes, Ibid, 401.)

Written after 5 years of service under the Truman administration,
this is as much a statement of Eccles’ feelings about Truman, as about
The years Eccles spent on the Board during the Truman adminis­
tration were, in his words, “years of frustration and failure, as I tried,
in my limited capacity, to influence public thought and governmental
policy.” (Ibid, 397.)
T he T ruman Y ears

A front page story headline in the New York Times, of January 28,
1948, read as follows:
Eccles is demoted in Federal Reserve by Truman’s order—is reduced from
Chairman to Vice Chairman of Governors’ Board in unexpected shift—T. B.
McCabe is new head—change held a victory for conservatives led by Snyder.

According to the article, the “shuffle” surprised the banking frater­
nity and official Washington.
The shuffle was a surprise to Mr. Eccles as well.

President Roosevelt in 1944 had designated Marriner S. Eccles
Chairman of the Board of Governors of tlie Federal Reserve for a 4year term expiring in February of 1948.
Several months after Roosevelt’s death in 1945, Eccles went to see
President Truman. Restating his belief that the Chairman of the Fed­
eral Reserve should serve at the pleasure of the President, Eccles
volunteered to step down although there were 3 years remaining to his
term if Truman desired to designate someone of his own choice. Tru­
man, in response, indicated he totally approved of Eccles’ work. He
had no one else in mind, and expected Eccles to stay on as Chairman of
the Board.
According to Eccles, as late as December 1947 Truman received him
cordially. Although they had had disagreements over policy in the
past, Eccles hadn’t the slightest notion of what was about to occur.
On January 22, 1948, 9 days before his term was to expire, John
Steelman, special asistant to President Truman, called Eccles to his
office. The meeting was short. “The President has given me a very
unpleasant assignment,” Steelman said. “I am to inform you that he is
not going to redesignate you as Chairman of the Board of Governors.
But he told me to be sure that you understand that he wants you to
stay on as a member of the Board.” (Eccles, “Beckoning Frontiers,”
Eccles was incredulous. No reasons were given.
Eccles requested to see the President, and at a meeting the following
day, learned no more about this decision. When asked why he had not
made his decision earlier so that Eccles could have announced his non­
candidacy for redesignation, and saved much embarrassment and the
implication that he was being asked to resign because of his failure,
the President responded that he simply had not thought about it
To avoid just such embarrassment and implication of failure,
Truman complied with Eccles’ request, and released the following
exchange of letters in announcing the change:
Dear Mr. Eccles:
Shortly after I became President you offered to resign as Chairman of the
Board of Governors of the Federal Reserve System and said it was your feeling
that the Chairman, who is designated by the President, should serve at his
pleasure. I told you then and on other occasions that there was no one I desired
to appoint in your place.
You will have completed your present term as Chairman on February 1, your
appointment as a member of the Board continuing until 1958. As I explained to
you last week, it is now my preference to appoint a new member of the Board
to fill the vacancy created by the death of Vice Chairman Ransom and, when
confirmed by the Senate, to designate him as Chairman.
This decision, as 1 assured you, reflects no lack of complete confidence in you,
or dissatisfaction in any respect with your public service, or disagreement on
monetary or debt-management policies, or with official actions taken by the
Board under your chairmanship. All who are familiar with your record recog­
nize your devotion to the public welfare and the constructiveness that has char­
acterized your leadership in the Federal Reserve System.
Therefore, I urged you to remain as a member of the Board and to accept the
Vice Chairmanship so that the benefit of your long experience and judgment will
continue to be available and so that you may carry forward legislative proposals
now pending in Congress dealing with the important problems of bank credit as
outlined in the President’s economic report to Congress, as well as with other
matters in the interest of a sound banking system and a sound economy.
Sincerely yours,
H arry S T ru m an .

The response:
JMy dear Mr. President:
You have stated in your complimentary letter the substance of our conversa­
tion of last week. As I advised you then, I desired to have time to consider fully
your decision and request. I have not altered my conviction that the Chairman
.of this Board should serve at the pleasure of the President, and I sought to have
:such a provision included in the Banking Act of 1935.
I have carefully considered your request After consultation with close friends
and associates on the Board and because of the reasons mentioned in your let­
ter, I have decided to remain with the Board in the capacity as you suggest.
Respectfully yours,
M. S. E c c l e s , Chairman.

The complimentary language did not satisfy the curiosity of the
press. At a press conference following the announcement and release of
the correspondence, the President was sharply questioned about the
changes. Truman’s response was simply that the demotion of Eccles
was his own business, and he need not and would not explain it. (“New
York Times,” Jan. 30, 1948.)
No explanation was in fact forthcoming. There were reports that the
conflict in the outlook between Treasury Secretary Snyder and Eccles
over controls on bank credit and other anti-inflation steps was a factor
in the change. (“New York Times,” Jan* 29,1948.) Snyder denied these
reports, although the New York Times’ article reporting the demotion
of Eccles called the change “a triumph for orthodoxy and conserva­
tism in fiscal policy as represented by John W Snyder, Secretary of
the Treasury” (Ibid.) The article continued, “Mr. Snyder and Mr.
Eccles have long been at odds.” The differences between Snyder and
Eccles predated Snyder’s appointment as Secretary of the Treasury
in the summer of 1946.
As long as the United States was at war, the primary objective of
Treasury and Reserve was the expeditious financing of military opera­
tions. The Treasury had decided early in 1942 to finance the war
through the expansion of the national debt, and, as much as possible
at the abnormally low interests rates then prevailing. Reserve had
agreed to take all steps necessary to implement Treasury’s decision to
finance a “2 Percent War.”
When the war ended in August 1945, the Federal debt was over five
times what it had been in December 1941 at the outbreak of the fight­
ing. This debt expansion involved considerable sales of Government
securities to the banking system, and a considerable rise in bank de­
posits. The increase in commercial bank holdings during this period—
$60 billion—was the equivalent of one-third of the increase in the na­
tional debt. Total deposits and currency increased by approximately
$85 billion. The Federal Reserve bought over $20 billion of Govern­
ment securities. (Fforde, “The Federal Reserve System 1945-49,”
Oxford University Press, 1954,21-22.)
>During the wartime “cooperation” between the two financial agen­
cies, Reserve followed Treasury policy on interest rates and availa­
bility of credit. Reserve banks created reserves at the direction of the
Treasury Department through its debt management policies.
The end of the war saw the beginning of the great conflict between
Treasury, led by Snyder, and Reserve, led by Eccles. Eccles believed
two things had to be done for the postwar adjustment to come about
with a minimum of inflation: (1) The controls on the economy had to

be maintained until levels of peacetime production could be restored,
and (2) the money supply had to be reduced. (Eccles, Ibid, 409.)
Truman, however, supported by the then head of the war mobilization
and reconversion program, Snyder, urged the early removal of all
When in August of 1945 all manpower controls and almost all com­
modity controls were removed, and most rationing was abandoned,
Eccles felt the most prudent course for curbing inflation would have
been to defer tax reductions until the time when supply more nearly
balanced demand. Again, with Snyder’s support, Truman proposed to
the Congress that the excess profits tax be repealed.
With the end of the war Eccles took the position that fixed pat­
terns of rates on securities used to finance the hugh war expenditures
were no longer justified. Specifically, that the rate on Treasury short­
term securities should be allowed to rise instead of being “pegged” at
exceedingly low wartime levels by Federal Reserve support.
The preferential rate had been established in 1942 when banks were
being called on to do an increasing amount of war financing by buying
and holding Treasury bills and certificates. A preferential discount
rate on loans secured by Treasury bills and certificates was established
as an inducement to the banks to do this. Since the problem in the
postwar years was to retard the growth of bank holding of securities,
Eccles felt this was no longer justified.
Thus, the Federal Reserve suggested that Reserve banks discon­
tinue the preferential discount rate of one-half percent on loans secured
by Treasury bills and certificates. Treasury opposed, on the grounds
that it would be interpreted by the market as an indication the Gov­
ernment had abandoned its low interest rate policy. The Federal Re­
serve backed off.
A few months later,. Reserve proposed the abolition of the pref­
erential rate. Treasury opposed on the grounds that the action would
increase the already large interest charge on the public debt. Reserve
again backed off. However, after a year of resistance, the Board ex­
ercised its discretion, and, against the will of Treasury, independently
ended the preferenial rate. (Eccles, ibid, 422.)
According to Eccles, the rate changes on Treasury bills accom­
plished the desired purpose but, alone, could not stop bank credit
expansion. Reserve felt it had to act.
Inflationary- pressures had become so great that President Truman
called a special session of Congress in Novem ber of 1947 to present a
10-point inflation control program. Restraint of bank credit was one of
the primary items on the program.
When asked for the Federal Reserve’s suggested plan to deal with
this matter, Eccles, on behalf of the Board, submitted the secondary
Reserve plan:
As a more basic means of restricting excessive growth of bank credit. I recom­
mend that Congress give to toe Open Market Committee of the Federal Reserve
System a temporary authority under which all banks engaged in receiving and
paying out demand deposits may be required to hold in addition to present re­
quired reserves, some specific proportion of their deposits in the form of cash
and balances with the Federal Reserve banks or other banks or in Treasury bills,
certificates or notes. At present the banking system has access, without effec­
tive limitation, to reserves upon which a multiple expansion of bank credit can
be built. The proposed measure would serve to retard expansion of bank credit
beyond the requirements of full and sustained production. (Eceles, supra 430.)

To Eccles’ surprise and chagrin, on the advice of Secretary Snyder,
Reserve’s program was not included in the President’s message.
Eccles’ program was not dead yet. The Joint Committee on the Eco­
nomic Report was to hold hearings shortly thereafter. Eccles discussed
his proposal with Snyder prior to the hearings. Snyder indicated that
although he could not support the proposal, he would raise no objec­
tions to it. Congress would have to determine the merits of Reserve’s
Eccles thus outlined his proposal for a secondary reserve as a means
for restraining bank credit before the committee. Snyder, however,
when he appeared before the same committee, flatly stated that he
thought the secondary reserve plan wouldn’t work.
With formidable opposition from bankers, including Allan Sproul,
president of the New York Federal Reserve bank, and lack o f ad­
ministrative support, Congress did not give the Board the power to
authorize a special reserve. It was shortly after this controversy that
Eccles was notified that his chairmanship of the Board of Governors
would not be renewed.
Eccles desperately wanted to stop inflation. He was on record as
being totally opposed to the policy the administration was following.
Confronted with public disagreement between the money managers
of the country, Truman evidently decided that Eccles would have to>
g°The Eccles Theory
WU disagreements with Treasury and administration policies, not­
withstanding, Eccles offers a different theory to explain his demotion.
He attributes his fall to pressures brought on President Truman by the
Giannini banking interests.
Since the early 1920’s the expansion of the Giannini banking empire
on the west coast had been a subject of concern by Reserve, the Comp­
troller of the Currency, and later, by the FDIC. As Transamerica
Corp., the holding companyfor the Giannini interests, acquired more
and more banks in California, Oregon, Arizona, Nevada, and Wash­
ington, it became evident that only their joint resistance could prevent
Transamerica from monopolizing the banking business in the West.
In February 1942, Transamerica was informed that the Govern­
ment’s three banking agencies would decline permission for its
acquisition, directly, or indirectly, of any additional banking offices.
Undeterred, Transamerica continued to buy control of existing banks.
Bank of America, part of the Transamerica group, applied to the
Comptroller for permission to take over these newly acquired banks
from Transamerica, and convert them into branches. The Comptroller
consistently refused.
In 1943 the Antitrust Division of the Department of Justice com­
menced an investigation to determine whether Transamerica’s domi­
nation of commercial banking was in violation of the Sherman
Antitrust Act. The conclusions of that investigation, led by the then
Attorney General, Thomas Clark, were that evidence of abuse of its
dominant position, essential to make a case under the Sherman Act,
could not be found.
Representatives of the Department of Justice, the Comptroller o f
the Currency, the Federal Reserve, and the FDIC, agreed that some

means had to be devised to halt the further expansion of the Transamerica group. The result was a bank holding company bill drafted
l>y the Board of Governors, and introduced in Congress in 1947. Due
to the opposition of the new Secretary of the Treasury Snyder, how­
ever, the bill died before coming to a vote in the Senate.
In the meanwhilej the Supreme Court had decided the American
Tobacco Co. case which indicated that an antitrust case was actionable
if it could be shown that a corporation was merely in a position to
assert monopolistic power. Eccles brought this to the attention of At­
torney General Clark in a letter which was never answered. Evidently
Secretary of the Treasury Snyder had requested that he be advised of
«ny matters pertaining to Transamerica, so Clark had sent the letter
to Snyder, and there the matter had died.
In April 1947 Eccles addressed a letter to Snyder asking him to give
the subject of Transamerica his “early consideration” in that the
Board was anxious to know what justice planned to do so that it could
decide its own future course of action. (The Board, under the Clayton
Act, was empowered to take action against Transamerica but had de­
ferred to justice since they had initiated the investigation.) This letter
was never acknowledged.
When in November it was reported to the Board that the Comp­
troller was being pressured by Treasury to permit the branching of the
tanks that Transamerica had been buying over the years, the Board
initiated its own investigation into whether the facts concerning Transamerica justified proceedings under the Clayton Act.
It was less than 2 months later when Eccles was informed that he
would not be redesignated as Chairman of the Board of Governors of
the Federal Reserve.
Eccles’ theory that west coast pressure brought about his firing, is
supported by an article appearing in the St. Louis Post-Dispatch on
Tebruary 3,1949, with the headline:
Biffle discloses Downey urged demotion of Eccles—Senator’s action indicates
link between Reserve Board shift and bank trust case. (Eccles, Ibid, 451-462.)

When the Post-Dispatch interviewed Leslie L. Biffle (Secretary to
the Senate, and the “Colonel House” of the Truman administration),
he stated that Senator Sheridan Downey of California (1938-50) had
urged President Truman to fire Eccles.
Since Senator Downey was a good friend of the Giannini family,
•and Federal Reserve, under Eccles, was trying to prevent the Bank
of America from acquiring so many western banks, the Post-Dispatch
concluded that it was really the Bank of America that got to Truman
to fire Eccles.
Two days after Eccles was fired, an attempt was made by Senator
"Charles Tober (R.-N.H.), in a congressional hearing, to link Treasury
Secretary Snyder and the Giannini banking interests with Truman’s
decision to reshape the Federal Reserve Board. (“New York Times,”
Mar. 31,1938). Snyder, who had previously pressured the Comptroller
of the Currency to permit the branching of the banks that Trans­
america had been buying, denied allegations that he had been offered a
job by the Gianninis.
Senator Tobey asked Snyder whether or not he had met with the
"Gianninis in a Florida hotel room, or had entertained the California

bankers in Washington in the fall of 1947. Snyder replied that he did
not meet with the Gianninis in Florida, but that he did entertain them
in Washington.
Senator Tobey’s attempts to associate Snyder and the Giannanis with
the Eccles demotion, however, were inconclusive.
Interestingly enough, Snyder, during his directorship of the RFC,
was closely associated with Samuel Husbands, who, in the summer
of 1946, “accepted a high position with a flattering salary with the
Transamerica interest.” (Eccles, supra, 447—448.)
Significantly, the day before the Transamerica hearings opened at
the Federal Reserve, President Truman was visited by Samuel B.
Stewart, Jr., of San Francisco, then counsel for the Gianninis. Stewart
had previously been counsel for Truman’s War Investigating Com­
mittee. When interviewed by the Post-Dispatch, Stewart conceded it
was his “third trip to the White House in recent months,” but said
“his latest call was ‘personal.’ ” (Eccles, Ibid, 452.)
Under all these circumstances one must conclude that Eccles was
not “stretching the laws of probability to any large extent” when he
concluded that Biffle, carried to Truman, Downey’s complaint and,
that was, that if Harry Truman was to carry California he needed the
Gianninis and their price was Eccles’ head. (Eccles, Ibid, 452-453.)
Considering that the Transamerica hearings opened in June 1948,
and the feeling between Eccles and the Gianninis was very bitter, and
his relations with Snyder not much better, you can see that Truman
was hearing a lot against Eccles from his close friends. He was also
running for President.
A fter t h e F ir in g

After the firing of Eccles, the postwar inflation that commenced
immediately after V-J Day continued through 1950. In June, with the
outbreak of the Korean war, it threatened to increase even more, and,
as the war raged, so did the conflict between the Treasury and the
The conflict centering around the management of the public debt
was not a new one—Treasury was issuing securities at a low rate of
interest pattern, and Reserve was being forced to defend them unless
it was prepared to see the financing fail. Yet, Reserve believed such
financing was just stoking the “engine of inflation.”
Even with Thomas McCabe, Truman’s new appointee as Chairman
of the Board, the struggle between Treasury ana Reserve continued.
The Federal had, for the most part, continued its pegging of the
Government securities market. According to Eccles, the Reserve Board
was gearing up to stop the pegging, although it had neither taken any
action in that direction, nor made a formal presentation of its views
to the President by January of 1951.
Truman and his council of economic advisors were opposed to the
Fed’s stopping its support of the government bond market. They felt
that cheap and ample credit was necessary to counter the inflation.
Truman felt the continued pegging of government securities neces­
sary for another reason—the success of the defense program.
In his memoirs, Mr. Truman writes that:
* * * It was my position that until we could determine the extent of the defence
requirements that might result we should maintain a stable position in reference
to money rates that affected the management of the public debt. * * * It did not

seem appropriate to me that we should enter into a period of deficit financing on a
rising money-rate pattern. I also felt strongly that in the moment of impending
crisis we should not take deliberate steps that could possibly disturb public
confidence in the nation’s financing. (Memoirs by Harry S. Truman. Doubleday
& Co., Inc., Garden City, N.Y., 1956; vol. II, p. 44.)

According to Truman, it was to assure the success of the defense
program that he invited the members of the Federal Reserve Board to
meet with him at the White House on January 81,1951. He described
the results of the meeting in his memoirs: (Truman, Ibid, 44-45.)
I was given assurance at this meeting that the Federal Reserve Board would
support the Treasury’s plans for the financing of the action in Korea. This assur­
ance was given entirely voluntarily. At no time during the conference did I at­
tempt to dictate to the Board or tell them what specific steps they ought to take.
I explained to them the problems that faced me as Chief Executive, and when
they left I firmly believed that I had their agreement to cooperate in our financ­
ing program. I was taken by surprise when subsequently they failed to support
the program. (Eccles, supra, 484.)

Eccles disagreed with this position, and felt that a majority of the
members of the federal open market committee concurred in his views.
On his own initiative (as he writes), he brought the matter out into the
open by releasing the memorandum of the meeting with the President
which the Board had prepared.
Focusing on the fact that the President had not tried to “dictate to
the Board, or tell them what specific steps they ought to take”, Eccles
denied that the Board had agreed to continue to support the govern­
ment bond market, or maintain the 2% percent long term rate.
He interpreted the Board’s offer of support as just a vague commit­
ment “to protect the government credit”. He emphasized the fact that
Chairman McCabe had suggested to the President that the Board
“consult frequently with the Secretary of the Treasury, giving him our
views at all times, and presenting our point of view strongly, and that
by every means possible we try to reach an agreement.” (Eccles, supra,
The conflict was out in the open. Throughout the month of Feb­
ruary there were consultations between the Board and the Treasury,
but there was no answer to the question of whether Reserve would
support the securities market as the demanded.
Secretary Snyder became ill during this period of consultations, and
William McChesney Martin took his place as spokesman for the
Treasury at the meetings which Chairman McCabe had suggested.
Describing his role during the subsequent hearings on his nomination
as a member of the Board on March 19,1951, Mr. Martin said:
I plead with the Federal Reserve Board and with the Open Market Committee
to go along with us on this operation; that both of us jointly agree to keep
within the family what our policies and programs were, and that I wanted to
have a working relationship between the Treasury and the Federal Reserve that
would make it possible for us to combine our judgment as to what proper pricing
of securities should be. (Nominations of William McChesney Martin, Jr., Hear­
ings before the Senate Committee on Banking and Currency, 82nd Cong. 1st
sess., March 19,1951, p. 10).

During the course of these negotiations, Chairman McCabe submit­
ted his resignation effective March 31, 1951, and President Truman
nominated Mr. Martin the Treasury’s spokesman to succeed him. Sub­
sequently, Mr. Eccles implied that McCabe resigned in protest over the
terms of the accord—possibly because he was unaware that in the end,
the Fed would win.

During the hearings on his nomination, Mr. Martin gave his view of
the projected relationship between the Fed and the Treasury:
* * * I don’t see any way that we can move forward, regardless of how the ar­
rangements that currently exist were arrived at, to refinance in the balance of
this year $39 billion in addition to some $13 bilUon of bills, plus any new money
demands that may be faced by the Treasury—I don’t see how we can move for­
ward to face that sort of a situation unless the Treasury and the Federal Reserve
are working hand in glove. (Ibid, p. 6.)

Elsewhere, during the course of these hearings, Mr. Martin defined
the so-called “accord” in a colloquy with Senator Bricker:
Senator Bricker. What further commitments, if any, are there on the part of
the Treasury or the Federal Reserve under this so-caUed understanding, which
of course was never reduced to writing in any way, shape, or form, or any definite
promise, but what is the understanding as to the future?
Mr. Martin. Well, the understanding as to the future is that the Treasury and
the Federal Reserve work very, very closely together.
Senator Bricker. That is what I was getting at, whether there was any definite
understanding of any kind or character or whether there was just an understand­
ing that would be a definite working arrangement.
Mr. Martin. There is a working arrangement, yes sir. (Ibid, p. 13.)

The “accord”, then, announced on March 4, appears to have been
an arrangement for consultation between the Federal Reserve and the
Treasury as to policy.
The agreement, reached in March of 1951, reflected President Tru­
man’s position that the policies of the Fed should be coordinated with
those of the administration.
Far from seizing its independence, it seems the Federal Reserve
agreed to cooperate with the administration. Independence came in
1953 when the Eisenhower administration granted it without a

Interest rates in the 20th century are probably as much a subject
of political and economic controversy as they were in antiquity.
American political parties are as divided on interest rates as were the
patricians and plebeans of republican Rome. Some like them high, and
others prefer them low. The issue has plagued man from time im­
memorial. (See “Hie History of Interest Rates,” by Sidney Homer,
Rutgers University Press, 1968.)
The dispute which materialized between President Johnson and
William McChesney Martin during the midsixties evolved from the
“plebean” Johnson attitude, and the “patrician” Martin attitude to­
ward the issue of bank interest rates.
The resulting controversy served to illuminate the significance of
Federal policies, and their effects on the economy.
As early as January 1964, Chairman Martin indicated, in a veiled
fashion, that a rise in interest rates could be forthcoming. (New York
Times, January 23,1954,43.) This discreet admission was clearly in­
compatible with the publicly stated wishes of President Johnson, who
believed that a higher interest rate would not be necessary to counter
his newly-proposed tax cut.
Needless to say, a rise in interest rates at that time would have af­
fected the 5-percent-plus unemployment figure unfavorably. Higher
interest rates would render greater difficulties to business dependent
on borrowed money, thus stifling production and increasing
In view of its undesirable influence on unemployment and inflation,
the President was opposed to any rise in interest rates. Being an elec­
tion year, the issue became even more of a critical consideration to the
A higher interest rate would, on the other hand, have favorable con­
sequences within the banking community: a fact which raised quite
a bit of suspicion as to Mr. Martin’s real economic loyalties. These sus­
picions were often voiced by Congressman Patman, who had main­
tained for some time that the Federal Reserve was serving the inter­
ests of the American Bankers’ Association. (Ibid., sec. I ll, 1.)
On April 28,1964, in a speech to American business leaders, Presi­
dent Johnson expressed his opposition to high interest rates and made
clear his hope that the Federal Reserve would support his policy.
(“Public Papers of Lyndon B. Johnson (1963-1964),” U.S. Govern­
ment Printing Office, Washington, D.C., 1965,295.)
But let me assure you: If the balance of payments turns sour, of If inflation
starts rolling, I will look to the independent Federal Reserve as our second line
•of defense. I would have said “first” but you in this room are the first line
But right behind you is Bill Martin.

On November 24, 1964, the discount rate was increased from 3y2
percent to 4 percent. The action was clearly contradictory to the Presi­
dent’s program to keep interest rates down. The Reserve Board’s deci­
sion to increase the discount rate was a response to a similar move
exercised by the British Government, which raised its interest rate from
5 to 7 percent earlier that same day. Mr. Martin stated that the Federal
Reserve action was an attempt to prevent an outflow of dollars abroad,
and not an attempt to raise the rates at which banks lend to businesses
and individual borrowers. Nevertheless, creditmen and Wall Street
observers predicted that a rise in interest rates would, in all likelihood,
increase borrowing costs for businessmen. (“New York Times,”
November 24, 1964.)
The long-debated issue of whether the Federal Reserve System
should be making their decisions independently was intensified by the
Board’s unwelcome decision to raise interest rates. On the 20th of
December, 1964, Congressman Patman announced that he would in­
troduce legislation to dilute the Federal Reserve Board’s independence
and to encourage closer cooperation with the administration and Con­
gress on matters of monetary policy. (“New York Times,” December
The rise in interest rates on November 24, 1964, though, did not
seem to be an arbitrary decision on the part of the Board but rather
a necessary action to protect the dollar. An editorial appearing in the
November 29,1964 issue of the “New York Times” praised the Federal
Reserve for its swift and “unfortunately necessary” response to the
British interest rate increase. The editorial also said that the conse­
quences of a rise in American rates would not be as drastic as expected
because it would create a tighter credit policy which in turn would
prevent an outbreak of domestic inflation.
A real conflict, according to a majority of press reports, was to
arise in the following December when the Board voted four to three in
favor of raising the discount rate again; this time from 4 percent to
4y2 percent.
On December 5, 1965, the Federal Reserve Board, “defying the
President,” announced the increase. The Board also raised from 4y2
to 5y2 percent, the ceiling on interest rates that banks could pay to
interest-earning deposits of large corporations, but maintained the 4percent ceiling on personal savings accounts. Chairman Martin said
he acted, despite Secretary of the Treasury Henry Fowler’s public
warning against an increase in interest rates, because of “compelling
financial and monetary reasons.” (“New York Times,” December 14,
President Johnson who was at his Texas ranch on the day of the
announcement, remorsefully stated that the decision was made by an
“independent agency” and would result in the higher cost of credit
for homes, schools, hospitals, and factories. Furthermore, the President
regarded the decision as premature, having been made without the
knowledge of the following year’s budget, Vietnam costs, and other
significant economic data. Johnson believed that the decision would
have been more responsible if the Board had consulted the Treasury
and the Council of Economic Advisers. The Reserve Board’s measure
was the result of a narrow majority and constituted a unilateral, un­
coordinated effort. Yet its policies were implemented, and began to
take their effects on the economy.

One member of the Board who voted in the minority, Sherman J,
Maisel, when testifying before the Joint Economic Committee^ 2
weeks after the decision, said that he found the reasons for the action
less “compelling” than Mr. Martin did. Maisel expressed shock at the
Board decision which he believed to be an irresponsible use of inde­
pendence. (“New York Times,” December 14,1965.)
The Reserve Board’s decision elicited similar response from Con­
gressman Patman, who stated that the Board had become a “second
government” whose action was both unnecessary and harmful to the
consumer and borrower. (“New York Times,” December l4 ,1965.)
Three months after the decision, President Johnson, in an address
to a national mayors’ conference said that he was disappointed by the
Board’s December decision. Johnson said that he “did not agree with
Bill Martin and the other three members of the seven-man Board that
it was either the time or the means to take action, but they did take
it .
and it’s beginning to bite.” (“Public Papers of Lyndon B.
Johnson 1966,” U.S. Government Printing Office, Washington, D.C.,
The December 3,1965, Federal Reserve Board action had been timed
rather conveniently to fall after the Presidential election, which was
also the case in the November 24,1964, rate increase. This fact caused
some individuals to see President Johnson’s disapproval of the rate
increase as a token reaction intended to assuage certain block votes to
which the Chief Executive had committed himself in the 1964 election.
“New York Times” columnist Arthur Krock said the Reserve Board
had actually done Johnson “a very great favor” by imposing inflation
restraints tnat would have been embarrassing for the President him­
self to invoke. (“New York Times,” December 12, 1965.) Mr. Krock
added that in view of the “Florentine atmosphere” of the Johnson
administration, it would be no great surprise to learn that the Presi­
dent was not really displeased with the Federal Reserve Board’s
As the quadriad (Chairman of the Federal Reserve, Chairman of
the Council of Economic Advisers, Secretary of the Treasury, and
Director of the Budget) met at the LBJ ranch on December 6,1965,
President Johnson was asked if discussions with Martin had made the
interest rate increase any easier to swallow. The President indicated
that his previous statement expressing regret at the Federal Reserve
Board decision still stood firm. But he added he was not concerned
with “post mortems.” “Your (the Press) job” said the President, “is to
provoke a fight. Mine is to prevent one.” (“Public Papers of Lyndon
B. Johnson 1965,” U.S. Government Printing Office, Washington,
D.C., 1966, vol. II, 641.)
Mr. Martin made reference to his widely publicized dispute with the
administration over the 1965 interest rate increase during a farewell
speech he gave shortly before his retirement. He told the audience
(members of the business council) that President Johnson had told
him that he came from a “part of the country that liked interest rates
to be low—all the time.” (Speech by Mr. Martin at Hot Springs, Va.,
October 17,1969, 7.) The soon-departing Chairman said he told the
President that the “only way” interest rates could be low was by
cutting down on Government spending and tax cut policies. “If you
will see to that,” said Martin, “you can have moderate interest rates—

maybe not as low as Mr. Patman likes, but you can have them low.”
In the same speech, Martin criticizes nations in which the welfare of
the people is subordinated to the self-serving policies of a totalitarian
Other countries have staked their destiny upon systems whereby
an all-powerful few decide what’s best for the many, and then use thewhip of governing authority to drive their people to sacrifice their
labor and lives in service to a government whose welfare is considered
to stand separate from that of the people themselves.
For many, this criticism also applied to the Federal Reserve Board
itself, which was viewed as an “all-powerful few using the whip of
governing authority” to enhance the profits of the banking community.
The pro-banking bias alleged to the Board was given credibility by
an obscure measure implemented in conjunction with the discount
rate increase. Under its regulation Q, the Federal Reserve Board
raised, from 4 to 5 percent, the ceiling interest rate that member banks
could pay on time deposits. The subtle change in regulation Q quickly
shifted the balance in market power, giving large commercial banks
the advantage over savings and loan associations. Soon, savings and
loan associations became hard pressed for funds. Interest rate compe­
tition forced their costs up rapidly while income from outstanding
mortgages—issued earlier at lower interest—could not be propor­
tionally increased. To worsen matters, the housing market was suffer­
ing because of overbuilding, particularly in California. (G. L. Bach,.
“Making Monetary and Fiscal Policy, The Brookings Institution,
Washington, D.C., 1971,127.)
During the first half of 1966, savings and loan associations sustained
a net loss of $3 billion in customer savings. The subsequent credit
crunch was largely due to the Federal Reserve Board’s action which
raised the discount rate and its change of regulation Q. The Federal
Home Loan Bank Board (FHLBB), the supervisory authority for
federally insured savings and loan associations, was extremely lim­
ited, in terms of funds, in its power to aid the weakening savings and
loans. They could not expect, and certainly did not receive, any help
from the Federal Reserve System. Policy coordination between the
Federal Reserve and the FHLBB, a seemingly prudent idea, appar­
ently was not an objective of Chairman Martin. Congressional testi­
mony revealed that the Reserve Board’s action of raising regulation Q
ceilings for commercial banks did not have the benefit of prior consul­
tation with either the FHLBB or the Comptroller of tne Currency.
When asked if he was given advance notice of the December 1965
Reserve Board action, FHLBB Chairman John E. Home replied in
the negative. The same answer came from James J. Saxon, Comptroller
of the Currency, who stated that he had first learned of the Board’s
measures from the “Monday morning newspapers.” (Ibid., 131.)
The Federal Reserve Board’s December decision to increase interest
rates and alter regulation Q had grave consequences on the Nation’s
economic health. For the savings and loans, the Federal Reserve Board
action nearly sounded a death knell. The permutation of regulation Q,
raising the amount of interest commercial banks could pay on time
deposits drained the lifeblood out of the already weakening savings
ana loans. Commercial bank credit increased, but the savings and loans

suffered a devastating aggregate loss of $3 billion within 6 months of
the Board’s decision. Fierce competition among financial institutions
for funds resulted in a dizzying upward spiral of interest rates. The
savings and loans became ineffective as a vehicle to promote the build­
ing industry, and prospective homeowners and sellers alike suffered
for lack of credit.
To help heal these wounds, Congress enacted the interest rate
control bill. This law was designed to reduce exorbitant interest rates,
thereby aiding citizens in building, purchasing, or selling their homes.
The bill would also serve to strengthen financial institutions like sav­
ings and loan associations. It became a law on September 21, 1966,
less than 1 year after the fateful Federal Reserve Board vote.
The dispute between President Johnson and Chairman Martin was,
in one respect, another episode in the continuing “tug of war” over
monetary policy. On one side was the administration pulling for low
interest rates and a supportive electorate. On the other was the chair­
man of the central bank of the United States, convinced that what was
good for the banking community, was good for the Nation. In another
respect the conflict was an illustration of the tremendous power
wielded by the Federal Reserve, and the ofttimes tragic consequences
of its use.
The interest rate increase in 1965 was a clear example of the Federal
Reserve’s abuse of power which, unfortunately, led to an economic
crisis of widespread proportions.
The Chairman of the Federal Reserve Board had actively guarded
what can be described as a self-imposed mandate to manage the coun­
try’s monetary policy without interference from the President or
anyone else.
History has revealed that, frequently, Federal Reserve policy has
gone against the grain of administration and congressional thinking.
And, if the Federal Reserve System pursues contradictory policies
then the Government has, in effect, no policy at all.


[Reprinted from the St. Louis University School o f Law Journal, vol. 10, No. 3, spring,
1906, pp. 299-326. Copyright, 19& , by -St Louis University School o f Law]

: A B r ie f fo r L e g a l R e fo r m
B y Wright Patman*
The Constitution vests the monetary powers of the nation in the Congress.
Article I, Section 8, Clause 2, of the Constitution provides that: “The Congress
shall have Power.
To borrow money on the credit of the United States. .. ”
Clauses 5 and 6 empower the Congress “To coin Money, regulate the Value
thereof, and of foreign Coin
” and “To provide for the Punishment of counter­
feiting the Securities and current Coin of the United States.
.” Clause 18,
embodying the so-called “Incidental Powers,” provides that the Congress shall
have power “To make all Laws which shall be necessary and proper for carrying
into Execution the f oregoing Powers and all other Powers vested by this Constitu­
tion in the Government of the United States, or in any Department or Officer
thereof.” Article II, Section 1, Clause 1, states: “The executive Power shall be
vested in a President of the United States of America.” Thus it is eminently clear
that Congress has the responsibility of establishing the laws for carrying out
the monetary powers and that the President, vested with the executive powers,
has the responsibility of carrying out the laws established by Congress.
The founding fathers realized the power inherent in these monetary functions.
They were keenly aware from their study of history that the power to regulate
and control money, like the power to declare war and to levy taxes, is fundamental
to the public welfare. Their study of history had taught them that these great
powers must be kept subject to the will and vigilance of a free and alert
citizenry; for, otherwise, that citizenry stood in imminent peril of domination
by a powerful oligarchic minority, a phenomenon that has recurred countless
times throughout human history.
The landmark decision of McCullough v. Maryland,l clearly affirmed the princi­
ple that Congress holds the monetary powers under our Constitution, and this
doctrine has been reaffirmed and elaborated in a number of cases since that
decision, one of the more recent being Norman v. Baltimore & O.R.R.* Further­
more, the federal government argued successfully in the Legal Tender Cases
that Congress was “under no express restrictions on the subject of money.” *
There is no equivocation in legal precedent, therefore, about the principle that
the monetary powers belong to the people and reside in the Congress.
In spite of this indisputable clarity, however, we find that Congress has in
fact handed this sovereign power to create and control money to the Federal
Reserve System, an institution more responsible to itself than to the federal
government, and one which has shockingly close ties to the commercial banks.
As an illustration of this self-accountability, William McChesney Martin, Jr.,
Chairman of the Federal Reserve Board, told the Joint Economic Committee on
February 6, 1964, that the Board has “the authority to act independently of the
President” and even “despite the President.” 4
On December 5, 1965, by a four-to-three vote, the Board raised the discount
rate in flagrant disregard of the President’s statement a few days earlier that
T h e F ed e r a l R e s e r v e S y s t e m

♦United ^States Congressman, Chairman o f the House Banking and Currency Committee
and the Joint Economic Committee of Congress.
*79 U.S. (12 Wall.) 457, 518 (1871).

/Betiringt Before tin Joint Economic Committee on the January 1»«S Economic Report
of the President, 89th Cong., 1st Seas., pt. 8, at 46 (1965).

tightening monev would be harmful. This action prompted Professor Tobin of
Yale University to say in a letter to the New York Times that, “Because of the
paranoiac mania for Federal Reserve independence, the Federal Open Market
Committee, the real hard core on policy in this country, does not even let the
Secretary of the Treasury or the Council of Economic Advisers inside the door to
explain the Administration’s fiscal outlook for strategy.” 5 When the Board was
brought before the Joint Economic Committee to answer questions about its
precipitate action, Chairman Martin admitted, in response to a question from
Senator Sparkman, that prior to raising the interest rate the Federal Reserve
Board did not consult the Federal Home Loan Bank Board, which represents
the Savings and Loan industry and which was destined to be adversely affected
by the action.6 In the previous year, the Board refused outright to furnish the
Banking and Currency Committee of the House of Representatives with minutes
of the recent meetings of the Open Market Committee.
It should be stressed that the Open Market Committee is a creature of the
Federal Reserve System that possesses tremendous power over the money supply
of the nation through the purchase and sale of billions of dollars of United States
securities each year. But even the congressional committees, charged with the
responsibility of supervising our banking laws, have no access to its activities and
decisions* It is unfortunate that the operation of our monetary system is shrouded
in obscurity and is not as well known to the people as it should be. This situation
has been fostered by the Federal Reserve Board and by some of the banking
community who have made a mystique of the subject. They carefully cultivate
the illusion that they are the only ones who can understand the money market
and the mysterious breezes and occasional hurricanes that blow through it.
The principles of our money system can be clearly understood if people are
given a chance to see the facts. We have a fractional reserve system under which
the commercial banks are permitted to lend out money approximately ten times
in excess of their reserves. These loans by the commercial banks constitute
demand deposits which bankers can create, literally, by a stroke of the pen. The
Federal Reserve System, by regulation, sets the reserve requirements which the
private commercial banks must by law maintain against their demand deposits.
In other words, it is the Federal Reserve System which has the power under
the law to determine the percentage ratio between reserves and demand deposits.
In actual practice, the Federal Reserve System controls the supply of money or,
more specifically, the amount of commercial bank reserves through the purchase
and sale of government bonds in the open market. By selling bonds, the Federal
Reserve Board withdraws reserve funds from the banking system. Conversely, by
purchasing bonds in the open market, it adds to the reserves of the banking
system. In short, the power to create money, which the Constitution vested in
the elected representatives of the people, and the power to fix its volume and
its cost have been given to the Federal Reserve System and its Open Market
Committee, consisting largely of representatives of private banks.
The limit on the lending power of the commercial banks is the supply of reserves
which is determined by the Federal Reserve System. It is the Open Market
Committee, made up of the seven members of the Federal Reserve Board and
the twelve presidents of the regional Federal Reserve banks, who are selected by
representatives of private commercial banks, which actually determines the
purchase and sale of securities and, thereby, controls the reserves of the banking
system. This is the most important power in the Federal Reserve System. This
committee has the power to issue notes of the federal government which are
interest free in exchange for United States bonds which bear interest. The
Committee also has the power to do the reverse: Issue United States bonds
bearing interest in exchange for interest-free notes.
The Federal Reserve System is a quasi-private exercise of public power which
is completely improper in a modern democracy. Even though the Employment
Act7gives the President extensive responsibilities for the prosperity and growth
-of our economy, neither the President nor the Congress controls the monetary
powers which are among the most important and fundamental for our well being.
"The E m p loym en t Act cannot be carried out effectively unless the Government has
the power to control and coordinate all of its economic activities, including the all5 Letter to the Editor, N.Y. Times, Dec. 15,1965, p. 46.
• Hearings B efore the Joint Economic Committee on the recent Federal Reserve Action
and Economic Policy Coordination, 89th Cong.. 1st Sess., pt. 1, at 120 (1965) [hereinafter
«iter! as Hearings on recent Federal Reserve Action1.
» 60 Stat. 23 (1946), 15 U.S.C. § 1021 (1964).

important monetary powers which include the control of the money supply, the
available credit, and the interest rates charged to borrowers—the fundamentals
of economic stability. The policies of the United States Government for full
employment, international stability, equitable taxation, and domestic pros^nty
can never be sound or dependable while the most important part of the nation s
economic powers is in the hands of a private group which exists as a separate
government The result is that there are two governments in Washington—tiie
elected Government of the people and the autocracy that controls our financial

destiny ^

It is tremendously important to the public welfare that lawyers understand
the nature, origin, and development of our present monetary situation. This article
will analyze in detail the present structure of the system that manages the public
money, explore the turning points of history that brought about the present
system, examine some of its results, and, finally, suggest what can be done about

As presently constituted, the Federal Reserve System0 consists of twelve
regional banks governed by directorates and supervised by a board of seven
members appointed by the United States President for terms of fourteen years.
Bach of the twelve Federal Reserve banks has nine directors. One of the vital
insights into an understanding of the Federal Reserve System is the method of
selecting these directors. Three of them are called Class A, three, Class B, and
three, Class C. The Class A and Class B directors are elected by member banks.
Class A directors are chosen from officers of banks in the area; and Class B
directors are chosen by the commercial banks from the fields of commerce,
industry, or agriculture, and may be stockholders in banks. Class C directors are
appointed by the Board of Governors, and they must not be officers, directors,
employees, or stockholders of any bank.
It should be noted that the 7,000 commercial banks who are members and who
hold “stock” in the Federal Reserve System, do not vote according to the size of
their stock-holdings. Rather, each exercises one vote. It should also be noted
that the word ‘‘stock” is a misnomer since the relationship it denotes lacks the
true attributes and power of stock in a corporation. The president of each of the
twelve Federal Reserve banks is elected by the nine directors of the bank; and
significantly, no oath of office is taken by these presidents or by the directors.
Studies have revealed a preponderance of banking background among direc­
tors.10Early in 1964 the House Banking and Currency Committee, in connection
with the comprehensive review of the Federal Reserve System, sent to all Class B
and C directors a questionnaire regarding bank affiliation and bank stock owner­
ship. Since Class A directors are chosen from officers of banks, they would be
expected to have banking connections. But the study showed that of the thirty-six
Class B directors, all of whom responded, seventeen had been directors of banks
8 The Committee on Administrative Management characterized the problem in this
They (Administrative Agencies) are, in reality miniature independent governments
set up to deal with the railroad problem, the banking problem, or the radio problem.
They constitute a headless “ fourth branch” of the Government, a haphazard deposit
o f irresponsible agencies and uncoordinated powers. They do violence to the basic theory
o f the American Constitution that there should be three major branches o f the Govern­
ment and only three. The Congress has found no effective way o f supervising them,
they cannot be controlled by the President, and they are answerable to the courts only
in respect to the legality of their activities. .
They suffer from an internal inconsistency, and unsoundness o f basic theory. This is
because they are vested with duties o f administration and policy determination with
respect to which they ought to be clearly and effectively responsible to .the President
(or to the Congress) and at the same time they are given important judicial work in
the doing of which they ought to be wholly independent o f Executive control. . . .
[T ]h e independent commission is obliged to carry on judicial functions under condi­
tions which threaten the impartial performance o f that judicial work. The discretionary
work o f the administrator is merged with that o f the judge. . . . Any program to
restore our constitutional' ideal if a fully coordinated Executive Branch responsible to
the President must bring within the reach of that responsible control aU work done
by these independent commissions which is not judicial in nature.
Report o f President’s Committee on Administrative Management 36-7 (1937). For a
current summary o f these problems see also, •Staff o f Senate Comm, on Administrative
and Procedure»
Cong., 2d Sess. Report on Regulatory Agencies (Comm. Print
!JKLS ta t 25 *
12 U.S.C. S 221 (1964).
» The results of the House Banking and Currency Committee survey are pubUshed for the
first time in this article.

before becoming Federal Reserve directors and four bad held other positions or
offices in banks. Of this total of twenty-one, there were only three who did not own
some bank stock. Of the remaining fifteen who had never been directors or officers
of commercial banks, nine owned bank stock. Thus, out of thirty-six Class B
directors, thirty had some connection with banking.
Of the thirty-six Class C directors, all of whom responded, eighteen had
formerly been bank directors and two had held other bank positions. Of this
group of twenty, there were only three who had never owned bank stock. Out of
the remaining sixteen who had never been directors or officers, five had owned
bank stock at one time. Thus, out of the total of 108 directors in the twelve banks,
ninety-one are or have been connected with the private banking industry which
they have the responsibility to regulate.
The present Chairman, Mr. William McChesney Martin, Jr., is widely regarded
as sympathetic to the banking interests and is much respected by them.
Mr. Martin has won great respect as a man of ability and integrity; but there is
a very serious question whether he has the balanced view that should be the
sine qua non of public service with broad national responsibilities. He belongs
to the money world of New York and was, at one time, the president of the
New York Stock Exchange. In his testimony before the Joint Economic Commit­
tee on December 13, 1965, Mr. Martin stated that, in his conversation with
President Kennedy concerning the idea of making the Chairman of the Federal
Reserve Board “persona grata” to the President, he [Martin] “would undertake
to take that up with the American Bankers Association . to see if he could
get their support for it.” n The presence of Chairman Martin and of Alfred
Hayes, president of the New York Federal Reserve Bank, on the Open Market
Committee, along with the additional support received from the presence of the
presidents of the Chicago, Boston, and Philadelphia banks, guarantees the power­
ful New York banks ample protection.
It is important to recognize that the fundamental monetary powers of the
nation are exercised by the Open Market Committee which is made up, on the
record, of five Federal Reserve bank presidents and the seven members of the
Board. But, in actual fact, all twelve bank presidents participate in the delibera­
tions which, of course, are conducted in secrecy every three weeks. In this way,
the fundamental power for economic good and economic ill in our country is
exercised by a group currently identified with the banking community and
operating willfully and deliberately outside the ambit of the United States

Throughout the fifty-three years of its existence, there has been a struggle over
the control of the Federal Reserve System between the advocates of a publicspirited, impartial, able administration dedicated to the public interest and the
advocates of the special interests of the banks. There is no doubt that the bankers
have been winning the struggle and that the open market function has been the
basis of their control. This extra-legal power is so great that its exercise can
literally create prosperity or depression. The Open Market Committee maintains
a forty billion dollar portfolio of bonds, over which there is no outside control and
upon which the people of the United States are required to pay full interest, in
spite of the fact that the Federal Reserve Board has already paid for these bonds
with the people’s money.
Contrary to notions disseminated by spokesmen for the banking interests, this
state of affairs was never sanctioned by the Congress. It was deliberately engi­
neered by the banking interests and was aided by the inactivity of the Congress
which failed to take action as, step by step, the people’s control of their own
monetary powers was whittled away. Furthermore, the Federal Reserve System
has never been subjected to public audit or budgetary control like the other
agencies of government. Although it controls exclusively the forty billion dollar
portfolio which belongs to the Government, handles hundreds of billions of
dollars of the Government’s money, and exercises the Government’s power to
destroy soiled and damaged bills, the Federal Reserve System has become a power
unto itself. It decides its own budget without any congressional scrutiny and it
audits itself.
As passed in 1913, the Federal Reserve Act18 was never intended to set up
anything like the system that exists today. What the Act did was establish twelve
r. e°?nt Federal Reserve Action, supra note 6, pt. 1, at 167.
12 38 Stat. 251 (1913).

regional banks, each with autonomy in its own region and designed to operate
more or less automatically to provide a flexible supply of money and credit under
general supervision of a Board appointed by the United States President. There
was no central bank; President Wilson was opposed to the very concept of a
central bank. He also stressed the need for public control. When the Act was
under consideration in 1913, President Wilson said:
The control of the system of banking and of issue which our new laws
are to set up must be public, not private.
It must be vested in the
Government itself so that the banks may be the instruments, not the
masters, of business and of individual initiative and enterprise.1*
President Wilson was once approached by a group of bankers who desired to
assure themselves of control of the System while in its formulative stage. In a
circumspect way, they proposed the subject to him in his office. “Which of you
gentlemen would condone putting a Railroad President on the 1.0.0.?,” 14 asked
the President. There was an embarrassed silence, after which the delegation
walked out. They did not convince Woodrow Wilson, but they did achieve certain
compromises in the final legislation. One of them was the provision that six out
of the nine directors of each regional bank be chosen by the banking community.
It is this provision, more than any other, which has weakened the Federal Reserve
System and has allowed banking interests to dominate it, in spite of the fact
that its original legislative character contemplated twelve autonomous regional
When the Federal Reserve legislation was considered in 1913, the question
whether it should be a central bank or a system made up of twelve independent
regional banks was basic. The Aldrich Commission had proposed a system of
branch Reserve banks operating under the control of a central board of directors.15
Under this system, the branch banks would have carried out mechanical opera­
tions without any control over policy. Nelson Aldrich, the maternal grandfather
of Governor Rockefeller of New York, was a prominent New York banker. The
plan developed by him and his commission was a big-bankers’ dream and, thus,
it was opposed strenuously by President Wilson. Due to the vigorous efforts of
the President and of many legislators mindful of the public interest, the Aldrich
plan was rejected in favor of a system of semi-autonomous regional banks which
had the power to buy and sell bonds and notes of the United States and of States
and counties, to purchase and sell bills of exchange, and to establish discount
rates. The Board, which was appointed by the President, had certain supervisory
powers such as the right to review discount rates. The clear aim of the legisla­
tion’s sponsors was to “get the money market out of New York,” and that is one
reason the Aldrich plan was rejected.
At the time of its enactment and for a number of years thereafter, there was
no general awareness of the great power inherent in the open market function.
Gradually, several astute eastern bankers began to see the tremendous possibility
for power and control in exercising the open market function and, more impor­
tant to them, in centralizing it under the control of the New York bank. Andrew
Mellon, the Secretary of the Treasury from 1921 to 1932, Benjamin Strong, the
governor of the Federal Reserve Bank of New York from the time it was estab­
lished in 1914 until his death in 1928, and a number of others began a long quest
for power. It should also be pointed out that in 1921 the banks began to purchase
bonds in the open market, mainly to provide themselves with earning assets.
They paid for these bonds by simply increasing the reserves of banks. In other
words, they simply created the purchasing power. Although this had not been
intended by the Act, neither the Board nor the Congress recognized this usurpa­
tion and the practice expanded. Bach of the Reserve banks determined the amount
of its own purchases and bought as much as it felt it needed.
In the vital period between 1921 and 1932, the Federal Reserve System was
dominated by Andrew Mellon, Secretary of the Treasury. For, in those days, the
Treasury Secretary and the Comptroller of the Currency were members of the
Board and the former was the ex-officio chairman. Mellon was a representative
» 50 Cong. Rec. 4643 (1923) (Representative Carter Glass o f Virginia quoting President
W ilson).
m Bearings on recent Federal Reserve Action, supra note 6, pt. 1, at 167.
** In 1910 Congress created a National Monetary Commission to conduct a searching
examination into the nation’s monetary and banking structure. Senator Aldrich was Chairman of the Commission, and submitted the first report to Congress. S. Doc. No. 784. 61st
Cong., 3d Sess. (1911). Senator Aldrich retired from the Senate on March 3. 1911, but the
proposed plan was later submitted by Senator Burton. Although Senator Aldrich had
retired from the Senate, he continued as Chairman o f the Commission, and the final report
was submitted by him, S. Doc. No. 243, 62d Cong., 2d Sess. (1912).

of bie ixmiHno interests; and, in various ways, he and his associates saw to It
that the Board remained weak and under banker domination. He established a
nattern that has proved hard to change. Mellon took an immediate and violent
jifaHirn to the regional autonomy in the purchase of bonds. He took the position
that it interfered with Treasury efforts to purchase securities for government
a<w>T*nt« and he claimed that they were bidding against each other for lreasury
securities” a situation which one might expect to redound to the advantage of
the Treasury. Unfortunately, the Treasury Department does not have such a
delightful option today. Mellon, along with Benjamin Strong and a number of
stalwart allies, took the first step away from public control in a 1922 Palace
revolution which ended in the formation of an ad hoc committee of the presidents
of the five eastem-district Reserve tanks. The function of this conmittee of
governors” was to coordinate open markket operations. As Governor Strong of
the New York hynfc stated, “Nobody watches this market as closely as we do
if we do not do something they [the Federal Reserve Board] will. The Federal

•» i1"of
? eastern
* “ “ if
wWchclearly put the open market function in the hands
bankers, by
r^uUi«toat! tfthey did not do what he said, the Federal Reserve Board would
take control. Obviously, this was anathema to the banking community and was
sufSdent to frighten the regional banks into acquiescence. It is also a revealing
S t a i t b K Federal Reserve Board had failed at a vital juncture to
assert the power that the Congress gave it This deficiency in.initiativei furthered
the success of the eastern bankers toward their objective of constituting thems e lv ^ S t r a l bankwith the vital monetary powers of the nation to their hands.
When in 1923 the Federal Reserve Board, dominated by Andrew Mellon, failed
to take any action, the Committee of Governors started at once on a policy of
tiL S enC m o n e y and ralsing interest rates. Already it had become an extension
nfBenlamin Strong’s ego. In the short space of a year he prevailed against most
o f t o e o t h e r S o n a n t s in monopolizing the power not only to recommend purchases and sales but actually to control them and thus to dominate the monetary
EronCarter Glass, then Chairman of the House Banking and Currency
Committee who often showed great tolerance for the ambitions and powers of
the banking community, observed that ‘‘Strong is trying to dominate the Treasury
and the Federal Reserve Board.” 18 Strong and his associates beat down every
feeble effort of the Board to reassert its authority except for the relatively Hjinor
of>/>omnlishment in 1923 of changing the name of the committee and requiring
that it submit its actions to the Board for approval. However, the committee
retained the power of initiating policy and therefore preserved its control. Mean­
while Mellon muddied the waters by thundering against the confusion engen­
dered by local bank purchases. Although ostensibly shaking for a stronger Board,
he was really strengthening the hand of Benjamin Strong, the president of the
NeMeUonkabndStrong were the successful architects of the transformation of the
Federal Reserve System. It is clear that Congress intended to establish public
control over the System through the appointive Board and that the decentraliza­
tion in the form of regional banks was designed to nullify the monopolistic
of the New York money managers. Mellon and Strong, however, transformed the
nature of t h e to^tution through assuring “safe” control of the open market
function. They shrewdly left the discount provisions of the l a w , u n d e r which
regional banks discount debt paper for commercial banks to provide flexibility
for the credit system and to meet local needs, in the hands of the local banks.
They realized that the discounting function, which was paramount in the minds
of the founders, would decline steadily in importance as the scope of the open
^ A ^ a M a t t e r t h e arrogant domination by New York was not readily
accepted in the other sections of the country, and there was counter agitation
from time to time. Moreover, the Board, stimulated by this g ra ss roots dis­
content, o cca s io n a lly made feeble efforts to assert itself. Due to ^ p e rio d ic
ferment there was another revision in March 1930, resulting in the informal
formation of the open market policy conference to replace the open market
is chandler, Benjamin Strong, Central Banker 209-10 (1958).
w H ea rin g s 'Before the Subcommittee on Domestic
4? the Bouse Committee on
Banking and Currency, 88th Cong., 2d Sees., vol. 3, at 1986 (1964).

investment committee. This was done without any legal sanction. Ihe confer­
ence was made up of the heads of all twelve banks and, on the surface, gave
more weight to the various regions of the country. But in actuality, the functions
continued to be dominated by the New York bank. In the 1933 legislation, this
provision was enacted into law,20thus giving legal sanction to the idea of complete
control of the sovereign monetary powers of the people of the United States
by the banking interests. This legislation was reported by the House Banking
and Currency Committee without any hearings, and it slipped through without
a record vote after an intensive campaign by the American Bankers Association.
Representative Lemke of North Dakota summarized it as follows:
I can well understand why this bill was considered in executive ses­
sions by the committee, because, if my friends and colleagues, the gen­
tleman from Texas (Mr. Patman), the gentleman from Pennsylvania
(Mr. McFadden), and others had been permitted to take part in the
considerations, the bill would never have appeared on the floor of this
House in its present form—A bill of this kind could never have been
bom in the bright sunlight of day. It had to be born in executive session.
And now we are asked to vote, for it without knowing its contents and
without having had time to digest its far-reaching results.21
Actually, the 1933 Act was a step toward a central bank, but not a complete
one, because it was still possible for regional banks to refuse cooperation with
New York. It was the 1935 Act, discussed below, that converted the Federal
Reserve System from a twelve-bank regional system to a central bank, Marriner
Eccles, who became Chairman of the Federal Reserve Board in 1934, in discussing
the 1933 Federal Reserve Act Amendments, said:
Under easting law open-market operations must be initiated by a
committee consisting of representatives of the 12 Federal Reserve Banks,
that is, persons representing primarily local interests. They must be
submitted for approval or disapproval to the Federal Reserve Board,
and after they have been approved by the Federal Reserve Board, the
boards of directors of the Federal Reserve hanks have the power to
decide whether or not they wish to participate in the operations, we
have, therefore, on this vital matter a setup by which the body which
initiates the policies is not in a position to ratify them; and the body
which ratifies them is not in a position to initiate them or to insist on
their being carried out after they are ratified ; and still a third group
has the power to nullify policies that have been initiated and ratified
by the other two bodies. In this matter, therefore, which requires prompt
attention and immediate action and the responsibility for which should
be centralized so as to be inescapable, the existing law requires tbe
participation of 12 governors, 8 members of the Federal Reserve Board,
and 108 directors scattered all over the country before a policy can be
put into operation.8*
The struggle by the dominant eastern banking elements to set up a central
bank controlled by them in New York continued. As indicated above, a major
objective of the founders of the Federal Reserve System and m^st of the
bankers who participated in it was avoidance of the domination of the eastern
» The Federal Reserve Board became particularly^concerned with the easy money policy
initiated in 1927 by Governor (President) Strong o f the New York Federal Reserve Bank.
Because o f his close connections with the European central.banks, Strong]
that this policy was necessary to stop the continuous cold flow to the U.S. OonB^nentl^
the Open Market Investment Committee, under his domination, undertook a
of government securities in 1927. The disastrous consequences of this policy led the Federal
Reserve Board to attempt to assert its authority over the regulation of open market opera­
tions. As a result it established the Open Market Policy Conference to March 1930 to
replace the Open Market Investment Committee. The main purpose was to reduce the power
of the New York Bank by making the Board Chairman, Chairman o f the Conference and by
h rin fir all 12 banks representation.
, , ,
The Conference still remained “ extra-legal,” as there had never been any legislative pro­
vision for an open market committee, and this change took place without any legal action.
(Emphasis supplied.)
1 *>48 Stat. M (1933}, 12 U.S.C. I 263 (1964).
, _
a Hearings Before the Subcommittee on Domestic Finance o f the House Committee on
Banking and Currency, supra note 18, vol. 3, at 1992.
„ ^«
. . _. _
22 Hearings Before the Rouse Committee on H.R. 5S57, 74th Cong., 1st Sess.. at 181-82

bankers—the so-called New York Money Trust. But in spite of the fact that
the regional bankers and their representatives in Congress battled valiantly
over the years and put up strong resistance to the New York forces, they slowly
lost the fight. By the early 1930’s the trend of the struggle was apparent, and,
by the end of the World War II period, the battle was over. At the present time,
there is no doubt that the New York money market dominates the Federal
Reserve System. As was brought out in the December 1965 hearings of the Joint
Economic Committee in a colloquy between the author and Chairman Martin,
the President of the New York Federal Reserve bank dominates the open market
function, controls its employees, and has exclusive possession of the forty billion
dollar portfolio.2*
One aspect of this situation that should command the attention of students of
public law is the existence of an exclusive and limited group of bond dealers
who have a monopoly on the huge purchases and sales of government securities
conducted by the Open Market Committee. In this way, the twenty authorized
dealers are in possession of a double tollgate that permits them to collect com­
missions on every bond transaction of the Open Market Committee—both pur­
chases and sales. They get them coming in and going out, and neither the Con­
gress nor the people have the slightest idea how much profit these dealers make
from this exclusive franchise. The legality of channelling all of this public busi­
ness through an exclusive and restricted handful of large-scale operators is open
to serious question.
The dominance of the New York bank became obvious to all informed observers.
Carter Glass once reported that the English press regards the Federal Reserve
bank of New York as the central bank of the Federal Reserve System, with the
other eleven banks mere branches.*4
At the time of the 1933 legislation, advocates of bank domination began to
express concern about “political” control of the System. It was first raised in
connection with the feeble and partly successful efforts to give the Board some
role in the open market function by requiring its approval. This power was
exercised in a very timid fashion and had virtually no effect. This theme has
been repeated constantly and can be heard daily from the lips of Federal Reserve
officials and commercial bankers. The originally intended public role of the
Federal Reserve System has been reversed and replaced by the spurious doctrine
of nonpolitical control of the monetary powers. By this is meant banker con­
trol as opposed to public control in the public interest. This is like having
the geese guard the shelled com. Thus it has never failed to amaze this observer
to see how many people can ge duped by the notion that somehow the Government
would not run the Federal Reserve System properly and that the commercial
bankers would. The 1933 legislation also extended the terms of the six appointed
governors to twelve years and put them on a staggered basis, thus placing the
Board beyond the reach of the President and the administration. It was a great
victory for the banking interests.
Riding the crest of his overwhelming mandate in 1932, President Roosevelt
had determined that a substantial work-relief program was necessary to increase
employment and purchasing power and to help get the country back on its feet.
He was well aware that the Federal Reserve System would play a key role in
deciding what kind of reception would be accorded the government bond issues
that would be necessary to finance it. With good reason he was afraid that the
Federal Reserve banks might block his program by failing to take appropriate
action in the open market. In particular, he was afraid that they would try
to offset the stimulative effects of large-scale government spending by dumping
government bonds and shrinking the money supply. This situation was docu­
mented by Marriner Pedes, who for many years was Chairman of the Federal
Reserve Board *
To avoid this prospect President Roosevelt sent a reform bill to the Congress
which would have given authority for open market operations to an eight man
Federal Reserve Board, including the Secretary of the Treasury and the Comp­
troller of the Currency serving as ex-officio members. The Board members were
to be appointed by the President to fourteen year terms and were to consult with a
five-man advisory committee appointed by the Federal Reserve banks. The com­
mittee would not have any vote in the final determination of policy. Thus the

V$°*pt Federal Reserve Action. supra note 6, pt. 1, at 166.

* Ecrtes?B^kon°n!^rontlers>i!e e(1951)?1

System 120 (1965)'

proposals were designed to place full authority for open market operations in a
central board which represented the national interest
The bill, as introduced in the House by Congressman Steagall of Alabama,
differed from the Administration proposal in the composition of the committee.
SteagalFs bill provided for a Committee made up of the Chairman of the Board,
two members of the Board to be selected by the entire Board, and two Federal
Reserve Bank presidents selected by all the presidents of the Reserve banks*
In the hearings before the House Banking and Currency Committee, Marriner
Eccles stressed the desirability of placing final authority in the Board. He told
the Committee:
Open-market operations are the most important single instrument of
control over the volume and cost of credit in this country.
thority over these operations, which affect the welfare of the people as
a whole, must be vested in a body representing the national interest.*7
He critized the Steagall bill as follows:
The Federal Reserve Board, which is appointed by the President and
approved by the Senate for the purpose of having general responsibility
for the formulation of the monetary policies, would have to delegate
its principal function to a committee, on which members of the Board
would have a bare majority.*8
Eccles also quoted from President Wilson and other founders of the Federal
Reserve Act, clearly indicating the intention of the framers to assure Govern­
ment control of the System. After Eccles’ testimony, Congressman Steagall in­
troduced an amended bill which would have placed full responsibility for open
market operations in the Federal Reserve Board. In the debates that followed
on the floor of the House, there was very clear indication that the basic issue
was who would wield the monetary power—private banks or the elected govern­
ment of the United States. Symptomatic of the opinions of the proponents was
the following statement by Congressman Sisson:
I am heartily in favor of the main provisions of title II, which carry
out nearly in whole the recommendations made by Governor Eccles
to the Banking and Currency Committee, and in accordance with the
program initiated by the great leader of the American people, Franklin
D. Roosevelt, to give us a sound and adequate currency and to place the
control of the issue of money and the control of credit, which is at
least nine-tenths of our money, in the Government of the United States
rather than in the private bankers.**
Another comment, from Representative Hancock, is of interest:
[T]he heart of this bill, as I have just said, revolves around the
operations of the open market committee. , Every power provided for
in this bill exists today in the present law; but there is a transfer of
power to take the control of the volume and the cost of money from
private hands and place it in Government hands, where, in my opinion,
it should have been for the past 20 years.30
And finally, Representative Steagall himself made clear his own considered
judgment on the Act, saying:
After the Federal Reserve Board outlines policies, every Federal
Reserve bank will be required to carry out in full faith the plans and
policies declared by the Federal Reserve Board, as the servants of the
Government of the United States, speaking for all the people and not
for any private interest"
Unfortunately for the national welfare, the bill was badly weakened in the
Senate—partly, I regret to say, because of efforts of an old Mend, the late
senator Glass.
to the Committee on
” fd 0^tx81?820re
* /* . at 6720.

“*® Committee m H R-


supra note 22, at 101.

Carter Glass had been annoyed at President Roosevelt for ignoring him when
the President chose Eccles to be the new Chairman of the Federal Reserve Board.
As Chairman of the Subcommittee on Monetary Policy, Banking and Deposit
Insurance in the Senate at that time, Senator Glass challenged the philosophy
underlying the bill and solicited support from sympathetic economists and
bankers as witnesses before the Subcommittee. As a result of his efforts and
aided by the testimony of witnesses he produced, the Subcommittee amended the
provisions affecting the open market committee to include five Federal Reserve
bank representatives and seven members of the Board. This, of course, greatly
changed the original bill. It was passed by the Senate in the form proposed by
Glass and, in conference, the Senators were able to prevail. The conference bill
passed both Houses on August 19,1935.88
As a result, appointments to the Board were staggered over periods of from
two to fourteen years so that not more than one would expire in any two-year
period. The fourteen-year term remains in the present law. Moreover, the Chair­
man was selected from the members of the Board. When Chairman Martin’s
term expired during the administration of President Kennedy, the President
found his hands tied. He had no freedom of choice, being limited to the seven
members of the existing Board. A President who serves two full terms will not
have, under present law, the opportunity to appoint more than two members
in his first four years in office. The third would come in the first half of his
second term. Inasmuch as a recent amendment to the Constitution limits a
President to two terms, the law virtually denies him any opportunity to control
the Board through appointments. The net result is that he is controlled by his
predecessors’ choices and his selections control his successor.
To sum up the history of deliberations on the vital question of control of the
open market committee, the original bill would have drastically revised the open
market committee which, because of its control of the monetary system, is one
of the most powerful economic forces in the world. The House bill would have
placed this important function exclusively in the Federal Reserve Board, which
is appointed by the President and confirmed by the Senate, and it would have
relegated the committee of bank presidents to a supervisory role. This House
bill passed, 262 to 110, on a record vote. However, the Senate-passed bill favored
the bankers’ position, and it was this substitute measure that passed in House
and Senate without a record vote.
In addition to diluting the possibility of Board control of the open market
activities, the bill eliminated any possibility of day-to-day Administration con­
tact with the Board by eliminating the Secretary of the Treasury and the Comp­
troller of the Currency from its membership. Moreover, it was not long before
all twelve Reserve Bank presidents began to attend the open market committee
meetings. While only five could vote, all could participate freely in the discussion
and in shaping the consensus of the meeting which was generally summed up
for the record, in any case, by the Chairman. In this way, the Reserve Bank
presidents, under the leadership of the New York Federal Reserve Bank, are
able to exercise a dominance on the committee.
The Administration’s efforts to strengthen the public control of the Board
suffered a defeat in 1935 and, as a result, the Board and the open market func­
tion were further removed from Administration control and influence. In addi­
tion to the 1935 legislation, subsequent developments have strengthened the
control of the System by the banking community.88 The president of the New
York bank, for example, was made a permanent member of the Open Market
Committee in 1942. This appointment became effective on March 1, 1943. Thus,
the New York bank now conducts the open market operation in its entirety. The
32 H.R. 7617 was reported from the House Banking and Currency Committee on April 19,

1 985 , ,H.R. Rep. No. 742. It passed the House May 9, 1935. by a record vote o f 271 yeas to

110 nays. On May 10,1935, the bill was introduced in the Senate and referred to the Senate
Committee on Banking and Currency. 79 Cong. Rec. 7281 (1935). It was reported favorably
bv Chairman Glass on July 2, 1935, with an amendment. 79 Con*. Rec. 10588 (1935). The
amendment changed the Open Market Committee provisions of the bill to include not only
the Board o f Governors, but also five representatives o f the Federal Reserve banks which
in the House bill were to act in an advisory capacity only. On July 26, 1935, the bill, with
the Federal Open Market Committee amendment intact, was passed by a voice vote. 79
Cong. Rec. 11935 (1935). On August 19, 1935, the Conference Report, which included the
Senate provision, was agreed to by a voice vote in both Houses. 79 Cong. Rec. 13711, 13655
^ a s r ie Voting Record. On September 18,1913, the Federal Reserve Act was passed by the
House with only two Democrats voting against it while 248 voted for it. On the other nand,
eighty-one Republicans voted against it with only twenty-five voting for it. 50 Cong. Rec.
5129 (1913). In the Senate, forty-seven Democrats voted for it with none voting against i t ;
thirty-four Republicans voted against it with only six voting for it. 51 Cong. Rec. 1230
(1913). It will be recalled that Aldrich, a leading New York banker, and other representa­
tives o f the large banks had proposed a system that was completely independent o f the

eleven other banks conduct no open market activities; they are mere service
centers for check-clearing and similar functions. They do not even know their
condition until the New York bank sends them a telegram to advise them: It is
the New York bank which assigns to the other eleven banks their shares of the
portfolio of government bonds held by the Committee. These bonds, of course,
are the basis for the earnings of the various banks. Detailed questioning of the
bank presidents during the 1964 hearings held by the Banking and Currency
Committee revealed that most of the bank presidents did not even know how
the allocation of the portfolio or its income is determined. For this function is
handled completely in New York, and the other eleven banks are merely passive
recipients.34 This practice is particularly indicative inasmuch a,s the original
Federal Reserve Act did not mention the New York bank. Instead, it contem­
plated taking the money market out of New York and decentralizing it to the
twelve regional banks, the sole overall coordination coming from Washington.
These developments in the history of the Federal Reserve System, all of
which were made possible by the inaction or indifference of the Congress, placed
the Federal Reserve System well beyond the reach of the people and thoir elected
Representatives. It became an autocracy and it has so remained. This trans­
formation to autocracy was accomplished through a number of steps which
looked small or harmless to most people at the time. But each step led eventually
to the control of the central bank by private commercial banks. As indicated
above, it was the clear intention of the founders that the System be run by
public officials and completely in the public interest.83 But the Vaniiin? coinGovernment. Consequently, there was fear that the final version o f the Act, moderate as
it was, might be too effective in reducing banker control. In the vote on tlie Conference
report in the House 248 Democrats voted for the bill with only two against it while forty
Republicans voted for it with fifty-eight against it. 51 Cong. Rec. 1464 (191?,). In the
Senate, thirty-eight Democrats voted for the Conference Report with none voting against
it. On the other hand, twenty-five Republicans voted against the bill with only three voting
for it. 51 Con. Rec. 1488 (1913).
The 1935 legislation evidenced a similar voting pattern. House bill, H.R. 7617, which
would have vested the open market function in the Board and therefore kept it more closely
under public control, was passed by a vote of 271 to 110. Two hundred ana sixty-two Demo­
crats voted for it, and eleven against it. Only three Republicans voted for it, and nine tv-six
were against it. 79 Cong. Rec. 7270 (1935). However, the bill was changed in the Senate
in order to bring the Reserve bank presidents back into the open market picture, and this
version stayed in the Conference report. With these added assurances o f continued banker
influence in the system, the Republicans no longer opposed the bill and, when the Conference
report came before the Senate, only three voted against it. 79 Cong. Rec. 13655 (1935). It
is also of interest to note that the House Joint Resolution, H.J. Res. 27. passed by the
Eightieth Congress and which later became the Twenty-Second Amendment to the Consti­
tution had overwhelming Republican support. One o f the effects o f this legislation
was to further insulate the Board members from presidential control. As indicated elsewhere
in this article, a President must stay in office for two terms before his influence will be felt
by the Board. The vote on this resolution in the .House on February 6, 1947, showed 238
Republicans as opposed to forty-seven Democrats for the bill. One hundred and twenty-one
Democrats voted against it without a single Republican dissent. 79 Cong. Rec. 872 (1947).
A month later in the Senate, forty-six Republicans and thirteen Democrats voted for the
bill. Twenty-three Democrats voted against it, and, again, not one Republican voted against
it. 93 Cong. Rec. 1978 (1947). The proposals suggested in this article will probably arouse
similar opposition from the Republicans in the Congress.
» The strength of the New York Bank president's position is further indicated by the
powers granted to him by the Federal Reserve Act.
[A ] Federal Reserve bank shall have power . . . to appoint by its board of directors a
president, vice presidents, and such officers and employees as are not otherwise provided
for in this Chapter. . . . The president shall be the chief executive officer of the bank and
shall be appointed by the board o f directors, with the approval o f the Board of Governors
o f the Federal Reserve System, for a term o f five years; and all other executive officers and
all employees o f the bank shall be directly responsible to him. (Emphasis supplied.)
12 U.S.C. $ 341 (1964). Thus, the president o f the New York Bank maintains a command­
ing position in the Federal Reserve System.
» The.following quotations from the House and Senate debates on the original Federal
Reserve Act provide further documentation o f the intention o f Congress in establishing
the System:
Mr. Glass (Dem., Va.) quoting President W ilson :
And the control of the system o f banking and o f issue which our new laws are to set
up must be public, not private, must be vested in the Government itself, so that the
banks may be the instruments, not th e masters, of business and o f individual enterprise
and initiative. 50 Cong. Rec. 4643 (1913).
Mr; Glass (Dem., Va.) :
The danger which the banking community professes to see is not the real danger
which I apprehend. The bankers seem to fear that men o f their craft will be excluded;
but the real peril o f the provision is the possibility o f too many bankers being included.
50 Cong. Rec. 4645 (1913)*
Mr. Korbfy (Dem., Ind.) :
We have created these 12 banks, partly in control of bankers, in conjunction with
Government officers, and then we have practically put these 12 banks under the control
o f the Federal reserve board, which is altogether a Government office, and wenronose
that this board shaU see to it that the prescriptions o f Congress shaU be obeyed. 50
Cong. Rec. 4663 (1913).
Mr. Murdock (Progressive, Kansas) :
The measure places the central conventional control of reserve banks in the hands
o f the Government, a proposition which the bankers themselves very strenuously op( Continued)

munity has never accei>ted this principle and, today, while the tide of battle
has varied, the private banking community clearly has the upper hand.
Throughout the 1920’s, these differences were acute. In the course of the 1935
revisions, there were a number of eloquent exhortations by Senator Borah,
(COnpw2d^nntn a guardian advisory committee of bankers was added to the centra
®®(WUaMWo^wwaiened the original proposition, but as the amended governmental
control stands, even though it prove feebly fonnal, it carries the promise o f the ulti­
mate actual control by the Government, and this promise alone warrants a supporting
vote o f the whole measure. 50 Cong. Rec. 4664 (1913).

^ r* ^phe^supreme oversight and control o f the whole system,however, is
representing the public. Thus the bill renders unto the bankers what is the bankers,
but positively and definitely secures to the public what belongs to the public. 50 Cong
Rec. 4673-4 ( 9 l » ) .
^ r* Either*th?control o f credits and money m ust b etu rn edover to the banker or it must
be retained in the hands o f the people o f the United States and their representatives.
The Glass bill does not make the national reserve board a corporation. It is simply a
board o f public officials similar to the Interstate Commerce Commission or any other
governmental agency through which the people exercise administrative control. 60
Cong. Rec. 4731 (1913).
Mr* ^ r o n ? t o s a y to you, gentlemen, that the people want the Government to control the
banks under this bfil, irat the special-privilege crowd are all exceedingly anxious that
the banking fraterSfty shouldI control the board. I standJfor the rights of the People
o f this country, and I am voting fo r them to control through the President and the
Senate, fo r the people in the final analysis are financially responsible for every doHar
of this currency. 50 Cong. Rec. 4763 (1913).

W ^ S v e ^ a c S ^ t h e palling o f the ways in this legislation. We must either give the
power to regulate our financial system to priva tea n d special interests or else we
must confine it exclusively to governmental supervision and discretion. The Demo­
cratic Party will never permit this great function to be exercised through other than
overnmental agencies. On this declaration it stands fearless and unafraid. 50 Cong,
ec. 4708 (1913).k


^ S ^ J a ln S S i! we near much criticism from the Republican side o f this House and
from some o f the larger bankers o f the country because it p ro v id e s fo r a Federal
reserve board, to be appointed by the President o f the United States. Those who have
criticized this provision o f the bill upon this floor and elsewhere c la im to fe a r th a t by
reason o f the fact that this board shall be appointed by the President, It will therefore
be a political board and may use its great powers for political purposes.
IThere Is not a governmental function with which we have to do today that is not
a poUtical function. There is not an act o f Congress, nor an order of the executive
department, nor a decision o f the courts, from the smallest to the highest, that is not a

Government to be performed that Is not a political function.
Mr. Hayes. “ Mr. Chairman, w ill the gentleman yield?*
The Chairman. “ Does the gentleman yield?**
Mr Barkley "Yes **
Mr! Hayes. “ I would like to ask the gentleman If he claims that aU o f the powers of
the Government are exercised as a matter o f partisan politics?”
Mr. Barkley: “ No, s ir ; I do not. And that Is where the gentleman fails to distin­
guish between the terms *polltlcal* and p a r t is a n /”
Mr. Hayes. “ I would like for the gentleman to distinguish between ‘partisan* and
^ B frJ^ark ley: “ I appreciate that difference. That is where the critics make their
mistake. They take It fo r granted they are the same, which is largely true o f the
so-called Republican Party.*
“ The President does not control the action If the reserve board after they are
appointed any more than he controls the action o f the Interstate Commerce Commis­
sion after he appoints its members.** 50 Cong. Rec. 4789 (1913).
Mr. Helvering (Dem., K a n sa s):
The issue and control o f money Is too Intimately connected with the welfare o f every
Inhabitant o f the United States to leave it in private hands, and while the banker is a
most important cog In the economic life o f the Nation, yet his powers are so great
and his opportunities for good or evil so many that it is absolutely necessary that he
should be the servant o f the Government In dealing with the people instead of a
separate and Independent entity. 50 Cong. Rec. 4800 (1913).
Mr. Collier (Dem., Buss.) .
One o f the most serious objections to the Aldrich plan o f currency reform was that
It contemplated placing this control In the hands ox the bankers themselves. I would
never agree to support such a proposition. I would never be willing to place this
power, this control, In the hands o f the bankers or the lawyers or the merchants or
any other set o f men. Human nature Is too strong In the best o f us to permit such
power to be vested In private hands. This power should properly be placed under the
control o f the Government Itself— under the control o f a Government placed Into
power by the ballots o f the American people and responsive to the will o f that people.
50 Cong. Rec. 4805 (1913).
Mr. Gray (Dem., Ind.) : “ I believe that the issue o f money and its control and distribu­
tion is a vital public function which should be exercised only by the people themselves
through the Instrumentality o f government.** 50 Cong. Rec. 4821 (1913).
Mr. Graham (Dem.. 111.) :
The ordinary banker devotes very little o f his time to a study o f financial system.
He devotes himself rather to the Immediate management o f his bank, such as deter-

Senator LaFollette, Senator Thomas, Representative Goldsborough, and a host
of other prominent public figures, pleading for public control of our monetary
system.8* These men were concerned basically with one thing Congress had not
mining the soundness o f the paper he discounts, the character o f the loans and invest*
ments made for the bank, and all that. In fact, he is so dose to this part o f the field
that it is quite difficult for him to have a clear and disinterested view o f the entire
field. 50 Cong. Rec. 4843 (1913).
Mr. Neeley (Dem., Kans.) :
. . . . .
The failure o f this plan would be directly charged to the administration in power,
and justly so. Therefore in instaUing it and in its future ministrations, no matter
what political party may be in power, it should be directed by those who are in sym­
pathy with the administration charged with the responsibility of its proper conduct.
50 Cong. Rec. 4845 (1913).
Mr. Wilson (Dem., F la .) :
,a A
Objection is made by the opposition to this bill, claiming it would give the President
too much power in appointing the Federal reserve board. The bill provides these
appointments shall be made with the advice and consent o f the Senate. They also
claim this board would be under political control. Political control is governmental
control. Who constitutes the Government in this country? The People. D o you want
to deny the people the right to govern themselves? 50 Cong. Rec. 4855 (1913).
Mr. Gray (Dem.. Ind.) :
Money is the most vital o f all public agencies, and as such vital public agency it
should be held in the full and complete control of the public, all the people— its issue,
volume, and its distribution, to insure its availability to all the people equally and
impartially for their use. Such a public function should never rest in the control o f
private or selfish interests, to be made the subject of monopoly and concentration into
the hands o f a few. The provisions of the Glass bill place such control where it prop­
erly belongs— in the Government— to be administered by the sworn and chosen repre­
sentatives o f the people.
The unrestricted power to issue money carries with it the power to control the
volume o f currency, and thereby the power to fix prices o f all products, commodities,
services, and property, and o f all values as measured in money. To surrender this
power to private control would be to surrender the most potent and vital authority o f
the Government— the control o f money and the virtual control of the welfare of the
Give me the absolute power to control the volume o f money and I will control the
destinies o f this Nation more fully and completely than the exercise of arbitrary power
by a czar. . . .
This House is under political control, the Senate is under political control, the
Executive is under political control. . . .
Political control means the rule of the people, and it has terrors only for those who
are afraid o f and recoil from the rule of the people. 50 Con. Rec. 5038 (1913).
Mr. Brown (Dem., W. Va.) : “ Under the proposed system, however, the appointees on the
Federal reserve board must be confirmed by the Senate, ana the majority o f the board must
retire when a new President is elected. In this way the people have the power to ratify or
reverse the policy o f any administration at the end o f every four years.” 50 Cong. Rec.
5107 (1913).
Mr. Underwood (Dem.. Ala.) .
The rock on which our friends on the Republican side have broken when they
attempted to pass their monetary legislation through this House in the last 16 years has
been the fact that they have attempted to put the control o f the system that they
advocated in the hands o f the men who loan the money and not in the hands o f the
representatives o f the people who borrow the money. 50 Cong. Rec. 14*59 (1913).
Mr. Reed (Dem., Mo.) :
The banks have contended that they are entitled to be represented upon the Federal
reserve board. I utterly deny it. They are on one side of the table; the Government
of the United States, representing the people o f the country, is upon the other. The
bankers represent those who demand, who ask, rights from the Government. They
come to the Federal reserve board making their demands and proffering their requests.
No man should sit upon that board unless he represents the people o f the United
States— the people o f the United States alone—for it is their money and their credit
which is to be granted. 51 Cone. Rec. 179 (1914).
Mr. Weeks (Repub., Mass.) : “ And the control o f the system of banking and o f issue
which our new laws are to set up must be public, not private, must be vested in the Government itself, so that the banks may be the instruments, not the masters, o f business and
o f individual enterprise and initiative.” 51 Cong. Rec. 538 (1914).
Mr. Hollis (Dem., N.H.) : “ But the Federal reserve board should represent the Govern­
ment solely. They should control broad questions o f policy concerning which individual
interests might tend to favoritism and abuse.” 51 Cong. Rec. 783 (1914).
Mr. Borah (Repub., Idaho) :
It cannot adjust itself to an industrial life grounded in inequality; it cannot be
fitted to m onopoly: though strong enough to destroy, it can never be powerful enough
to regulate monopoly. These things we ought to realize and cease our efforts to adjust
our Government to the centralizing, monopolizing tendencies of business and compel
business to adjust itself to the fundamental principles of democracy. This Government
should assert its power and exert its prerogatives, and nowhere is it more essential
and vital that it do so, than in the complete regulation and control o f the money
and currency o f its people. Everything that performs the functions o f money, whether
technically money or not. should come under this control. 51 Cong. Rec. 1071-2 (1914).
Mr. Norris (Repub., N eb r.): “ I did believe, and do believe, that the banking and cur­
rency system and the banks organized under the system ought to be under Government
control.**Jtt Cong. Rec. 1136 (1914).
88 Mr. Borah (Repub., Id a h o ): “ To regulate the value o f money is the function o f the
Government by the express terms o f the Constitution. It ought not to be delegated to pri­
vate interests.” 79 Cong. Rec. 11909 (1935).
Mr. LaFollette (Progressive, Wise.)
[TJitle II does not go as far as I believe it should. It is my firm conviction that we
must have a complete control o f credit and monetary policies in the public inter(Continued)

realized in 1913, the immense potential of the monetary power. They did not
.realize a central bank could control the money supply and influence the entire
spectrum of interest rates through its absolute control of the reserves of the
banking system. This was not realized until long after 1913. Eventually, how­
ever, it became apparent that the central banking function was the most con­
centrated, single economic power in modem society; and that, in a democracy,
it must be employed for the social good, kept under complete public control, and
completely coordinated with the other broad economic policies of the Govern­
ment. Nevertheless, the 1935 Act made a central bank out of the Federal Reserve
System, further removing the System from public direction and control.
It is ridiculous for the President of the United States to be overruled by the
Federal Reserve Board without any preliminary advice and to be forced to resort
to the forum of public opinion to try to keep an arrogant central bank in line. It
is an absurd and dangerous situation. The proponents of private control have
cynically distorted the basic reasoning behind the Act. They persist in arguing,
as Mr. Martin has done even before the Banking Committees of the Congress,
that the Federal Reserve System must be protected from political control. In
effect, the System must be left in private hands, beyond the reach of the elected
representatives of the people. It is perfectly legitimate, they argue,.that the
vital powers of taxation and the issues of war and peace remain m the hands
of the elected representatives, but not the monetary powers. And this they
argue in spite of the clear constitutional mandate vesting the monetary powers
in the Congress.
- . ..
It is inevitable that the Federal Reserve System will necessarily reflect the
bias of the people who control and dominate it. Interest rates are the bankers in­
come ; and the higher the interest rates, the more the lender receives. Bankers live
^Cone»t” Tl? . I find myself in complete disagreement, therefore, with the
of the Senate committee that the banker representation uponthe open
tee should have full and equal power, so far as
w*th the members o f the newly constituted board. 79 Cong. Rec. 11914 (1935).

Mr' ^bsiiwestDt^"a2ri«ibmty of rongresslonal legislation

it should be, in my judgment, the Federal Reserve Board to wgulate the value o f the
dollar. Today it is being regulated by influences outside of ttie public
Judgment the value of the dollar is being regulated by the Federal R ese^ e B a ^ of
New York City. It is my purpose to get that power out
Ba? i
o f New York City and into some federally owned and controlled institution.
Cong. Rec. 11925 (1935K
>Tr. G oW sboro^h <£ e m .^ d - themselves practically control the
country, and this [the open market provisions] changes all that. That is what^ this
racket is about, that is whv the subsidized press tells us that there is something
wrong with the bill. They call it a political bill. They say that we are setting up a
POI t 1is lexact?y the opposite. . . . Now it is the Governors of the Federal Reserve
Banks who control the open market policies o f the Federal Reserve B a n k s. This bill
places their open market policies under the control o f a n independent boaw . ttie
Federal Reserve Board, which is not dependent at all upon the banks. 79 Cong. Kec.
6053 (1935).
Mr. Martin (Dem., Colo.)
. . .
, . ,
That the monetary system o f the country has been privately.
benefit o f the banking system o f the country and not in the interest of the people frpiv
erally. I believe the time has come to curb that system and that it would be nothmg
than a hollow gesture to pass a law here that would still leave the same control
in the banks over the money and the credit of the country that has existed up to this
time and that exists now. 79 Cong. Rec. 6733 (1935).
Mr. Ford (Dem., Cal.)
... . . .
What this bill aims to accomplish is to give back to Congress its constitutional
function to “ coin money and regulate the valne thereof.” This function was long n.,o
surrendered to the privately owned banks and has been tenaciously held by them to
the detriment o f the people.
^ .
„ . 1U * „
Prfor to the creation o f the Federal Reserve System, the responsibility for the
^nonet.nry and credit policies of the Nation was in the hands of a powerful grcmp of
New York banks. The reserves of the entire Nation, through the correspondent sys
tern then in vogue, were in the hands of this powerful group.
__ _ .
If was this Money Trust
which made apparent the necessity for the Federal

On':, of^the shortcomings of the set was. that it left in the hands o f the Federal
■Reserve banks the control of open-market operations, one o f the most, powerful or the
l«ver* for the control o f monetary and credit policy. The bill before us
. iredy this defect by placing the control o f open-market operations in the hands of
the Federal Reserve Board. 79 Cong. Rec. 6802 (1935).
, _ ..
Ser generally. Hearings B efore the Subcommittee on General Credit Control axa Tfc-tt
.. ..*ment o f the Joint Economic Committee, 79th Cong.. 2d Sess., Vol. 1, 86-S7 (19.>-) ,
tlearbips Before the Subcommittee on Domestic Finance of the House Committee an Fan ir; Currency, supra note 18, vol. 1, at 536-37. 693: Hearings Before the Jotnt conow? Committee on the January 1965 Economic Report of the President, supra note 4,
pt X it 46.

on debt. If there is no debt, there is no money, no interest, and no income.
Bankers want only high-grade, low-risk debt paper, especially government bonds.
In fact, the one thing they do not want is Government reduction of the public
^Professor John Kenneth Galbraith, testifying before the Joint Economic Com­
mittee on February 24,1965, stated that “it is hard to recall any occasion when
the Federal Reserve was known to be agitating for lower interest.
. We have
come to envisage the Open Market Committee as a group of men of excellent
character and reassuring demeanor who meet to consider whether there is good
reason for tighter money.”88 Professor Emeritus Seymour Harris, testifying on
the same day, stated:
Financial groups seem to believe that the higher the price of their
product, the more profits. They exercised excessive influence in th 1950’s
when long-term rates rose by two-thirds. But, in my opinion, they will do
better with lower rates. Their attitude toward restrictive monetary policy
since 1961 only strengthens the case for the exclusion of the Federal
Reserve bank presidents from the Open Market Committee.
Both of these eminent economists again testified publicly in December 1965 on
the issue of the Federal Reserve Board’s raising the discount rate.40
The type of quasi-private exercise of public power manifested in the Federal
Reserve System is completely improper in a modern democracy. History indicates
the control of monetary power by private groups has had adverse consequences
for mankind. It is most unsound and actually dangerous for us in the United
States to permit the volume of money and the level of interest rates—the two
as Hearings Before the Joint Economic Committee on the January 1965 Economic
Report of the President, supra note 4, pt. *, at 11.
40 p r0f. John Kenneth Galbraith, December 15,1965 :
_ .
And this problem [coirdination o f economic policy] can be solved very simply by
jrivinjr the ultimate authority to the President o f the United States, where it belongs.
The point I am making is that . . the ultimate responsibility— lies with the Sec­
retary o f the Treasury, Council of Economic Advisers, Bureau o f the Budget, and,
also, ‘with the Federal Reserve. If the system o f economic management which we have
then allows six members of the Federal Reserve who have not attended these meetings,
have not participated in this discussion to exercise arbitrary independent power to
overthrow the decisions reached by the previous group, this is a very poor form if
coordination. It is indefensible. Hearings on recent Federal Reserve Action, supra
note 6, pt. II at 831.
The world in which the Federal Reserve System was born, apart from some romantic
echoes in the rescripts of the modern conservatives as they are called, is now gone and
. The Government now acts to insure expanding output and stable prices.
The central bank plays a subordinate but integral role in this policy. To such coordi­
nated management . . we owe the steady expansion and the steady prices o f the last
five vears. . . The imperatives of coordinated economic administration have required
all countries to bring their central banks fully under government control. . . Most
Americans regard successful management of the economy as an imperative. They do
not react well to unemployment, depression or stagnation. The right o f the Federal
Reserve to independent action has survived only because it has not interfered with
that management— because it has not been used.
Hearings on recent Federal
Reserve Action, supra note 6. pt. II at 308-09.
I do not wish to be unfair to these excellent and indispensable gentlemen [the
bankers]. Perhaps they have persuaded themselves that the money is, in their case,
unimportant. But it should be observed that an increase in interest rates is the only
form o f inflation control that ever appeals to the financial spokesman. Increased taxa­
tion is not urged. Tlie wage and price guideposts evoke no applause. And also, alas,
one must notice that the stock market did not misunderstand the recent increase in
interest rates. It prompted mark ups of banks* stocks on the over the counter market.
If I am wrong, if the banks are only interested in higher interest rates for their
public benefit, these capital gains must be most embarrassing. Hearings on recent
Fe*h ral Reserve Action, supra note 6, pt. II at 313.
Prof. Seymour Harris, December 16,1965 :
Federal Reserve independence is an insane idea. Even in less troubled times, it is
folly to allow the Federal Reserve to run in one direction and the Executive in another.
1 have never liad much sympathy with the theory of independence. Particularly in
these troubled times the Government certainly should not move in one direction and
tin monetary authority in another. The latter has every right to push its views before
Government decides on a policy. But once the decision is made monetary policy must
be au instrument of Government policy, not a barrier to its achievement.
Who wairn higher rates here ? Primarily European bankers because they are unwill­
ing or unable to control their inflation: and American bankers who want higher prices
for ‘•heir product, and more profits. But the banking system and the Fed should serve
th. public not the banks Hearings on recent Federal Reserve Action, supra note 0.
II it :;3<; -57.
A; for Th* American bankers, they are simply interested in raising the price of the
Ik>v -ell. Their profits are high and rising; but they want market forces.
v r
from the Fed.
raise their profit** even more. Somehow they do not
seen. ;c realize that a high money rate will reduce the national product and hene*
:-v'*n nt higher prices cut into banker*:* profits. Hearings on recent Federal Reserve
*cfor, - i>rc note 6, pt. II at 359.

basic determinants of our economic destiny—to remain under the control of an
institution which is independent from the executive branch and from the Con­
gress, and which is oriented toward the banking community. The welfare of the
nation is at the mercy of a group which is beyond public control and which
openly boasts of it. In fact, it asserts that the people, through their elected rep­
resentatives, cannot be trusted to exercise their own monetary powers, in spite
of the fact that the Constitution vests these money powers in the Congress of the
United States.41 This is not simply a question of proper government structure.
The country has paid a high economic price for permitting the Federal Reserve
System to control our money supply independently of the United States Govern­
ment It is a fact of economic life that the creation and the management of
money are prime determinants of employment, wages, prices, indeed, of the
prosperity and well being of the entire nation. Indirectly, these powers affect
the deficits, the debt, and the interest burden of the federal government, as well
as those of every governmental unit in the nation.
It was the Employment Act of 1940, with which the author was intimately
acquainted, that set forth the basic economic objectives of our society—maximum
production, purchasing power, and employment. The present Chairman, Mr. Mar­
tin, recognizes the mandate of this Act. It was his interpretation that the Em­
ployment Act gives him the power to take such action as he thinks desirable to
promote maximum production or stability, as the case may be. The following
colloquy from the 1957 Hearings of the House Banking and Currency Committee
on the Financial Institutions Act of 1957 is very interesting in this regard:
The Chairman: When we delegate power to an agency, without any
standards or limitations or definitions or restrictions, it is a legislative
power that we delegate.
Mr. Martin: That is what I conceive. *
The Chairman: We have delegated that to the Federal Reserve.
Mr. Martin: That is correct, sir.
The Chairman: Without restrictions or standards.
Mr. Martin: Oh, yes, indeed.
The Chairman: We might delegate power with standards, and within
the scope of the power delegated to the Board, it would have great
freedom of action.
Do you think it would be feasible and practical to legislate for the
Federal Reserve Board certain objectives which they are to attain?
Mr. Martin: Well, I think they have said to us that we are to attain
certain objectives. I think the Employment Act of 1946, to which I
subscribe, gives us certain objectives—maximum production, maximum
purchasing power. I think we have got to do everything we can, use the
resources of the Government to attain those ends.
The Chairman: Do you think you could attain a uniform price level, a
stable interest rate?
Mr. Martin: I don’t think you can do it precisely, but yes, sir, I think
that it is possible to have price stability if you have competition in the
economy and you have reasonable restraint on the part of businesses and
individuals, and you reduce spending and increase saving, when it is in
imbalance that way, or the reverse—when it is in imbalance the other
way—I believe it is quite possible to attain those objectives. I accept the
objectives that we are trying to reach, and the point I have constantly
made is that under present conditions the only way we can hope to at­
tain the objectives of the Employment Act is by resisting inflation, and
by resisting inflation, I mean dealing with this problem of the cost of
living, which for eight successive months has risen, and I think it is
something that has to concern all of us.42
Chairman Martin has chosen to intrepret the Act as empowering him to take*
whatever monetary action he judges desirable to obtain the objectives of the Act
as he interprets them. But this is not the proper interpretation. As indicated
above, monetary policy has been coordinated with the general economic policy of
the nation.
Tight money is closely related to a high interest rate; and, when money gets
too tight, the economy slumps. This nation suffered three recessions in the decade
41 U.S. Const, art. I, § 8.
42 Hearings Before the House Committee on Banking and Currency, 85th Cons., 1st.
Sess., pt. I, 68-60 (1957).

of the 1950’s, each of which was preceded by a deliberate tightening of money
and raising of interest rates. It is important to note that under our system, the
final stage in the creation of money is performed by commercial banks when they
lend to borrowers. In this way, the money supply is tied to the creation of debt.
Obviously, when people have to pay too high a price to borrow, they reduce their
business operations and forego previously planned expansion. This results in
lower spending and lower production; employment falls and deficits rise at all
levels of government. The overall result is that economic growth is stunted. The
only people who benefit from tighter money and higher interest rates are bankers.
Interest rates, after all, represent their income, and it is not strange that they
wish to take in as much income as possible.
Unfortunately, we have permitted the banking community to control our basic
monetary policies. When we consider that banking is not as competitive as other
industries and that it is, moreover, threatened by a virulent merger movement,
it becomes clear that the oversights of the Congress have permitted an autocracy
to develop and flourish.
It is striking to examine the rise in interest rates in the past fifteen years since
the Federal Reserve Board asserted its independence by refusing to cooperate with
the Treasury in supporting the government bond market. In this period, interest
rates on long-term government bonds have more than doubled and the annual
burden of the national debt to the taxpayers has risen from about six billion
dollars to twelve billion dollars. Interest rates on short-term obligations of the
United States have sky-rocketed from one-eighth of one percent during the
height of World War II to four percent today, practically as high as the interest
on long-term bonds. As a result of this increase, the Government now has to pay
thirty-two dollars in interest for every one dollar it would have paid under World
War II rates. The yield on long-term United States bonds at the time of writing
is four and forty-five hundredths percent, dangerously beyond the statutory ceil­
ing 48which has been in effect for almost fifty years.

On December 5, 1965, the Chairman and a majority of the Federal Reserve
Board openly defied the President of the United States and raised the discount
rate, thereby triggering a general rise in interest rates. This occurred at the very
time when the President and the Secretary of the Treasury were taking great
pains to make it clear that they were pursuing a policy of price and interest rate
stability in order to keep the economy on the prosperous course that had prevailed
for the preceding five years. This event illustrates the manner in which the Fed­
eral Reserve Board can force the hand of the President and of the Congress,
and shape the structure of our economy to suit itself. If there were, in fact, any
danger of inflation, it could have been countered in any one of several ways: by
Taising taxes, by reducing government expenditures, or by tightening money. When
the Board tightened the money supply, it cut down the options available to the
elected Government of the United States. Many observers overlooked the exten­
sive nature of the Board’s action. The increase, however, from four percent to
five and one-half percent on thirty to ninety day paper is a rise of thirty-seven
and one-half percent. These increases result in millions of unbalanced famiy
budgets. This distressing situation is the fault of the Congress. It is the failure
of Congress to exercise its responsibilities in the field of money that has permitted
the bankers to control the fundamentals of our money system.

At the beginning of the 89th Congress, the Omnibus Federal Reserve bill, H.R.
11, was introduced by the author. It was preceded by very extensive hearings in
the previous Congress during which expert testimony was received from econo­
mists, lawyers, bankers, political scientists, and others. The bill is designed to
correct the principal defects in the Federal Reserve System and restore it to its
proper position. The bill would accomplish this in a number of ways.
First, it would emphasize the public character of the Federal Reserve System
by providing for the retirement of the existing Federal Reserve stock which,
for many years, has given rise to the spurious impression that the member com­
mercial banks own the Federal Reserve System. Actually, the stock, which is
48 The Second Liberty Loan Act o f 1917 set the statutory ceiling for long-term Govern­
ment bonds, maturities o f five years or more, at 4 % % .

owned by the member banks, cannot be transferred *>r said and is ?learlj a fixedincome, nonproprietary asset. Retirement of the stock will remove any doubts
about the System’s belonging to the Government and eliminate the notion that it
is only “allied to Government,” a phrase used by one of the Federal Reserve
officials during a Banking Committee hearing.44
Second, it would place the open market powers in the Federal Reserve Hoard.
The independent status of the Open Market Committee and its continued per­
formance of crucial monetary functions are untenable in a modern democracy.
As indicated in the first part of this article, there is no basis in law or in fact for
having the open market function performed by a mixed body of V tlenii Reserve
Governors and Federal Reserve bank presidents. Moreover, the correction of
this situation would go a long way toward ridding the Federal Resei*v< System
of its chronic tight money bias and inflation psychosis.
Third, it would make the Federal Reserve System more responsive ~o the
President by reducing the membership of the Board to fire, by reducing N. terms
of office of the Governors to five years, and by making the term of the Chairman
of the Board of Governors coterminous with that :>f the President. : (V
present arrangements, a President does not have an opportunity to ippoint a
majority of the Federal Reserve Board until his eighth year in office. He is,
therefore, unable to count on a Board that is sympathetic and responsive him
President Johnson will have to retain the seven present Governors until January
of 1987. At that time one term expires the next term expires in Tanunvy. 190K
Mr. Martin will continue as Chairman until 1967. And. sign ifican tly the President,
under existing law and regulation, will have to pick his Chairman from among
the seven Governors then on the Board.
Fourth, it would insure public control over the expenditure o f public m oney
by requiring the Federal Reserve System to pay into the Treasury as miscellane­
ous receipts all the revenues which it receives, by providing a public audit by the
Comptroller General of all expenditures by the Board and the banks, and by
requiring that Congress authorize appropriations to defray the expense* of the
Federal Reserve Board and the banks.
Fifth, it would assure coordination of governmental economic policies by re­
quiring the President to set forth in his periodic economic reports the monetary
policies to be followed by his Administration and by providing that the Federal
Reserve Board report regularly to the Congress on its activities implementing the
President’s economic politics.
As members of the legal profession will readily discern, this legislation is
aimed at the so-called ‘Independence” of the Federal Reserve System. Jt is de­
signed expressly to return control of our monetary policy to the President of the
United States and to the Congressmen who are responsible to the will of the
people. The people can remove a Congressman or a President if they disapprove
of his actions; but they cannot dislodge the members of the Board of Governors
of the Federal Reserve from office, regardless of the mistakes they make.
In theory, the Federal Reserve Board should be an agency of the United States
government. Readers will recall, however, that the law requires that an agent
assume a special relationship toward his principal:
It is the duty of an agent in all transactions concerning or affecting
the subject mater of the agency, to act with the utmost good faith and
loyalty to further the principal’s interests.
It is an agent’s duty to adhere faithfully to all instructions given him
by his principal, and a failure or neglect to do so will serve to make the
agent liable for any loss or damage which may result therefrom.
Agency presumes subordination on the part of an agent to the

Needless to say, no such relationship exists between the Federal Reserve Board
and the federal government at the present time.
In summary, I would like to make it clear that the Federal Reserve System,
as it presently operates, is harmful to the best interests of the people of this
country. As has been shown, the Federal Reserve System was not designed to be
independent. It merely assumed and seized its present position. Furthermore,
this situation has continued because Congress has not retained supervision over
its delegated monetary powers, not even to the extent of clearing the annual
u Hearings Before the Subcommittee on Domestic Finance of the H om e Banking and
"w rency Committee, supra note 18, vol. 1.
« 8 C.J.S. Agency §§ 188,147 (1836).

l;lidget for the Federal Reserve System, appropriating its fund? or ai^nmg its
As indicated above, for the first twenty-two years of it's life. th€ Federal lie*
serve System did not really have control over the money supply. ,ioi was it
designed to have such control. This was made clear in the Report of the IIouso
Committee on Banking and Currency on the Federal Reserve Act. In speaking
oft!* Ac*
reported t* the House. Chairman Carter Gla^ aid
It it proposed that the Government shall retain a sufficient po »
the reserve banks tc enable it tc exercise a directing author!t < v,
recess. .;y u. do <j '.mi tha it ?har i nr. ;ay itte-npf it :i »•;. on
through its own mechanism the routine operations ?f hanking which
require detailed knowledge of local and individual 21. dif and licii
determine the actual use of the funds 5f the cornuunit* in any giveu
instance. Tn other words, the reserve-hank plan retains to the Gov* m
inent power over the exercise of the broader banking function?*. y:nlU
it leaves to individuals and privately owned iustltun.ns the . ual
direction of routine.40
It is now time to remedy the present situation by appropriate legislation placing
the Federal Reserve System into the position envisioned by the Congress when
it first enacted the Federal Reserve Act.47
[Reprinted from the American Bar Association Journal, vol. 61. February 1975.
pp. 179-184]
W iia t ’s

W ron g W ith

t h e F ed era l R eserve

in d W h a t

To Do Anor


By Wright Patman*
The Federal Reserve System got off on the wrrong track when private hanks
were permitted to own stock in the district Fed banks, letting the tail wag
the dog. Now the Fed’s Open Market Committee has control of the banking
system but operates in secrecy, while the Fed itself operates cavalierly, even
with private auditors. It’s time to curb the abuses of the Fed and reform
the system.
As Chief Justice Charles Evans Hughes so well said, the Constitution means
what the Supreme Court of the United States says it means. In our economy,
how we fare depends crucially on what the Open Market Committee of the
Federal Reserve System says. We have as much or as little money to spend as
that committee dictates. Banks have an abundance or scarcity of reserves to lend
depending on what it decides. The committee determines the volume of bank
reserves and the nation’s money supply, primarily by instructing the New York
Federal Reserve Bank to buy or sell securities in the open market. When the
New York bank buys, it adds to reserves and increases the money supply When
it sells, reserves and money supply fall.
The Federal Reserve also affects how much money banks can lend by fixing
reserve requirements, specifying what fraction of deposits banks must keep in
reserve. Lowering the requirement increases reserves available for loans. Raising
it decreases availability of reserves.
In its exercise of these awesome powers the Fed has made serious mistakes, and
the time has come for basic changes.
In 1912 a commission, headed by Nelson Rockefeller’s maternal grandfather,
Sen. Nelson Aldrich of Rhode Island, proposed a central bank controlled by the
private banks, but Woodrow Wilson would have none of it. Putting on his best
16 House Committee on Banking and Currency, 85th Cong., 1st Sess., Report to accom­
pany H.R. 7872.18-19 (Comm. Print 1958).
47 Lawyers must Interest themselves in this important public policy question. For this
reason, I wish to recommend to the legal profession the Report of the December 1965
Hearings on the Federal Reserve and a recent study of the $49 billion Federal Reserve
portfolio, both o f which were prepared by the Joint Economic Committee. These docu­
ments and those referred to in this article can be obtained from your Congressman or
either o f your Senators. I am sure they would be happy to supply you with any of the
documents you may need.
♦Wrijrht Patman is the senior member o f Congress and a long-time chairman o f the
House Banking and Currency Committee and the Joint Economic Committee. A graduate
of Cumberland University (LL.B. 1916), he has represented the First District of Texas
continuously since his election in 1928.

frock coat and breaking precedent by appearing in person before a joint session
of Congress, President Wilson, along with Carter Glass and Robert L. Owen, then
chairmen of the House and Senate banking committees, proposed a presidential^
appointed Federal Reserve Board. Under this board there were to be independent
regional banks, but bank lobbying forced him to compromise and allow private
banks to hold the stock of the twelve district banks in the Federal Reserve System
and to elect six of the nine directors of each.
To this day these bank-elected directors select the executive heads of each
Federal Reserve district bank, formerly called “governors” but since 1935 “presi­
dents,” the title “governors” being reserved today for members of the Federal
Reserve Board.
Although board members receive $40,000 and the chairman $42,500, these banker
directors, without consulting with the president or the Congress, pay the presi­
dent of the New York bank $90,000, Chicago $76,000, San Francisco $75,000,
Kansas City $65,000. Saint Louis $64,000, Boston $60,250, Atlanta $60,000, Dallas
$59,000, Cleveland $58,650, Minneapolis $56,500, Philadelphia $55,000, and Rich­
mond $50,000. Paying these district bankers at the bottom of the system more
than board members at the top has made board membership less attractive and,
worse, robbed it of prestige.
Believing that the open market operations were for “bankers,” not “politicians,”
Benjamin Strong, then “governor” of the New York bank, created the Open Mar­
ket Committee in 1915 exclusively from the then district governors and persuaded
them to allow the New York bank to buy and sell for all the banks. This ended
Woodrow Wilson’s dream of twelve independent regional banks. Ever since, the
New York bankers have dominated Federal Reserve policy—a case of the tail
wagging the dog.
Marriner S. Eccles, chairman of the Fed from 1934 to 1948 and himself a
banker, blames Federal Reserve inaction during the depression in 192&-32 on “a
narrow banking rather than a broad social point of view.”
By statute in 1935, President Roosevelt and Eccles were able to put the seven
board members on the Open Market Committee and compel it to meet in Wash­
ington, but they had to make the New York bank a permanent voting member,
allow the presidents of all twelve banks to attend, and give them five votes.
In his recent book, Managing the Dollar, Sherman J. Maisel, professor of busi­
ness administration at the University of California at Berkeley and a former
board member, states that these district bank presidents, “twice removed from
the democratic process” are “not strictly government officials.” While they
know bank operations, they are not qualified to pass on monetary policy, in­
crease the size of committee meetings by twelve, delay board action for their
arrival, or postpone it because of an early departure.

Professor Maisel says that giving area member banks a stock interest in Fed­
eral Reserve district banks “makes no sense” and is “a vestigial and sentimental
remnant of the system’s beginning.” In his opinion, whatever value the bank
presidents have on the Open Market Committee is “more than outweighed by
their conflict of interest.” Because district bank presidents depend for the jobs
and salaries on the commercial bankers of their areas, their presence on the
committee violates the spirit, if not the letter, of 18 U.S.C. §208. As Chief
Justice Warren said so eloquently in the Dixon-Yates case, United States v.
Mississippi Valley Generating Company, 364 U.S. 520 (1961), a conflict of interest
arises “by the logic of circumstances” when a person must serve two masters.
The time has come to redeem the stock area banks own in the Federal Reserve
district banks and allow the Federal Reserve Board, appointed by the president
of the United States with the advice and consent of the Senate, to manage the
nation’s money.
While the Federal Reserve promptly announces changes in the discount rate
and reserve requirements, it keeps secret the discussions as to why the Open
Market Committee makes or does not make monetary changes and the orders it
issues to sell or buy to the manager of the Federal Reserve’s securities portfolio,
who is an employee of the New York Reserve Bank.
Ninety days after a meeting the Fed publishes an enigmatic summary of its
instructions, and five years later the minutes. Both come at a time when they
are not much good to anybody. It is just now publishing the 1969 minutes. What
we need is immediate release of the instructions and a transcript of the dis­
cussions telling us the reasons for and against the policy instruction.

In short, the procedure is all wrong. Bankers and bond dealers who have the
most to gain find out from analysis of the buy and sell orders. It is only the
public and the Congress who are kept in the dark.
Federal Reserve officials know that secrecy serves insiders. Governor Sheehan
told Robert Weintraub, staff economist of the House Banking and Currency
Committee, that “It’s very difficult to find out really what the Fed is doing if
you’re not on the inside.”
President Mayo of the Chicago district bank put it this way:
the market indeed does have a fairly full understanding as to
what the factors are in monetary policy that are going to lead to specific
steps by the Federal Reserve. This happens to be a product, in part, of
the fact that many of these people who are in the market, and in the
position of making markets, have at one time either worked in the
Treasury or in the Federal Reserve. Indeed, there is also cross-fertiliza­
tion the other way. So it is no great secret as to how you interpret what
the Fed is doing and indeed is trying to do. A number of the leading
writers in New York—the Lehman Letter, Lanston’s Letter and so
forth—are written by former Treasury, former Federal Reserve people,
and they’re very good in interpreting these things.
Professor Maisel states that the Fed pursues a policy of secrecy from “fear of
political attack and public criticism.” It is fundamentally wrong, he adds, because the more you publish about monetary policy at the time you make it, the
better that policy is likely to be.

Square foot
Cubic foot-.
Square foot.
Cubic footRayburn:
Square foot.
Cubic foot—

. $57.67



Professor Maisel says open market foreign exchange transactions go into billions
and sometimes result in large losses. The comptroller general audits much more
sensitive matters at the Atomic Energy Commission and the Department of De­
fense, but no one has suggested that either of these should use a private auditor.

The ultimate irony is that the alleged nonopolitical Fed is one of the most
astute manipulators of political power in Washington. Nowhere was this more
evident than during the debate on the audit bill. Although Dr. Burns personally
lobbied against it among members of Congress and Manhattan bankers, the
House of Representatives approved the bill by a vote of 290 to 58. But the
Senate, sad to say, did not act on the bill.
The American people cannot afford to allow an agency so important to our
economy to operate in the dark as it pleases. The time has come to allow the
comptroller general to audit all Federal Reserve operations.
In 1933, when the banks closed, we attributed their troubles primarily to their
having security affiliates that were selling stock. When the financial history of
recent times is written, the ills that now afflict banks will be attributed in no
small measure to our allowing banks to be owned by holding companies.
The late Winthrop Aldrich wrote to me in 1969 that he was “horrified” that
banks were becoming “conglomerates” and holding “completely unrelated” busi­
nesses. He saw it as a return to the evils of 1933. Then the only danger was that
banking affiliates did not sell securities they brought: today the banks hold entire
big businesses, many abroad, all requiring high-priced, competent personnel and
millions in capital.
As in the 1920s, the banks today have become too deeply involved in businesses
other than commercial banking. Worse, particularly overseas, they are making
speculative long-term loans, that only investment bankers should make.
In October of 1974 at the convention of the American Bankers Association in
Hawaii, Dr. Burns pointed out that the Federal Reserve System “regulates all
bank holding companies.” What he does not say is that though this is the way
the legislation reads, there has been no regulation of any consequence. Until
recently the Fed has approved routinely the creation of bank holding companies
and their applications for mergers or acquisitions. Lately a few have been dis­
approved. There has been no regulation worthy of the name.
The problems with bank holding companies are many and serious.
Theoretically, a bank holding company is a separate corporation, and the hold­
ing company’s failure should not affect the bank. But, alas, for theory. When the
holding company fails, as was the case with the Beverly Hills National Bank,
there is a run on the bank that ends with its sale. This is for good reason. The
management is the same, so that a lack of confidence in the holding company
causes a lack of confidence in the bank.
Some owe as much as twenty dollars of debt for every dollar of capital. This is
not all ordinary debt but commercial paper running infco millions of dollars, some­
times with an average maturity of thirty days. The best holding company is in
serious trouble the day it cannot roll over this debt.
There is also a great temptation for bank holding companies to go into the
banking business by buying from their banks high interest loans, many of which
are made abroad in countries as unstable and militaristic as Peru. likewise,
when they need to borrow money, there is a temptation for bank holding com­
panies to sell their commercial paper to a bank owned by another bank holding
The difficulty i* that the bank holding company is not a bank, and there are few
restrictions on what it can borrow or lend and to whom. It does banking business
without regulations or safeguards. Take a decision as to payment of dividends.
While a bank holding company needs dividends from its bank to show a profit, it
is sometimes cheaper to leave the dividends with the bank to loan out at high
interest even though it obliges the bank holding company to borrow to pay its own
dividends. The legality of that is open to question, but the Fed has not forbidden
bank holding companies from paying dividends when not earned. It has simply
done nothing about their regulation.
The tendency of bank holding companies is to think of themselves as corporate
conglomerates, which they are not. And it is dangerous and misleading to consoli­
date the bank’s balance sheet with that of the holding company. Worse, the direc­
tors, officers, attorneys, and accountants who act for both the holding company

and the bank usually are the same. Yet there is a fundamental conflict of interest
between the two that makes every transaction between them suspect. Because
banks hold and invest other people’s monies, their officers, directors, attorneys,
and accountants should be independent.

When Congress passed legislation regulating bank holding companies, these
serious problems were not brought to its attention. Perhaps the time has come
again to limit all commercial banking institutions, regardless of corporate form,
to traditional commercial banking services. The truth is that we have not thought
these problems through. In any event, the time has come to return commercial
banks to banking and divorce them completely from holding companies.
Unfortunately, this is not simply a holding company problem. As Dr. Burns
told the bankers in Hawaii, “some carelessness” has “also crept into our banking
system.” The good doctor is a master of understatement. Presumably he had in
mind ‘the two largest bank failures in the nation's history”—the United States
National at San Diego and the Franklin National in New York.
What is most disturbing in the failure of the United States National is that the
Federal Deposit Insurance Corporation in an action against bank directors
charges that more than $400 million of loans were made in contravention of sound,
safe, and prudent banking practices; that loan officers were not supervised: that
the records were inaccurate; and that the directors had no audit committee and
illegally distributed dividends when there were no profits.
In an attempt to save Franklin, it now appears the Fed advanced $1,750 bil­
lion of the peoples* monies at 8 per cent interest against collateral of doubtful
ralua Some creditors of Franklin were paid who would not have been otherwise *
for instance, banks which had advanced federal funds to Franklin in amounts up­
ward* of $500 million, and some six thousand of its six hundred and twenty thou­
sand depositors whose deposits were not insured by the Federal Deposit‘ insur­
ance Corporation.
By what right, without consultation with the president and the Congress do
Dr. Burns and the Fed secretly dispense $1,750 billion of the people’s money’ ’
In sharp contrast, when in June of 1974 the largest private bank in Germany,
BankhaiiF 1.1). Herstatt of Cologne, had foreign exchange losses and failed the
West Germans let it happen, causing the Wall Street Journal to remark
The Bundesbank
believes that the public will have confidence in
bank when banking is sound, and that banking diverges from “sound­
ness’ when ^iose who run banks, know there is a net under them
^inking community here and abroad would now be in a more promising
co idition if the Fed had followed the toad of those West German Social*
’.sts. The Franklin National Bank should have been permitted to sink,
rietim of its excesses in ‘unauthorized currency trading.” Its loan port­
folio would have been peddled and its depositors paid off, and if there
were anything left over, the shareholders would have divided that up.
The very morning this editorial appeared (August 8, 1974), Dr. Burns was
testifying before the House Banking and Currency Committee, and in response to
a question regarding the editorial from Rep. John H. Rousselot of California
said i
In the case of Herstatt, the Germans had an insolvent bank; in the case
of Franklin National, we had a solvent bank faced with a serious liquid­
ity problem. That distinction is not made by the Wall Street Journal in its
editorial. It is a very basic distinction.
Dr. Burns was mistaken. The comptroller of the currency, on whom he relied
«i% n w n .1Sta?e“; ^ ben the Fed>actinS 111recret on its own, decides to advance
ii£r i , 11’ is lt: t0° much t0 ask that it be sure that the bank is solvent?
led by Dr- Burns>once acted on its own to bail out
;J „
* held Penn Central commercial paper. Now the newspapers tell ns that
the Fed is pressuring hundreds of banks to pick up a $600 million debt of W T
Grant Company and a $130 million debt of Pan Am—acting again in secret with­
out consultation with the president or the Congress.
As Barron's said editorially on December 9, this is “easy to credit” becaire
of the Fed’s unbridled interventionism” but there are “issues of principle in­

volved” because by “becoming Grant's partner” the banks “are diverting scarce
credit from worthier borrowers.” The editor, Robert H. Bleiberg, found it
“extravagant” to claim that W. T. Grant Company as a going concern “is vital
to the nation’s commerce and the national interest.”
While Barron’s doesn’t want to see Grant’s flashy skyscraper at One Astoi
Place in Manhattan “turn into Grant’s Tomb,” it suggests that a “lasting monu­
ment to failure” there “would be worse.” Its point is that, “Keeping Grant open
may force competitors which are more efficient—but less visible, hence with less
political or financial clout—to shut their doors.” Mr. Bleiberg adds that this
is “no way to run a candy store, let alone a country.” I could not agree more.
There is more at stake here than meets the eye. It is an assertion of a right
of complete independence from political accountability by Dr. Bums and the
Fed to use the people’s money in any way they see fit. It is arrogance we must
not tolerate. No one man or institution should have this unbridled power. The
people did not elect Dr. Bums, and he is not our king.
It is clear that Dr. Bums did not exaggerate when he told the bankers in
Hawaii that “some carelessness” has “crept into our banking system.’’ As he
points out, the comptroller has jurisdiction over national banks and the F.D.I.C.
over state-chartered banks that are not members of Federal Reserve. This leaves
the Fed with jurisdiction over state-chartered member banks, holding companies,
and so-called federally chartered Edge Act corporations that are supposed to
do only an international business.
Dr. Bums sees these “overlapping regulatory powers” as “a jurisdictional
tangle that boggles the mind” and fosters a “competition in laxity,” allowing
bankers to play one agency off against another.
I am sure that Dr. Bums wants to centralize all banking powers in the Fed.
This he must not be allowed to do. As the Wall Street Journal said editorially
last November 25: “If regulatory authority is centralized, it had better be
centralized somewhere else than in the Fed. Combining the money creation power
with regulatory authority creates a conflict of interest.”
Granted something must be done, my suggestion of long standing is the creation
of a single National Banking Commission combining existing regulatory au­
thority over all banking institutions in one agency. Then, at least, we will have
one agency in charge of examination of banks, Edge Act corporations, and hold­
ing companies. A single agency will be more competent than the comptroller,
the Fed, and the F.D.I.C. have been in the United States National and Franklin
bank failures. It could not do worse.
In Honolulu Dr. Bums said that during the last three years “the assets of
foreign branches and subsidiaries of American banks nearly tripled, reaching
$117 billion” and accounting “for more than one fifth of the growth in total
assets of the U.S. commercial 'banking system/’ We also know that in 1973
the American banks listed below received the following percentages of their
operating income from abroad:
Bankers Trust Company (New York)-------------------- ---- ------ ... - 80.0
First National City Bank (New York).......... ..................... .....
Bank of America (San Francisco)------------------ ---------- ----- — ............ 56.5
Chase Manhattan Bank, N.A. (New Y ork ).----------- -------- -----—
Morgan Guaranty Trust (New York)------------------ -----------—
First National Bank of Chicago-------------------------- ------ ------------21.0
Continental Illinois (Chicago)--------------------------------- -------------- — 18.0
We also know from former Governor Maisel that while he devoted 20 percent
of his time to international matters, neither Chairman Martin nor Chairman
Burns brought important international matters to the board for resolution, al­
though these chairmen were more in accord with administration policy than the
board. This is a serious indictment, because Professor Maisel says that in
August 1971, the Federal Reserve System “was in debt for $3 billion” on foreign
currency “swaps” and lost close to $400 million.

In 1919 Sen. Walter E. Edge of New Jersey proposed that member banks of
the Fed be allowed to organize federal corporations to engage in international
banking and other foreign financial operations.
When his act was passed, the United States was a creditor nation, and Europe
was broke. Senator Edge proposed that these corporations be set up to finance
European imports from the United States by buying European bills, rolling them

over, and redeeming them as -the economies of Europe began recovering. When the
Glass-Steagall Act was passed in 1933, Congress forgot about providing that
Edge Act banks be confined to commercial banking. Perhaps this was because Edge
Act banks were then so few in number.
Now, more than twenty banks or bank organizations are operating more than
thirty Edge Act corporations in states other than their home state. For instance,
Bank of America National Trust and Savings Association has Edge Act corpo­
rations not only at its head office in San Francisco but also in New York, Chicago,
and Miami.
Although the Fed assures us that these domestic Edge Act corporations only
do business incidental to the banks’ foreign business, we see advertisements in
the Wall Street Journal, Business Week, and Fortune describing how throughout
the United States they finance off-shore drilling, a grain deal, a London sterling
market problem, international medium-term financing, international leasing,
and an Export-Import Bank project
When we do not permit interstate banking, and the Edge Act specifically
provides that no Edge Act corportatlon can “carry on any part of its business
in the United States” except as ‘Incidental to its international or foreign busi­
ness” (12 U.S.C. §616), I question the right of the Federal Reserve Board to
allow any of these Edge Act corporations to exist within the continental United
States in any other state than the head office of the parent bank. As has happened
so frequently, the board has read into the phrase “incidental to its international
or foreign business” a power to authorize the Edge Act corporations of large
banks to do an interstate banking business, soliciting customers who do business
abroad, something Congress never intended,
In addiiton, the banks make questionable high-risk foreign loans at home but by
subterfuge execute them abroad through their Edge Act corporations so as to
avoid Securities and Exchange Commission regulation. They are marketed
without the protection of adequate disclosure on which the S.E.C. insists for
domestic securities. At the least, the S.E.C, should require registration of these
loans before they are sold.
In briefing the Federal Reserve Open Market Committee on the state of the
economy, the board’s staff in nineteen consecutive meetings from November 1971,
to June 1973, stressed that the economy was expanding at a rapid rate of growth*
There was, therefore, no reason to increase the money supply rapidly at that
time. Nonetheless, it was done. The result was reaccelerated inflation.

In the course of warning against giving the Fed too much power, on No­
vember 25, 1974, the Wall Street Journal editorially stated that, “The money
grew far too rapidly in 1971-1973. In blunt words, the erosion
of bank capital ratios were fundamentally caused by the inflationai policies
pursued by Chairman Bums.’* Professor Maisel, who was then a member of
the board, states that Oeorge Schultz, then director of the Office of Manage­
ment and Budget, in 1971 passed the word to the board that, “If an election were
to be won, the Federal Reserve would have to increase the money supply at far
more than the 4.2 percent average of 1969-70.”
The fact is that the Fed increased the money supply beyond what the economic
indicators required, and President Nixon was re-elected. In no small measure,
Dr. Bums is personally responsible for our inflation.
It is not so much that Dr. Bums as chairman of the Federal Reserve Board
in 1971-72 used his position to flood the country with money, it is that the
regulation of banks and bank holding companies by the Fed under his chairman­
ship has been poor.
In his Hawaii speech Dr. Bums said there are five things wrong with our
banks: (1) an “attenuation of the banking system’s base of equity capital” ;
(2) “reliance on funds of a potentially volatile character” ; (3) “heavy loan
commitments in relation to resources” ; (4) “deterioration in the quality of
assets” : and (5) “increased exposure of the larger banks to risks entailed in
foreign exchange transactions and other foreign operations.’’ Translated, this
means that under Dr. Bums’s stewardship at the Fed the banks are in a mess.
As in previous Congresses, I intend to reintroduce in the Ninety-fourth Con­
gress a bill for a comprehensive reform of the Federal Reserve System.
Whatever the doubts about the wisdom of this reform or that, the time has
come to effect at least these:

1. Have the United States redeem the stock held by member banks in the
twelve Federal Reserve district banks, removing bank presidents with their
conflicts of interest from the Open Market Committee and allowing the Federal
Reserve Board to operate the system as Woodrow Wilson intended.
2. Compel the Fed’s Open Market Committee to publish a transcript of its
proceedings on the day it meets, thereby disclosing to the people and the Con­
gress what the country’s monetary policy is that day, not five years ago.
3. Except to the extent necessary to operate the open market account, cancel
the $82 billion of bonds held by the Fed, thereby preventing it from building
any more marble palaces to departed chairmen and requiring it to operate
on appropriated funds.
4. Subject the Fed to audit by the comptroller general in the same way he
audits other agencies.
5. Regardless of their corporate form, limit all commercial banking institutions
to traditional banking services, divorce commercial banks from bank holding
companies, insist that commercial bank officers, directors, attorneys, and account­
ants be independent, and to the extent they are allowed to exist, subject bank
holding companies to the same regulation as commercial banks.
6. Forbid the Fed from continuing to bail out banks and large corporations
secretly without the permission of the president and Congress.
7. Vefct one federal agency with all the federal bank examination powers now
held by the Fed, the F.D.I.C., and the comptroller.
8. To ensure that the Federal Reserve Board and its chairman are accountable
to the president of the United States and the Congress, as duly elected represent­
atives of the people, reduce the present staggered fourteen-year terms of board
members to five years and make the four-year term of the chairman coterminus
with that of the president of the United States.

The high interest policy of the Fed under Dr. Burns bears a marked resem­
blance to what Andrew Mellon did in the depression of the thirties. Both have
inflicted hardships on the lower and middle classes. The Burns polices at the
Fed have increased unemployment, liquidated the real estate industry, emptied
the savings banks, taxed the little fellow, proved ruinous to the housing industry
and thrift institutions, and brought on depression. This is power that no one
man or no one agency of government should have. There is no need for me to
recall the evils of Watergate, except to point out that they came from individuals
operating in secret with excessive governmental power.
The Fed’s claim of independence niasquerades its desire to use the people’s
money secretly in any way it chooses. Before its wrong policies bankrupt this
nation, the Fed should be made to account to the elected representatives of the
people- -the president and the Congress.

C ongress of t h e U nited St a t e s ,
J o in t E conom ic C o m m it t e e ,

Washington, D.G., February 24,1975.
Chairman, Securities and Exchange Commission,
Washington, D.0.
D ear M r . G a r r e t t : On July 24, 1974, with your approval, Citicorp, the hold­
ing company for the First National City Rank, issued a prospectus for the sale
of $650 million so-called floating notes. I am very concerned about the scope of
disclosure in this prospectus. It was a “first’*, and has become a model for of­
ferings of this type.
As 1 understand it, corporations may use in their prospectuses unaudited
quarterly figures subject to the condition that such figures fully and fairly de­
scribe the company’s quarterly position. In my opinion, Citicorp s quarterly
figures for 1973 and 1974 showing actual loan loss chargeoffs in Citibank, do not
accurately reflect losses sustained at those times. Citicorp represents that on
June 30 1974 Citibank may legally declare a dividend in the amount, of the bond
issue, $650 million. Presumably, this figure is obtained by plugging actual loan
loss figures for the first and second quarters (see table below) into the statutory
formula of Section 60 of Title 12 of the United States Code:

H on . R a y G arrett ,

Actual loan loss minus tax benefit


1973:First -

ft wi


Second . .
Third ...


Fouth .

1974FirSt .
S e c o n d ...............

(», M4
4 *2 3 4



8 ’ 523

Third ...
........................... - ................... ^,000
Fourth________________ _____________________________ 59, 780
You will note that in both years approximately 83% of the Bank’s total losses
are deferred to the third and fourth quarters. The statements in the prospectus
do not contain any explanatory footnote, but it is extremely unlikely in a Bank
the size of Citibank that any seasonal factor could cause such large fluctuations
in revenue.
Of course by manipulating the actual charge-off figure a bank may arbitrarily
increase the amount of legally available profits from which dividends may be
declared under 12 U.S.C. 60(b). There is no evidence in the prospectus that Citi­
bank has employed an objective accounting method—-or any method at all—in
choosing to write its loans off in this manner. Both the S.E.C. and the Comp­
troller have the authority to prevent illegal manipulation of 12 U.S.C. 60 by
promulgating guidelines for reporting unaudited quarterly figures which repre­
sent loan loss charge-offs. As this same pattern of loss activity has been ob­
served in the prospectuses of other banks offering floating rate notes, it is time
that authority were exercised. The S.E.C. might consider insisting on audited
I am also concerned >by the fact that while the prospectus is careful to high­
light the Bank’s legal ability to declare a dividend, any discussion of the Bank s
actual ability to make such a payment is conspicuously absent. Citibank did not
pay dividends to Citicorp in 1972 or 1973. Nor did it declare a dividend in 1974.

However, Citicorp has paid dividends of $75 million in 1972, $86 million in 1973,
and $98 million in 1974. The logical inference is that Citicorp is paying these
dividends with money borrowed in the commercial paper market In addition to
being a practice of doubtful legality, it is one which should certainly be disclosed
to the potential investor and discusssed in the holding company’s prospectus.
While I appreciate the values served by the equity method of accounting, it is
singularly inappropriate as a method of disclosing the cash position of a bank
vis-a-vis its holding company. The Bank’s assets are not the holding companv’s
When Citicorp is allowed to represent—
In the determination of the dividend policies of Citicorp its Board
of Directors considers the earnings of Citibank available for the pay­
ment of dividends to Citicorp. Citicorp would anticipate that a portion of
such earnings would be paid to it as dividends if such payment were re­
quired as a source of funds to pay Citicorp dividends in the future.
a consolidated statement is irrelevant. It is the liquidity of Citibank which is
in issue, and the Commission ought to require that a statement providing this
particular information be included in the prospectus.
The prospectus, moreover, neatly sidesteps disclosure of the nature and ex­
tent of Citibank’s foreign investments—another factor affecting the Bank’s actual
ability to pay dividends. A geographic break-down of domestic and international
net income is qualified by the statement—
It is not practicable to make a precise separation of the domestically
oriented business from the part of the business resulting from opera­
tions in foreign countries and derived from customers in foreign coun­
tries ; accordingly, the separation set forth below is based upon internal
allocations which necessarily involve certain assumptions. (P. 13, Citi­
corp prospectus.)
Such assumptions are never defined. The investor has no facts on which to base
a judgment as to the soundness of the Bank’s loans in foreign countries.
While you or the banking agencies may lack the statutory power to do so,
don’t you think that the directors, officers, attorneys, and accountants who repre­
sent a bank holding company should be completely independent and different
from those of the bank? After all the Bank directors as trustees owe their first
duty to the Bank’s depositors. Here the holding company’s need for the divi­
dends may clash with the obligation of the Bank’s directors to retain the divi­
dends. If necessary, should we not pass legislation to effect this?
I would appreciate hearing from you what you can do to correct this situation.
W r ig h t P a t m a n , Vice Chairman.
[Reprinted from the Congressional Record o f Feb. 24,1975, pp. H1117-H111S]
F l o a tin g N otes


C iticorp

(Mr. Patman asked and was given permission to extend his remarks at this
point in the Record and to include extraneous matter.)
Mr. P a t m a n . Mr. Speaker, I would like to bring to the attention of the Mem­
bers a copy of a letter I have forwarded to Chairman Ray Garrett, Jr., of the
Securities and Exchange Commission with respect to the $650 million floating
note issue which Citicorp marketed in July 1974. I have presumed to send a
copy to Congressman John E. Moss, chairman of the Subcommitte on Oversight
and Investigations of the House Commerce Committee.
Inasmuch as this matter involves the Nation’s second largest bank, First Na­
tional City Bank—“Citibank’’—it should be of equal or greater interest to our
three banking agencies so I have also sent copies to the Comptroller of the
Currency, James E. Smith, the Chairman of the Board of Governors of the Fed­
eral Reserve System, Dr. Arthur F. Burns, and the chairman of the Federal In­
surance Deposit Corporation, Frank Willie.
In this connection, I also call the Members’ attention to the complaint, dated
July 5, 1974, filed in the United States District Court for the Southern District
of New York, against the Board of Governors of the Federal Reserve System by
the Bowery Savings Bank, and the National Association of Mutual Savings
Banks, in which it is alleged that these floating notes should be subject to Fed­
eral Reserve regulations D and Q.


The Bowery Savings Bank, National Association of Mutual Savings Banks, by
its President Kenneth L. Birchby and Savings Bank Association of New York
State, by its President Joseph C. Brennan, Plaintiffs, v. Board of Governors of
the Federal Beserve System, Defendant.
The plaintiffs The Bowery Savings Bank (“Bowery” ), the National Association
of Mutual Savings Banks and Savings Banks Association of New York State, by
their attorneys, Cadalader, Wickersham & Taft, for their complaint allege:
1. This action for declaratory judgment arises out of the provisions of Section
10 of the Federal Beserve Act, as amended, 12 U.S.C. § 461 and Regulations D
and Q of the Federal Reserve Board, 12 C.F.R. §§ 204 and 217 respectively, is­
sued pursuant to said act.
2. Jurisdiction of this Court is based upon Sections 1331 and 2201 of Title 28 of
the United States Code.
3. The amount in controversy exceeds $10,000 exclusive of interest and costs.
4. Venne properly lies in the Southern District of New York pursuant to Sec­
tion 1391 (c) of Title 28 of the United States Code. The plaintiffs have their prin­
cipal places of business in the Southern District of New York.
5. Plaintiff Bowery is a New York State mutual savings bank organized and
existing by virtue of the laws of the State of New York and maintaining its prin­
cipal place of business at 110 East 42nd Street, New York, New York.
6. Plaintiff National Association of Mutual Savings Banks is an unincorporated
association existing under the laws of the State of New York, and has its prin­
cipal place of business at 200 Park Avenue, New York, New York. Its 475 mem­
bers, representing $108 billion in assets, are mutual savings banks conducting
and authorized to conduct the business of savings banking under and by virtue
of the laws of various states throughout the United Sttaes. Kenneth L. Birchby is
the President of this association. This association brings this action on behalf
of itself and in the interest of its members.
7. Plaintiff Savings Banks Association of New York State is an unincorporated
association existing under the laws of the State of New York, whose members
are 118 mutual savings banks chartered under the laws of the State of New
York. Its principal place of business is in the City of New York, State of New
York. Its members conduct the business of savings banking in various counties
of the State of New York, including the County of New York. Joseph C. Brennan
is the President of this association. This association brings this action on behalf
of itself and in the interest of its members.
8. The defendant Board of Governors of the Federal Reserve System is an
agency of the United States empowered and authorized by the Federal Reserve
Act to regulate the business of members of the Federal Reserve System and their
affiliates for purposes germane to this action, including all National Banking As­
sociations (“National Banks” ).
9. On information and belief certain registered bank holding companies reg­
istered under the Bank Holding Company Act of 1956 which are affiliates of
National Banks subject to the provisions of the Federal Reserve Act are about
to and have expressed their intention to issue or their interest in issuing unse­
cured small denomination notes (“Notes” ). These issuers include the holding
company affiliates of Chase Manhatten Bank, N.A.* Bank of America., N.A. and
First National City Bank (“Citibank” ). The Notes will yield interest in excess
of the rates prescribed by Federal Reserve Board Regulation Q; and the require­
ments for reserves prescribed by the Federal Reserve Board pursuant to Regu­
lation D are to have no certain application to the proceeds of such Notes.
10. Bowery and the member of plaintiffs National Association of Mutual Sav­
ings Banks and Savings Banks Association of New York State (collectively re­
ferred to as “Associations” ), are within the group sought to be protected by au­
thority granted to defendant to expand the scope of Regulations D and Q.
11. One such bank holding company, Citicorp, which owns all of the capital
stock of Citibank, has presently pending before the United States Securities and
Exchange Commission a certain preliminary prospectus dated June 27,1974 with
respect to the issuance, offer and sale to the public of $850,000,000 of such Notes
( “Citicorp Notes” ) and is seeking registration for such an offering to the public.
12. The funds, or a portion of such funds, so obtained by such bank holding
companies will be used directly or indirectly in the banking business of their affil­
iate National Banks or to maintain the availability ol funds for the benefit of such

1’k Trsu: :>f such Note? r t o
and m
ivlih !
would !>( iimv. id in time > *u ng.* deposit?
savings instit itiori? rhich u< ni; ..;hers of the A>.• ' ' ;
14.'Bowery h ?s requested that rlv; Federal
it 0 >rdh 3
Securities an?1 Exchange Commissior m tlu ..-p-ica^l* d» :*i xuvi rega w .’Ik
application of Regulation?. D and Q c the issuance*1 >f the Notes. Thf plaintiffs
have requested that the defendant regulate the issuance >f the Notes by subjt cti>this .issuance (and »roc ds < Regulations !)nno 1>
15. Unless the defendant so regulates the issuance of the Notes. Bow •; /ind
the members of the plaintiffs Associations will suffer irreparable competitive
10. In a certain let+e: Inted »ulj 2. 1071 fion. «i
* *•
’ »»<*
K&s Garrett. .Ti Chaim n > th " .mil- a^ ttxrunngo <'
eerning the Citicorp Note?.the defe. u? < n . <: ognized thai:
the result :>f the lar.i-f offering- a)«. any >tlif ifferinj: -il'c •• « vrher
issued by bank holding companies >r :>fhc orp >rati'iis can web t-e r< divert
ttu flow of savings froir the residential mortgage market md to deprht home
buyers of needed mortsagf financing. It is n 't slear, therefore, that an offering of
this type is in the public interest at this time.'
17. In disclaiming authority to apply Regulation D to the entire offering of
the Citicorp Notes, and apparently disclaiming any power to apply Regulation
Q or to amend Regulation Q to apply to interest payable on any pari thereof the
Board states that it lacks the necessary statutory powers
‘The Board’s present statutory powers do ...*»t authorize it eitiiei t< prevent
or to regulate the terms of the Citicorp lease. The legislative history if the 1909
amendments to the Federal Reserve Act, liiich authorized the Board < deter­
mine what types of obligations issued by affiliates >f member banks may be
deemed to be deposits for purposes of the Board’s regulations, makes it cleai that
such authority applies only to the extent that the proceeds ,of such affiliate
obligations are used for the purpose of supplying funds to a member bank. To
the extent that the proceeds of the Citicorp Notes may be n«cd for supplying
funds to member banks, they would be subject to reserve requirements but not
otherwise.” (Emphasis supplied.)
17. With specific reference to the Citicorp Notes the issuer describes the pro­
posed “Use of Proceeds” on page 3 in its preliminary prospectus as follows:
“The net proceeds from the sale of the Notes offered hereby are ex?*ected to be
applied to the repayment at maturity of commercial paper issued by Citicorp.
See Capitalization” Citicorp has issued commercial paper principally to finance
the activities of its subsidiaries other than Citibank, including Advance Mortgage
Corporation, Nationwide Financial Services Corporation, and Citicorp Credit
Services, Inc. See ‘‘Business—Related Services and Activities” Citicorp expects
to continue to issue commercial paper to repay outstanding commercial paper
as it matures and to finance expansion of the activities of its subsidiaries, includ­
ing Citibank. With the anticipated continued growth of Citibank and other Citi­
corp subsidiaries, Citicorp also expects that it will, on a regular basis in the
future, engage in additional financings in character and amount to be determined
as the need arises.”
18. Defendant has the statutory power to apply Regulations D and Q to the
Citicorp Notes and proceeds thereof, and any similar issuances by other bank
holding companies, for the following reasons, among others:
(a) On information and belief Citibank has been able to avoid paying any
dividends to Citicorp, thereby retaining for its own capital base its entire net in­
come for two and one-quarter years—amounting to approximately $550 million.
Citicorp dividends during this period, in the amount of $186.2 million (to meet
the expectations of Citicorp shareholders—formerly shareholders of Citibank)
have been paid through funds supported by intricate borrowings by Citicorp and
by decreases in loans financed from previous borrowings (largely through com­
mercial paper). These previous borrowings are now “expected” to be refinanced
from the sale of Citicorp Notes. The defendant has the statutory power to ••baracterize the proceeds from the Citicorp Notes as “deposits’*for purposes of Regu­
lations D and Q by reason of the use of previously borrowed funds, intended to be
refinanced by the Citicorp Notes, to benefit Citibank by enabling it to retain earn­
ings otherwise payable as dividends to its shareholders.
(b) On information and belief, pending application of the proceeds to
payment at maturity of commercial paner issued by Citicorp, the proceed.* ‘may
be used for supplying funds” to Citibank. The defendant has the statutory power

to apply Regulations D and Q at the very least pending such application of
(c) The defendant has the statutory power to treat debt issuances oi Citicorp
on a “first-in-first-out” (“FIFO” ) method of tracing funds used by for the benefit
of Citibank. Hence, even if the present “expected” use of proceeds is not deemed
for the benefit of Citibank, funds resulting from a subsequent debt issuance
(and benefiting Citibank directly or indirectly) may be attributed pro tanlo to
the proceeds of the instant Citicorp issue. Defendant has the statutory power to
apply Regulatipn D to such proceeds on a FIFO basis, and Regulation Q a; then
applicable to all of the Citicorp Notes.
(d) Accordingly, the defendant has the statutory power to apply Regulations
D and Q to the Citicorp Notes by reason oi: past Citicorp uses of funds to be re­
financed (as described in (a) above), of current proposed Citicorp use: )f pro­
ceeds described in (b), and/or by reason of future u&es of proceeds u-oni the
Citicorp Notes under tracing described in (c).
20. Pursuant to Section 19 of the Federal Reserve Act, the defendant has the
statutory power to apply the reserve requirement; of Regulation !) tx the pro­
ceeds of the entire offering of the Citicorp Notes or similar obligations. Similarly,
the defendant lias the statutory power to regulate certain of the terms of tiie
Citicorp Notes or similar obligations by the application to them or requirement*
of Regulation Q. The exercise of such statutory powers is plenary whethei or not
the proceeds are traceable to the direct use of banks wliicii are me: a>ei*r of th
Federal Reserve System.
21. In the event, that Section 19 of the Federal Reserve Act is construed so a>
to apply “only to the extent that the proceeds of such issuance arc used for th*
purpose of supplying funds to banks which are members of the Federal Reserve
System,” then:
(a) In those circumstances where the issuer identifies the Notes, proceeds of
which are to be so used, the defendant has the statutory power to subject to
Regulations D and Q such proceeds and Notes as so identified:
(b) in thise circumstances in which the issuer does not so segregate the Notes
and proceeds to be so used, thereby rendering identification not feasible, the de­
fendant has the statutory power to subject the entire issuance to the terms of
Regulations D and Q; and
(c) failure by the issuer to facilitate the determination of whether Notes and
proceeds therefrom serve the purpose of supplying funds directly or indirectly
to or for the benefit of banks which are members of the Federal Reserve System
shall in no way disable the defendant’s full use of its statutory power to deter­
mine that interest payable on all or any part of a Note. Issuance is subject to
Regulation Q, and that all or any portion of the proceeds are subject to Regula­
tion D.
Wherefore, plaintiffs pray for judgment in their favor declaring that the Board
of Governors of the Federal Reserve System has the statutory power under
Section 19 of the Federal Reserve Act to regulate the terms of Note issuances by
bank holding companies as described herein for purposes of determining w h eth er
and to what extent, proceeds shall be deemed “deposits” for Regulations D and
Q, and for such other relief as the Court deems just and proper.
Dated: New York, N.Y., July 5,1974.
C a d w a lad eb , W ic k e r s ii a m &
T aft,

B y -----------------,
A Member of the Firm
U.S. H ouse of R e p rese n ta tive s ,
S ubcom m ittee of D om e st ic M on etar y P o l ic y ,
C o m m ittee on B a n k in g , C u rre n c y a n d H ou sin g ,
Washington, B .C . April 2 4 . 1 9 7 5 .
Hon. A r t h u r F . B u r n s ,
Chairman, Federal Reserve Board,
Federal Reserve System,
Washington B.C.
D ear D r . B urn s : I have been concerned for some time by the problems inherent
in the control of American banks through foreign holding companies which also
control substantial nonbanking interests in the United States. These problems
become even more complex when the controlled American bank is owned by an


international joint venture. As I am sure you are aware, the parent/share­
holders of the European-American Bank and Trust Co., which recently purchased
the insolvent Franklin National Bank, include six of the largest banks in Europe:

Deutsche Bank, Germany's largest..............................................
Societe Generate, one of Franc s three largest.
Midland Bank Group, a major London clearing bank
Societe Generate de Banque, Belgium's largest.....................
Amsterdam-Rotterdam Bank, largest in the Netherlands.
Creditanstalt-Bankverein, Austria's largest..............................



Assets in

Percent of
stock in EAB
and EAC

9 .1

+2 0
+2 0

Under the statute and your own Regulation Y there is a rebuttable presumption
of control from ownership of so little as 5 percent of the stock, and, if need be,
you are authorized to hold a hearing. Accordingly, there seems reason to believe
that the four largest stockholders of the European-American Bank and Trust
Company, and probably the fifth, should be adjudged to be bank holding com­
panies and subject to Federal Reserve regulations.
I would also like to suggest that in making the factual findings necessary to
determine “control”, the individual influence of each stockholder not be measured
by standards applicable to “control” in a large publicly held corporation. Different
standards of “control” govern the conduct of a joint venture which, by definition/
is a cooperative undertaking. While in a publicly held corporation with majority
and minority shareholders and a whole range of interests in between it is
reasonable to assume the existence of adverse interests, such an assumption is
inappropriate in the case of a joint venture where the stock is not widely held,
and each mmber holds approximately the same interest.
These same banks control also a sister institution called the EuropeanAmerican Banking Corporation which is organized under the New York Invest­
ment Company Act. That Act gives companies organized under it wide powers
to buy and sell stock even though I understand they do not accept deposits
nor underwrite.
Moreover, the American Banker in June 1974 reports that the Deutsche Bank
has a 50% interest in an investment banking firm in New York called UBS-DB,
and that Societe Generale, Societe Generale de Banque, and Amsterdam-Rotterdam have interests in undisposed amounts in another New York investment
banking firm called SoGen-Swiss International Corporation.
As you know the Glass-Steagall Act (12 USC 377) prohibits an American bank
from being affiliated (12 USC 221(a) (b) (2)) “with any corporation, association,
business trust or other similar organization engaged principally in the issue,
flotation, underwriting, public sale or distribution at wholesale or retail or
through syndicate participation of stocks, bonds, debentures, notes or other
“Affiliate” is broadly defined by Glass-Steagall, and it would seem to me that
your Agency should look into the business that European-American Banking
Corporation actually does, and is empowered to do. Of course the ownership by
four of these banks of investment banking firms seems to be a violation of, if not
the letter, certainly the intentions of Glass-Steagall.
I am sure you will agree that we must not permit foreign banks, under the
guise of a joint venture, to do what we forbid to our domestic banks.
Accordingly, I should be much obliged if you would tell me:
3. Whether the ownership, by way of a joint venture of European-Ameri­
can Bank and Trust Company, at least by the four banks with the 20%,
and the one with a 17% interest, does not subject these banks to the Bank
Holding Company Act?
2. Whether the European-American Banking Corporation is an “affiliate”
within the meaning of the Glass-Steagall Act?
3. Whether the European-American Banking Corporation is authorized
under its state charter to engage in any of the activities forbidden to banks
under Glass-Steagall?
4. Whether the European-American Banking Corporation, while not ac­
cepting deposits, or acting as an underwriter, is principally engaged in any
of the other activities forbidden by Glass-Steagall?

5. Whether these six banks each have interests in investment banking
firms, what the firms are, what they do, and whether such ownership does
not make these firms “affiliates” under Glass-Steagall and in violation
thereof ?
Of course, if the present statutes are inadequate to meet this problem, please
be assured I stand ready to consider such new legislation as may be necessary.
S in c e r e ly ,

W r ig h t P a t m a n .

May 14, 1975.
Hon. E d w a r d H. L e v i ,
Attorney General, Department of Justice,
D e ar M r. A ttorney G eneral : I w o u d lik e t o r e q u e s t th a t y o u r D e p a rtm e n t
c o n d u c t an in v e s t ig a t io n t o d e t e r m in e w h e t h e r t h e E u r o p e a n -A m e r ic a n B a n k
and Trust Co. is b e in g o p e r a t e d i n t h e U n it e d S t a t e s i n v i o l a t io n o f o u r a n t it r u s t
la w s . As y o u m a y k n o w E u r o p e a n -A m e r ic a n B a n k , a m e m b e r o f t h e F e d e r a l
R e s e r v e S y ste m is a j o i n t v e n tu r e , a n d i t s p a r e n t c o m p a n ie s a r e :

Assets in


Percent of
stock in EAB
and EAC

Deutsche Bank, Germany’s la rg e st...— . . . ------- —— — ---------------------------------------

^ *5

io n

Societe Generale, one of France's 3! l a r g e s t ..- - - - - - - - ---------------------------------------------------------

g- J


Midland Bank Group, a major London clearing bank.........................................................................
T fX
Societe Generate de Banque, Belgium's fc rg g L- - - - - .............................................
T fV
Amstardam-Rotterdam Bank, largest in the Netherlands...........................................................
J ®
Creditanstalt-Bankverein, Austria’s largest. ...............................................................................................................................................................^ c

I was dismayed to learn that the Department did not conduct a bank merger
study in 1968 when this company was formed. Nor can I understand why such
perfunctory consideration was given to the purchase of the insolvent Franklin
National Bank by European-American in October of 1974.
Your so-called ‘‘Railroad Letter” of October 4, 1976 did not contain any dis­
cussion of the effect of this acquisition on the national and international whole­
sale banking markets, nor did it undertake to explain why the liaison of six
competing banks for the purpose of dividing the American wholesale banking
market between them is not a pare se antitrust offense.
I am enclosing a short report which lays out these issues in greater detail,
and a copy of a letter I addressed to Dr. Arthur F. Bums on April 24,1975 which
is self-explanatory.
_ _ _ . ,
I would appreciate your advising me whether your Department will look into
the matter.
With kindest regards and best wishes, I am,
W r ig h t P a t m a n ,

Vice Chairman, Joint Economic Committee.
M em orandum of L a w

European-American Bank and Trust Co. (EAB) and European-American Bank­
ing Corporation (EABC) form part of a world-wide banking empire commanding
resources in excess of $96 billion. The shareholder/parents of the EAB and EABC
joint ventures include six of Europe’s largest banks; Deutsche Bank, Germany’s
largest, with $24.5 billion in assets, holds approximately 20% of the stock, as does
Sotiete Generale, one of the three largest banks in France, with assets of $20.4
billion. Midland Bank Group, a major London Clearing Bank, with $19 billion
in assets and Amsterdam-Rotterdam Bank, largest in the Netherlands with assets
of $9.6 billion, also have stock interests of approximately 20%. Societe Generale
de Banque, Belgium’s largest bank, with assets of $9.1 billion holds approximately
17% and the remaining 2% is held by Creditanstalt-Bankverein, Austria’s largest
bank, with assets of $4.2 billion.
The predecessor of EAB began its United States operations in New York City
in 1921, as an affiliate of Societe Generale de Banque of Belgium, doing business
under the name of “Banque Beige pour L’Etranger.” In 1950, it became a New

York-chartered bank and a member of the FDIC. At this time its name was
changed to Belgian-American Bank and Trust Co., and a sister subsidiary.
Belgian-American Banking Corp., a state-chartered international investment
company, was organized.
In 1968, Societe Generale de Banque began to sell interests in its American
subsidiaries, and the Dutch, German, and English banks became partners in that
year. The names of the subsidiaries were changed to EAB and EABC to reflect
this change in ownership, and in 1971, the French and Austrian banks were
admitted to the consortium.
At the time of the stock acquisitions, Midland Bank and Societe Generale
(Paris) had full branches operating in New York City. The licenses of both were
surrendered in January 1971, and June 1972, respectively, and their offices were
consolidated in the European-American headquarters.
Prior to its purchase of the insolvent Franklin National Bank in October of
1974, EAB had four Manhattan offices, with headquarters at 10 Hanover Square,
in the heart of the financial district, and a Eurodollar office in the Cayman
Islands. Its operations were concentrated primarily in the area of ‘‘wholesale”
banking—serving mainly business customers with direct business loans, revolving
credit, and foreign exchange, as well as custody accounts and trust operations.
With assets of $580 million, EAB was the 190th largest bank in the United States
in terms of deposits.
EAB a n d EABO a s “ R everse E dge A ct C orporations ”
The Federal Reserve has determined that as a joint venture, the EAB is outside
the terms of the Bank Holding Company Act, as amended in 1970. It is interesting,
therefore, to explore the possible similarities the EAB and EABC bear to cor­
porations which are regulated by the Edge Act.
Viewed from a functional, rather than from a regulatory perspective, the EAB
and EABC are operated in the United States by their European parents in much
the same way that Edge Act Corporations subsidiaries of American parents are
operated abroad.
The Edge Act, passed in 1919, was added to the Federal.Reserve Act in the form
of Section 25(a). It authorized the Federal Reserve Board to charter
For the purpose of engaging in international and foreign banking,.
either directly, or through the agency, ownership, or control of local in­
stitutions in foreign countries.
Edge Act Corporations can indulge in all aspects of international banking—they
may accept drafts generated by foreign trade transactions, and foreign demand
and time deposits; they may provide advances to finance overseas trade and deal
in foreign exchange. In addition, they may also take part in other foreign financing
activities such as the buying and selling of foreign securities, and investment in
foreign non-banking concerns.
The Federal Reserve Board regulates Edge Act Corporations through Regula­
tion D, which details those operations which Edge Acts may undertake within the
United States. Section 211.7 which describes activities specifically allowed, states
its preamble:
It is the Board's general policy to permit corporations transact
such limited business in the United States as is usual in financing inter­
To a large extent, the activities of Edge Acts duplicate those of their parent
banks* overseas branch and correspondent networks, and their international de­
partments within the United States. American banks, however, are not allowed
to invest directly in foreign nonbanking concerns. The Edge Act is a convenient
device **or iv o id in g this restriction, and also allows, theoretically at least, a
limitation on liability for such investments to the amount of the Edge Act’s capital.
Tlowev- r, despite the advantages of a separate legal identity, American Edge Acts
>ften .‘f ain ciose ties to their parent banks. Many work closely with the internai>u., . action goes on to state that demand and time, (but not savings) deposits* may
but only when they relate to international business, and that funds not
.^n,h tiool up in international business can only be held in the form of cash, deposits
fl! banks, or obligations of “ the U.S., any state thereof, or any department, agency or
ent o f or corporation wholly owned by the U.S.”

tional departments of tlieir affiliates, paying a fee for the use of general services
and the advice of officers experienced in particular countries. That such a rela­
tionship is enjoyed by EAB and its European parents is evidenced by EAB’s
absorption of the operations of Midland’s and Societe Generale’s New York
brandies, including personnel.
The activities of European-American in the United States, (especially those of
EABC) are not subject to the same restrictions placed on the operation of Ameri­
can Edge Acts overseas. Investment in foreign banking and non-banking concerns
by American Edge Acts, for example, must be approved by the Federal Reserve
Board. Under the provisions of Regulation K, a general consent is given for invest­
ments which do not exceed a total of $500,000 in any one corporation, and which
do not amount to a holding of more than 25% of the voting shares of any one
corporation. Investments in limited partnerships and other similar organizations
are excluded from this general consent and any investment beyond the stated
levels must be specifically approved.
In addition, the total investment in any one company by an Edge Act Corpora­
tion is restricted to 50% of the Edge Act’s capital and surplus if it is also engaged
in banking. Aggregate outstanding liabilities at any one time may not exceed ten
times an Edge Act’s capital and surplus without prior approval of the Federal
Reserve Board.
Moreover, the permissible activities of Edge Act Corporations abroad can be
sharply contrasted with those activities in which their American parents may
engage. Under the Glass-Steagall Act, American banks may not be affiliates of any
security or investment company. With the exception of one brief period (19571963) the same blanket prohibition has been spared Edge Act Corporations
abroad- -a concession granted in recognition of the scope of activities commonly
pursued by foreign banking interests in their own countries. It was felt, too, that
regulation of parent bank activities provided a sufficient safeguard against the
abuses at which Glass-Steagall was aimed. Thus, under the present law, the bank­
ing agencies have no authority to monitor—or even inquire into—the holdings of
EAB and EABC’s foreign parents.

It seems clear that foreign banks operating in the United States (branches of
foreign banks as well as fully chartered domestic bauks owned in whole or in part
by foreign individuals, corporations or banks) are at least as important a com­
ponent of a sound American banking system as the Edge Act subsidiaries of
American banks operating abroad. Indeed, the failure of a foreign ’‘reverse Edge
Act’*operating in New York City, would probably have a greater adverse impact
on the American economy than would the failure of a Chase Manhattan Edge Act
Corporation’s subsidiary in London, Paris, or Rome. Would an American Edge
Act Corporation structured as a joint venture with participants similar to the
six banks which hold EAB and EABC be authorized by the Federal Reserve Board.
At the present time, only one American joint venture Edge Act Corporation has
been authorized by the Federal Reserve Board-Allied Bank International. Allied’s
banking business is not. dissimilar to that conducted by EAB and EABC prior to
EAB’s acquisition of Franklin National Bank. Their corporate structure and
ownership, however, differ in several important respects.
In contrast to the parents of EAB and EABC, which are in competition through­
out Europe and the rest of the world, the parents of Allied, in the judgment of the
Federal Reserve, do not compete with each other either locally, in New York City
(where the Edge Act Corporation is located), or in national or international
banking markets. In contrast to the size of the owners of EAB nad EABC, original
participation in Allied wa* limited by the Federal Reserve Board to banks with
less than $1 billion in deposits. Although several exceptions to this figure have
been made,2it is still felt to mark that point at which a bank possess sufficient
strength to enter the international market on its own.8This standard was adopted
by the Federal Reserve in order t< reduce the possibility that such joint ventures
would be in violation of the Clayton or Sherman Acts.
! Both the Valley National Bank and United States Bank of Oregon exceeded this limit.
TIip Federal Reserve Board determined, however, that, despite the size o f their deposits,
neither bank was eapable of individual market entry.
■’TU«: factors considered by the Federal Reserve Board in approving joint venture participati
are discussed in a 1972 letter to Cleveland Trust Company, the largest bank in
Ohio, in which the Board denied Cleveland Trust’s request to enter Allied Bank
Till err..; tional.

Another difference between the two joint ventures is with respect to their
ownership. ABI’s is broadly-based, divided among 18 banks of varying size. The
ownership of EAB and EABC, on the other hand, is confined to six banks, all
European giants.

The questions raised by the operation of banking and investment institutions
such as EAB and EABC—especially the antitrust aspects of those problems—
are many and complex. The do not, however, appear to have been considered in
great depth by the regulatory authorities involved.4
Under the Bank Merger Act of 1966, the Justice Department has the responsi­
bility to scrutinize the formation of joint venture subsidiaries for compliance with
the requirements of the Sherman and Clayton Acts. If anticompetitive effects are
found, the Bank Merger Act allows as a defense to the merger, proof that such
effects are outweighed by the convenience and needs of the community which the
bank will serve. Unfortunately, such a study was not done when Societe General
offered five other banks participation in Belgian-American in 1968.
The Supreme Court specifically held in Penn-OUn v. United States, [378 U.S.
158 (1964)] that joint ventures were within the contemplation of Section 7 of
the Clayton Act, noting that:
. the progeny was organized to further the business of its parents,
already in commerce, and the fact that it was organized specifically to
engage in commerce should bring it within the coverage of Section 7.
Moreover, the applicability of Section 1 of the Sherman Act to joint venture sub­
sidiaries was determined by the Supreme Court in 1951, in Timken v. United
States, [341 U.S. 593 (1951)].
The cases considered by the Supreme Court as well as the approach of the
Justice Department in non-banking areas, have identified two separate lines of
inquiry in the joint venture area: first, whether the creation of the joint venture
itself is in restraint of trade or tends to substantially lessen competition; and
second, if the joint venture passes this initial test, whether the venture is subject
to impermissible collateral conditions restricting the activities otf the venture or
its member.
Preliminarily, two types of parent-subsidiary relationship may be distinguished:
A. Where one or more of the parents continue to engage in direct competi­
tion with the joint venture after its formation; and
B. Where the parents transfer a given operation to a newly created joint
venture, and cease engaging (or determine never to engage) in the line of
commerce involved, except indirectly, through the joint venture.
The Type A joint venture was dealt with by the Supreme Court in Timken v.
United States. The Government’s complaint alleged that Timken, an American
firm which manufactured and sold roller bearings, had combined and conspired
with British and French subsidiaries to eliminate competition in world markets.
The Court held that “agreements between legally separate persons and companies
to suppress competition among themselves and others” cannot be justified “by
labelling the project a ‘joint venture.* ” Justice Black was careful to define ex­
actly what he meant by suppression of competition in the joint venture context:
What may not be done by two companies who decide to divide a market,
surely cannot be done by the convenient creation of a legal umbrella—
whether joint venture or common ownership and control—under which
they achieve the same objective by in unison.
Thus, where competition in a relevant market still exists between a joint venture
and a parent, every decision by the joint venture as to prices, production, cus­
tomers, or territory necessarily involves price-fixing and divisions of markets, and
runs the risk of being illegal per se.
The Court also refused to accept Timken’s contention that its agreements were
"reasonable” restraints of trade in view of current foreign trade conditions:
The argument in this regard seems to be that tariffs, quota restrictions
and the like are now such that the export and import of antifriction
4 One Federal Reserve official was o f the opinion that the anticompetitive impact o f such
joint ventures was simply not a pressing problem at this time— while American banks
control approximately 7% o f the total banking assets abroad, foreign banking interests in
the United States acconnt for only 3% o f our total.

bearings can no longer be expected as a practical matter; that appellant
cannot successfully sell its American-made goods abroad; and that the
only way it can profit from business in England, France and other coun­
tries is through the ownership of stock in companies organized and manu­
facturing there.
It seems clear that the creation of a common subsidiary by six European
banks already competing in the wholesale international banking market, is a
Type A joint venture, at least with respect to the five largest participants. It
embodies a de facto agreement to divide the American wholesale market between
competitors who have the demonstrated ability to enter that market individually.
However, it is also possible that the EAB-EABC combination could be con­
sidered a Type B joint venture with respect to those of its parents—if any-—which
do not compete in the international banking market, and, but for the joint
venture, would be incapable of individual market entry. The legality of a Type
B joint venture will depend on factors very similar to those which govern the
legality of a merger:
, ,
(1) The shares of the market held by the leading companies in the line of
commerce involved;
(2) The parent’s share of the market prior to the joint venture; and,
(3) The competitive capabilities of the parents prior to the joint venture.
These factors necessitate a consideration of the possibility that the merger
might tend to eliminate or lessen potential, as well as actual, competition in a
given area. Pewn-Olin v. United States dealt with an action brought under Section
7 of the Clayton Act to challenge a joint venture between two leading chemical
corporations. The puropse of the venture was to produce and market a particular
product in a regional chemical market dominated by two other firms. The Supreme
Court agreed with the Government that the joint venture eliminated the possi­
bility that one or both firms might enter the market independently.
The existence of an agressive, well-equipped and well-financed corpora­
tion engaged in the same or related lines of commerce waiting anxiously
to enter an oligopolistic market would be a substantial incentive to
competition which cannot be underestimated.
The court went on to state that:
The test of the section [Section 7, Clayton] is the effect of the acquisi­
tion. Certainly the formation of a joint venture, and the purchase by the
organizers of its stock would substantially lessen competition—indeed
foreclose it—as between them. , . Realistically, the parents would not
compete with their progeny.
. Inevitably, the operations of the joint
venture will be frozen to those lines of commerce which will not bring it
into competition with the parents and the latter
will be foreclosed
from the joint venture's market.
The Court also noted that while a merger was not perfectly analagous to a
joint venture, the merger intent—seeking to protect a market by acquiring a
potential competitor was equally illegal in the context of a joint venture. It is
also interesting to note that at least two members of the Court, Douglas and
Black, would have found a per se violation of Section 1 of Sherman, under the
standards announced in Timken.
The creation of EAB eiminated not only potential, but actual competition in
the New York wholesale—national and international—banking markets. As noted
above, in 1968, both Midland Bank and Societe Generale de France operated fall
branches in New York City. Their licenses were surrendered in 1971 and 1972
in order that their operations might be consolidated in the European-American
headquarters. The other European banks involved (while not having an estab­
lished New York presence) were certainly potential competitors, exercising some
influence on the behavior of those European banks participating more directly
in the New York international market. [United States v. Falstaff Brewing Co.,
410 U.S. 526, 93 S.Ct.1096 (1973)]. It is inconceivable that these large central
banks, already participating in the international market did not intend to
establish a presence in so important a center as New York City.
While the absence of Justice Department comment on EAB and EABC in
1968 is puzzling, It is even more difficult to understand the Department’s per­
functory approval of EAB’s acquisition of Franklin National Bank. The Depart­
ment’s “Railroad Letter” (6 November 1974) was limited to a discussion of
possible anti-competitive effects in the Long Island retail banking market. Again,

the antitrust implications of joint venture competition in the wholesale banking
market were ignored. Wholesale banking was, and continues to be, EAB’s pri­
mary field of endeavor. The Chairman of the Board of Directors and President
of the EAB, Harry Eckblom, is quoted by the Wall Street Journal and New York
Times as saying that EAB’s management plans to combine only the “strongest’*
aspects of Franklin’s business with its own wholesale banking orientation.
Banking analysts estimate that, despite Franklin’s image as a retail bank,
only 16% of its loans were retail by the end of 1973. The FDIC’s first report on
the Franklin National Receivership (2 February 1975) indicates that EAB
selected from Franklin’s assets approximately $250 million in cash and due
from banks, $371 million in securities (the bulk of which are United States
treasuries and Government agencies) and $761 million in loans at Franklin
National’s book value. (These loans include real estate mortgages and commer­
cial and installment loans.) EAB is now the 48th largest American bank, having
acquired from Franklin National an additional 74 branches on Long Isalnd and
26 in New York City. Moreover, EAB elected to retain Franklin’s London branch
(which raises, again, the possibility of antitrust violations). EAB controls de­
posits of approximately $1.88 billion and has $2.3 billion in total assets. In con­
junction with the EABC, which has offices in New Yoirk, San Francisco, Los An­
geles, and Nassau, this joint venture commands assets in excess of $4 billion.
The Justice Department excuses the inadequacy of the “Railroad Letter” on
the basis of the emergency situation created by the failure of Franklin National.
It was under intense pressure from both the Federal Reserve Board and the
FDIC to approve a purchaser. Now that the emergency is over, it would be well
for the Justice Department to consider the implications of its approval, and
formulate some guidelines for dealing with the problems which are certain to
arise in the future.
C o n g r e ss op t h e U n it e d S t a t e s ,
J o in t E c o n o m ic C o m m i t t e e ,

Washington, D.C. May 27,1975.
Hon. E d w a r d H. L e v i ,
Attorney General, Department of Justice,
Washington, D.C.
D e a r M r . A t t o r n e y G e n e r a l . The New York Times of May 19, 1975 and the
American Banker of May 20,1975 report that an application is to be made to the
Superintendent of Banks of the State of New York by the banks listed below to
form a new bank named United Bank, Arab and French (UBAF-N.Y.), and to op­
erate it as a joint venture similar to the European-American Bank of which I
wrote you under date of May 14,1975.

N am e

........... ..........
Credit Lyannais, Paris, France..
Bankers Trust, New York.....................................................
Security Pacific Bank of California, San Diego..
First National Bank, Chicago, III..........................................................................................
Banque Francaise du Commerce Exterieur, Paris, France___________
Union de Banques Arabs et Francaises, UBAF, Paris, France....................
Texas Commerce Bancshares, Houston, T e x -........................................... .................

Assets in •
s . 982



World *

> Business Week, April 21,1975.
* American Banker, July 1974.
. * Deposits only. The American Banker states that UBAF “ is 31.95 percent owned by the $23.6 billion deposit Credit
Lyannais, 8 percent by the $2.6 billion deposit Banque Francaise du Commerce Exterior, Paris, with the remaining shares
held by about 24 Arab banks.”

As I pointed out to you in my letter of May 14th with respect to the European*
American Bank, there are fundamental antitrust objection to joint ventures of
this type. Such a bank would doubtlessly do a retail as well as a wholesale bank­
ing business, an intrastate as well as an interstate business, and a naional as well
as an international business. If so, this would put the joint venture bank in
direct competition with its parent banks and consitute a per se antitrust offense
(Timken v. United States, 341 U.S. 593 (1951); PennrOUn v. United States, 378
U.S. 158 (1964), and Topco v. United States, 405 U.S. 596 (1971)).

Moreover, once the Superintendent approves this joint venture there is no
chance that any one of the many foreign banks will ever enter the New York
market oh its own.
As the Supreme Court held in Penn-OUn, supra, a joint venture is a merger
subject to Clayton Seven and the Bank Holding Company Act compels you and
the banking agencies, state and federal, to scrutinize its formation so as to avoid
antitrust offenses.
In addition, because foreign banks are involved, Section 14(g) of the Federal
Reserve Act (Title 12 USC 348(a)) gives the Board of Govenors of the Federal
Reserve System “special supervision” over “transactions of any kind” that
Federal Reserve members have with foreign banks. Indeed, under the statute,
officers of member banks are forbidden to negotiate with forign banks “without
first obtaining the permission of the Board of Governors” and, if permission be
granted, “a full report” must be given the Federal Reserve Board.
There are of course solid reasons why the Federal Reserve Board should dis­
approve the organization of such a bank. In the first place, participation by any
one of these four American banks in ownership of such a New York chartered
bank would be interstate banking in violation of the McFaddin Act (12 U.S.C. 36),
and the Bank Holding Company Act (12 U.S.C. 1842(d)).
Even if the foreign banks were to own the bank alone it is a joint venture, and
a holding of five percent should raise a rebuttable presumption of control sub­
jecting the foreign bank parents to the Bank Holding Company Act. It is unreal­
istic in joint ventures to measure control by percentage of stock ownership.
Investigation of the foreign banks may well reveal that they have interests in
investment companies not permitted to our own banks under Glass-Steagall. The
Superintendent of Banks of the State of New York should not issue a charter to
such an organization not only because the foreign parent banks have real com­
petitive advantages over our domestic banks in that they are not subject to the
reserve and loan requirements of member banks of the Federal Reserve System,
but also because under the above cited decisions of the Supreme Court of the
United States the joint ventaure itself is a per se antitrust offense.
My information is that to date no notification has been filed of an intention to
apply for a charter for this proposed bank, and if such notification be filed within
four weeks, a plan of organization of the bank must be filed.
I trust you will promptly investigate the matter. If you conclude with me that
the granting of such charter be unwise and unlawful I trust that yon n-iH
promptly communicate your conclusions to the Superintendent of Banks of the
State of New York and. if necessary, take whatever legal action be appropriate
to stop this bank before it begins.
With kindest regards and best iwshes, I am,
W e i g h t P a t m a n , Vice Chairman.
B o ard o p G o v e r n o r s ,
F ederal R eserve S y s t e m ,

Washington, D.C., June 26,1915.
Hon. W r i g h t P a t m a n ,
Chairman, Subcommittee on Domestic Monetary Policy, Committee on Banking,
Currency and Housing, House of Representatives, Washington, D.C.
D e a r M r . C h a i r m a n : I am responding to your letter of April 24.1975. in which
you ask certain questions about the status of the foreign bank shareholders of
European-American Bank and Trust Company (EABTC), New York, New York,
under the provisions of the Bank Holding Company Act of 1956 and the Banking
Act of 1933 (the so-called Glass-Steagall Act). I have asked the staff to prepare
a memorandum commenting on the questions raised and I am enclosing a copy.
I hope you will find it helpful to your concerns.
As indicated in the staff memorandum, the statutory provisions of the Bank
Holding Company Act and the Glass-Steagall Act presently limit the Board’s
jurisdiction over the foreign bank shareholders of EABTC and their banking
and nonbanking operations in the United States. A consortia bank, such as
EABTC, is a frequent form of banking organization in many foreign countries
but is relatively unique in U.S. banking markets. The question of how the indi­
vidual shareholding banks of such an entity should be treated under U.S. banking
laws poses many difficult problems and it occupied a great deal of mv attention
and that of my colleagues on the System Steering Committee on International
Banking Regulation in preparing the Board’s legislative proposals to regulate

foreign banks in the United States. As you know, the proposal that has been
submitted to Congress would not extend coverage of the Bank Holding Company
Act to the foreign bank shareholders of EABTC, The Board concluded that it was
not possible to do so without either singling out foreign bank shareholders of
consortia banks in a discriminatory fashion or changing the general definitions
of control in the Bank Holding Company Act The former would have been
contrary to the principle of national treatment underlying the proposal and
could possibly cause retaliation abroad. The latter could have domestic reper­
cussions and would reopen difficult questions concerning definitions of “control”
that required considerable time and effort in Congress’ consideration of the 1970
Amendments to the Bank Holding Company Act. Because of these difficulties
and because of the present limited number of domestic consortia banks, the
Board decided not to recommend specific amendments to cover the case of the
foreign bank shareholders of consortia banks such as EABTC.
At the present time, to my knowledge, there are only two other consortium
banks, The Japan California Bank and The Chicago-Tokyo Bank each of which
is owned by a large number of corporate shareholders none of whom own more
than 5 per cent of the outstanding voting shares of the bank. The shareholders
are mainly Japanese industrial or trading companies with only two shareholders
of Japan California Bank and one shareholder of Chicago-Tokyo Bank being
Japanese banks.
In addition to these existing joint ventures, as you know, a group of Arab
banks along with a French bank and four U.S. bank holding companies have
indicated an intention to establish a consortium bank in New York to be known
as UBAF Arab-American Bank.
In connection with your letter of May 27,1975, to Attorney General Levi con­
cerning the proposed establishment of this new consortium bank, I would like to
note that the domestic participants in the proposed bank have kept myself and
the Board’s staff advised of this proposed venture. In this regard, I have asked
the staff to analyze several of the legal questions you raised concerning this
venture based on information which has been made available to date. A staff
memorandum on these issues is also enclosed. It is my understanding that, if
chartered, the bank will apply both for FDIC insurance and membership in the
Federal Reserve System.
A joint venture bank which is a member of the Federal Reserve System, such
as EABTC, is supervised and examined to the same extent as any other member
bank, and is, of course, subject to the same monetary and regulatory restrictions
imposed on other member banks. In this regard, I believe EABTC to be a sound
and well-managed banking institution.
One aspect of a joint venture form of banking organization that does present
a unique problem for bank regulators is, however, the extent to which the various
shareholders of a joint venture bank are prepared or obligated to provide finan­
cial support for the venture in the event of financial difficulties. This matter has
emerged recently in relation to joint venture banks abroad and is a matter of
concern and study for bank supervisors in all countries.
The status and activities of foreign banks in this country, including those that
invest in consortia banks such as EABTC, raise important issues of public policy.
I would hore that hearings on the Board’s proposed legislation might be sched­
uled for the near future so that these issues might be aired and that Federal
legislation covering foreign bank activities in the United States might be
enacted this year.
G e o r g e W

. M

it c h e l l


B o a r d o f G o v e r n o r s o f t h e F e d e r a l R ese r v e S y s t e m , J u n e 23, 1975, S t a f f
M e m o r a n d u m o n P ro po s e d UBAF A r a b -A m e r i c a n B a n k , N e w Y o r k , N .Y .

In his letter of May 27,1975, to Attorney General Levi, Chairman Patman notes
three possible legal impediments to the organization of UBAF Arab-American
Bank: (1) antitrust objections under section 7 of the Clayton Antitrust Act
(15 U.S.C. 18); (2) possible legal objections under section 14(g) of the Federal
Reserve Act (12 U.S.C. 348(a)) ; and (3) possible violations of the multi-State
banking prohibitions of the McFadden Act (12 U.S.C. 30), and the Bank Holding
Company Act (12 U.S.C. 1842(d)). Chairman Patman also indicates that he
feels Board approval of the organization of UBAF is necessary under the Bank

Holding Company Act, and that UBAF will have an advantage over other U.S.
banks since it will not be a member of the Federal Beserve System.
It is understood that at the present time, the organizers of UBAF have not as
yet made a formal filing with the Superintendent of Banks of the State of New
York, although certain draft documents have apparently been filed for review
by the staff of the New York Banking Department.
The purpose of this memorandum is to give a preliminary evaluation of Chair­
man Patman’s legal or other objections to the formation of UBAF based on the
staff’s knowledge of this situation to date. In this regard, this memorandum is
intended as an outline of the possible legal issues involved in the formation of
UBAF, and is not intended as an exhaustive review of or formal staff determina­
tion on any such issues.
For analytical purposes, this memorandum is subdivided into four areas of
legal inquiry: (1) New York State Banking Law—Summary of Statutory Provi­
sions Relating to the Organization of a State Bank; (2) Legal Issues under the
Federal Reserve Act; (3) Legal Issues under the Bank Holding Company Act;
and (4) Legal Issues under Section 7 of the Clayton Antitrust Act.

Under § 4002 of the New York Banking Law, the proposed incorporators of a
New York bank or trust company such as UBAF, must first sign a notice of inten­
tion to organize such corporation which must specify their names, the name of
the proposed corporation, the amount of the capital stock, and the place where
its office is to be located as set forth in the organization certificate. The original
of such notice must be filed in the Superintendent of Banks’ office within sixty
days after its date of execution, and a copy thereof must be published at least
once a week for four successive weeks in a newspaper designated by the Super­
intendent. At least fifteen days before an organization certificate is filed with
the Superintendent, a copy of such notice must be served upon each State bank
and trust company doing business in the village, borough or city, if in a city not
divided into boroughs, specified as the location of the office of the proposed
corporation. To the staff’s knowledge, the incorporators of UBAF have not as yet
filed such notice, although a draft notice has apparently been filed for review
and comment by the staff of the New York Banking Department.
After the lapse of at least twenty-eight days from the date of the first due
publication of the notice of intention to organize a bank and within ten days after
the date of the last publication thereof, an organization certificate must be sub­
mitted to the Superintendent, together with affidavits or other satisfactory
evidence of publication of the required notice.1 The contents of the organization
certificate are specified in § 4001 of the New York Banking Law.
Within twenty days after the receipt by the Superintendent of an organization
certificate for a proposed bank, the Superintendent must file such certificate for
examination, if the certificate and accompanying documents comply with the
statutory requirements.2 If a certificate or other documents do not comply, they
are returned to the incorporators within the twenty-day period.8
If the Superintendent shall find after investigation and examination (1) that
the character, responsibility, and general fitness of the person or persons named
in such certificate are such as to command confidence and warrant belief that
the business of the proposed bank will be honestly and efficiently conducted in
accordance with the intent of the New York State banking laws, and (2) that the
public convenience and advantage will be promoted by allowing such proposed
bank to engage in business, he must, within 90 days after a certificate has been
filed for examination, submit the organization certificate, all relevant documents,
the results of his investigation and his recommendation to the banking board,
which is composed of the Superintendent as its Chairman, and twelve other
members appointed by the Governor by and with the advice and consent of the
State Senate.4
The ninety-day period may, however, be extended by a written consent exe­
cuted by a majority of the persons filing the organization certificate, for such
reasonable period of time as may be required for the applicants to comply with
1 N.Y. Banking Law $ 4003 (McKinney 1971).
*Id.s | 24.

conditions precedent stipulated by the Superintendent as being a prerequisite to
his recommendation to the banking board.®
If three-fifths of the banking board vote for approval and the Superintendent
remains satisfied that the bank should be permitted to engage in business, he
approves and dates the certificate.6 The corporate existence of the bank thereupon
begins and it may elect officers and take other steps relating to its organization.7
The bank may not begin any other business, however, until all of its capital stock
has been paid ini cash and a list of its shareholders shall have been delivered to
and filed by the Superintendent8
If three-fifths of the banking board do not vote for approval, or if the Super­
intendent, either prior or subsequent to the submission of the certificate, is not
satisfied that the bank should be permitted to engage in business, the Superin­
tendent refuses the certificate.*

Chairman Patman avers in his letter that section 14(g) of the Federal Reserve
Act (12 U.S.C. 348(a)) gives the Board “special supervision” over “transactions
of any kind” that “Federal Reserve member banks” have with foreign banks.
Section 14(g) of the Federal Reserve Act provides that the Board “shall exer­
cise supervision over all relationships and transactions of any kind entered into
by any Federal reserve 'bank with any foreign bank or banker. . .” (emphasis
added). It is thus clear from the plain words of the statute that such special
supervision applies only to the twelve Federal Reserve Banks and not to each of
the member commercial banks. Such construction is also conclusively supported
by the legislative history of the provision in question.
If chartered, UBAF, of course, need not become a member of the System. The
organizers of the bank have, however, apparently agreed that if UBAF is char­
tered, it will apply both for System membership and FDIC insurance.
In passing upon any application by UBAF for membership in the System, the
Board must by statute consider the financial condition of the applying bank, the
character of its management, and whether or not the corporate powers exercised
are consistent with the purposes of the Act.10 In addition, the Board must by
statute determine that the bank possesses capital stock and surplus, which in
the Board's judgment, are adequate to the character and condition of its assets
and to its existing and prospective deposit liabilities and other corporate
If it became a member, UBAF would, of course, be subject to examination and
supervision by the Board,12and would be subject to the Board's monetary controls
over reserves and interest rate limitations.18In addition, it would become subject
to the provisions of the Glass-Steagall Act,u and the McFadden Act,35 and would
have to abide by the restrictions of section 23A of the Act on loans to and invest­
ments in affiliates (12 U.S.C. 371c), the restrictions of section 22(g) of the Act
on loans to executive officers (12 U.S.C. 375a), as well as other financial and other
restrictions contained in the Federal Reserve Act.16
If it became a member bank, UBAF would also be under the Board’s jurisdic­
tion with respect to the administration and enforcement of certain provisions of
the Federal Deposit Insurance Act, including the Bank Merger Act17 and the
Financial Institutions Supervisory Act of 1966.18
As a member bank, UBAF would also be under the Board’s jurisdiction with
respect to the administration and enforcement of certain federal consumer credit
* M , §4004.
• Id., §


1012 U.S.C. 322 (1970).
u 12 TT.S.C. 329 (1970).
1212 U.S.C. 325 (1970).
1812 U.S.C. 371a, 371b, and 4G1 (1970).
14 Glass-Steagall Act restrictions on a national bank’s dealing In investment securities
nnd stock apply to State member banks nnder f *0 o f section 9 of the Federal Reserve Act
(12 U.S.C. 335). Prohibitions against affiliation and interlocking personnel relationships
with securities companies apply nnder 12 U.S.C. 377 and 78 respectively.
15 See paragraph 3 o f section 9 o f the Act (12 U.S.C. 321) which applies the McFadden
Act restrictions on branching to State member banks.
16 See paragraph 6 o f section 9 o f the Federal Reserve Act. which applies certain provi­
sions o f the National Bank Act to a State member bank and certain provisions of the
United States Criminal Code to its officers* agents, and employees. See also restrictions on
acceptances o f member banks in 12 U.S.C. 372.
w 1.2 U.S.C. 1828(c) (1970).
* 12 U.S.C. 1818(b) (1970).

protection laws, such as the Trust-in-Lending Act," the Fair Credit Reporting
Act,80and the Equal Credit Opportunity Act.21
While the above is not intended to be exhaustive, it does indicate that if it
became a member bank, UBAF would, in its banking operations, be subject to
a substantial amount of federal control over its activities.

Under the Bank Holding Company Act, any company, as defined in section 2(b)
of the Bank Holding Company Act (12 U.S.C. 1841(b)), must obtain the Board’s
approval to become a bank holding company.22As defined in section 2(a) (1) of
the Act, a bank holding company means any company which has “control” over
any bank or over any company that is or becomes a bank holding company by
virtue of the Act.* Under the Act, any company is deemed to have control over
a bank or over any company if (a) the company directly or indirectly or acting
through one or more other persons, owns, controls, or has power to vote 25 per
centum or more of any class of voting securities of the bank or company; (b) the
company controls in any manner the election of a majority of the directors or
trustees of the bank or company; or (c) the Board determines, after notice and
opportunity for hearing, that the company directly or indirectly exercises a con­
trolling influence over the management or policies of the bank or company.*4
In any case in which there is a proposal to organize a new bank, whether
national or State, and a company is to acquire control of such new bank and
become a bank holding company, it has been the Board’s practice not to accept
the filing of an application by the proposed bank holding company unless it is
reasonably likely that the new bank will be chartered. Accordingly, applications
in such situations are generally not accepted until receipt of information that
the chartering authority has given preliminary or tentative approval to the pro­
posed charter. The Board has therefore not yet received any bank holding com­
pany application in connection with the organization of UBAF, nor has there
been any determination by the Board or staff as to whether any application will
be required in the case of UBAF. The organizers of UBAF have, however, agreed
to furnish the Board’s staff with copies of all final documents filed with the New
York banking authorities, for analysis and comments by the Board’s staff.
With respect to the four domestic bank holding companies that plan to partici­
pate in the organization of UBAF—Bankers Trust New York Corporation, First
Chicago Corporation, Security Pacific Corporation and Texas Commerce Bancshares—it is provided in section 3(a)(3) of the Bank Holding Company Act
(12 U.S.C. 1842(a) (3)) that a bank holding company needs the Board’s approval
to acquire direct or indirect ownership or control of any voting shares of any
bank if, after such acquisition, such company will directly or indirectly own or
control more than 5 per centum of the voting shares of such bank. From infor­
mation available to date, it appears that each of the four bank holding companies
proposes to acquire only 5 percent of the voting shares of UBAF and thus each
of such bank holding companies would not have to obtain prior Board approval
under section 3 of the Act to acquire those shares. The exemption from prior
Board approval under section 3 of the Act also exempts such shareholdings from
the multi-State prohibitions of section 3(d) of the Act, since, by its terms, section
3(d) only prohibits the Board from approving “any application under this
section (i.e., under section 3 of the Act)” which will permit a bank holding com­
pany to acquire voting shares of an out-of-State bank. In the case of a 5 percent
or less acquisition, no application is required under section 3 of the Act, and
thus section 3(d) by its terms is not applicable. At present the staff knows of
three other bank holding companies which own or control 5 percent or less of
the voting shares of a bank outside their principal State of business—The Bank
of Tokyo, Ltd., which owns 5 percent of The Chicago-Tokyo Bank, Chicago,
Illinois; the Dai-Ichi Kangyo Bank, Ltd., which owns less than 5 percent of the
shares of The Japan California Bank; and The Mitsui Bank, Ltd., which owns
less than 5 percent of the shares of City National Bank of Honolulu, Hawaii.
While dealing with the issue of multi-State banking, it should be noted that
Congressman Patman also indicated that he thought the proposed investments
» 1 5 U.S.C. 1601 et seq. (1970).
» mtte m ‘
8t h f A c t o^October 28, 1074 (P.L. 93-495 ; 88 S ta t 1512) eff. 12/28/75.
Codified to 15 U.S.C. 1666.
» 1 2 U.S.C. 1842(a) (1970).
» 12 U.S.C. 1841 (a ) (1 ) (1970).
“ 12 U.S.C. 1841(a) U ) (1970).

in UBAF by domestic bank holding companies might violate the provisions of the
McFadden Act (12 U.S.C. 36). Under that Act, a national bank does not have the
power to establish a branch office in a State outside of the State where it is
situated. State member banks are subject to these same restrictions under sec­
tion 9 of the Federal Beserve Act. Since UBAF is to be a separately incorporated
State bank, and the proposed investment is to be made by domestic bank holding
companies and not their subsidiary banks, the restrictions of the McFadden Act
would not apply unless the facts indicated that UBAF was, in fact, to be staffed,
onganized and run as a branch office of a subsidiary national or State member
bank of one of the holding companies involved.

In United States v. Penn-OUn Chemical Co.,25the U.S. Supreme Court held for
the first time that Section 7 of the Clayton Antitrust Act applies to joint ven­
tures. While recognizing that “a joint venture creates a new competitive force”
whereas mergers eliminate one of the participating corporations from the mar­
ket, the Court nevertheless concluded that “ [o]verall, the same considerations
-apply to joint ventures as to mergers.. ” 28
Any action by the Justice Department against UBAF would thus, of course,
'depend on its evaluation of the anticompetitive effects of the proposed joint
venture under the standards of Section 7 of the Aot which, in general, prohibits,
acquisitions, “where in any line of commerce in any section of the country, the
^effect of such acquisition may be substantially to lessen competition, or to tend
to create a monopoly.”
The type of inquiry required in considering the legality of a joint venture under
Section 7 is indicated by the Supreme Court’s instruction in Penn-Olin that the
trial court on remand take account of the following criteria:
[T]he number and power of the competitors in the relevant market;
the background of their growth; the power of the joint venturers; the
relationship of their lines of commerce; the competition existing between
them and the power of each in dealing with the competitors of each other;
the setting in which the joint venture was created; the reasons and
necessities for its existence; the joint venture’s line of commerce and the
relationship thereof of that of its parents; the adaptability of its line of
commerce to non-competitive practices; the potential power of the joint
venture in the relevant market; and appraisal of what the competition
in the relevant market would have been if one of the joint ventures had
entered it alone instead of through Penn-Olin; the effect* in the event
of this occurrence, of the other joint venturer’s potential competi­
tion; and such other factors as might indicate potential risk to com­
petition in the relevant market.87
All of these criteria, of course, involve questions of fact, and thus until all of
the relevant facts are obtained and analyzed, it would be premature to express
any competitive judgment on the joint venture.
Any Justice Department action would also depend on whether a bank holding
company application will be required under the Bank Holding Company Act, for
if such an application is required, the Board, under section 3(c) of the Act (12
U.S.C. 1842(c)), must deny any bank holding company application involving the
acquisition of a bank or bank holding company that violates the standards of
Section 7 of the Clayton Act, unless it finds “that the anticompetitive effects
of the proposed transaction are clearly outweighed in the public interest by the
probable effect of the transaction in meeting the convenience and needs of the
community to be served.” Should the Board approve any such formation, the
Justice Department would, under section 11(b) of the Bank Holding Company
Act (12 U.S.C. 1849(b)), still have thirty calendar days to bring suit to prevent
the acquisition. Under section 11(b) of the Bank Holding Company Act, any
Board approval order would automatically be stayed by a Justice Department
suit, unless the court specifically ordered otherwise. If Bank Holding Company
Act approval is not required, the Justice Department could, of course, still bring
suit to prevent the formation of UBAF under Section 7 of the Clayton Act. The
* 378 U.S. 158,167-68 (1964).
Id*, at 169—170.
27 Id*, at 177. On remand, the district court again upheld the joint venture. United States
v. Penn-OUn Chemical Co., 246 F. Supp. 917 (D. DeL 1965*), aff’ d by an equally divided
Court, 389 U.S. 308 (1967).

formation would not, however, be automatically stayed if such suit were brought;
rather, it appears that in such case the Justice Department would have to show a
reasonable probability that it would ultimately prevail on the merits in order to
obtain a temporary restraining order or other prohibition.
B o a r d o p G o v e r n o r s o f t h e F e d e r a l R e s e r v e S y s t e m , J u n e 23, 1975, S t a f f /
M e m o r a n d u m o n E u r o p e a n - A m e r i c a n B a n k a n d T r u s t C o ., New Y o r k , N.Y*

European-American Bank and Trust Company (EABTC), a New York State**
chartered bank, assumed certain assets and liabilities of Franklin National Bankon October 9,1974. Shortly thereafter, on October 25, 1974, the Board approved".
EABTC’s application for membership in the Federal Reserve System and EABTCbecame a State member bank on October 31,1974. The Board's files indicate that
the stockholders of EABTC are as follows (as of October 31,1974):

Total shares


Amsterdam-Rotterdam Bank, N .V ., Amsterdam, The Netherlands__________________
Creditanstalt Bankverein. Vienna, Austria-----------------------------------------------------------------2,616
2 .2 7
German-American Capital Corp., a subsidiary of Deutsche Bank, A .G ., West Germany--------21, 111
Midland Bank, Ltd., Longon, England______________________________________
21, 111
Societe Generele de Banque S .A ., Brussels, Belgium--------------------------------------------------20,996
Societe Generele, Paris, France___________________________________________
21, 111
European-American Banking Corp., New York, N .Y----------------------------------------------------- ------------ 9,990_________8.68
Total, percent______________________________________________________________

1 99.79

* The remaining shares are qualifying shares held by directors.

As noted by Chairman Patman, EABTC's shareholders are among the largest
banks in Europe. Amsterdam-Rotterdam Bank is the largest bank in the Nether­
lands with assets in excess of $9.6 billion; Creditanstalt Bankverein is the largest
bank in Austria with assets in excess of $4.2 billion; Deutsche Bank is the largest
German commercial bank, with consolidated assets of approximately $24.5 bil­
lion ; Midland Bank, a major English clearing bank, has consolidated assets of
nearly $20 billion; Societe Generale de Banque (Belgium) is the largest bank
in Belgium with assets of approximately $9.1 billion; and Societe Generale of
France is one of the three largest banks in France with consolidated assets of
$20.4 billion.

Since no one of the foreign bank sharehloders of EABTC owns or controls 25
per cent or more of the shares of EABTC, or itself controls in any manner the
election of a majority of the directors of EABTC, none of the foreign banks has
ever been under a duty to apply to become a bank holding company. While the
Board could require any of the foreign bank shareholders to apply to become a
bank holding company, it could only do so if it found, after notice and opportunity
for hearing, that any such foreign bank directly or indirectly exercises a con­
trolling influence over the management or policies of EABTC. In this regard,
there does not appear to be any basis for instituting a controlling influence pro­
ceeding against any of the foreign bank shareholders of EABTC at this time,
since none of the foreign bank shareholders is presumed to control EABTC under
the Board's rebuttable presumptions of control (§ 225.2(b) of Regulation Y, a
copy of which is enclosed) and no information has otherwise been obtained
which would indicate that any one of the foreign bank shareholders of EABTC
exercises a controlling influence over the management or policies of EABTC.
At the time the Congress was considering the 1970 Amendments to the Bank
Holding Company Act, the House originally passed H.R. 6778 which amended the
definition of “control” in section 2(a) (2) (A) of the Act, such that any ‘‘person”
would have “control” over a bank or a company for purposes of the Act “if the
person directly or indirectly or acting in concert with one or more other persons,
. . has power to vote 25 per cent or more of any class of voting securities” of
the bank or company. However, as finally enacted by the Congress, the phrase
“any person” was deleted and replaced by the phrase “any company”, and the
phrase “acting in concert with one or more other persons” was deleted and re­
placed by the phrase “acting through one or more other persons”.1 Had the “in
x The statutory phrase first appeared in H.R. 6778 when it was reported out by the
Senate Banking Committee.

•concert” language been adapted by the Congress, it is possible that each of the
foreign banks with significant shareholdings in EABTC could have been required
to apply to become a bank holding company under the Act Under the statutory
language as adopted, however, a company cannot be deemed to be a bank holding
company merely by showing that it acts in concert with other shareholders to
control the bank; rather, it appears that it must be shown that the company acts
“through” one or more other persons to control the bank. On the basis of available
factsf it does not appear that any of the foreign bank shareholders acts through
the other shareholders to control EABTC. Thus, no foreign bank shareholder of
EABTC has ever been required to become a bank holding company.
Under the present definition of “company” in the Act, if a corporation, partner­
ship, business trust, long-term trust, association, or similar organization con­
trolled EABTC, that entity would have to apply to become a bank holding com­
pany. If the shareholders of EABTC had themselves formed a partnership, asso­
ciation or similar organization and that separate organization acted through
the foreign bank shareholders to control EABTC, that entity would be a bank
holding company. To date, the staff has been unable to obtain any factual evi­
dence which would support a finding that such an independent entity exists, or
that the foreign bank shareholders of EABTC are subject to the central control­
ling influence of any “company” as defined in the Act

As a member bank, EABTC is subject to the provisions of the Glass-Steagall
Act. Under section 20 of the Glass-Steagall Act (12 U.S.C. 377), EABTC may not
be affiliated, in any manner described in section 2(b) of the Glass-Steagall Act
(12 U.S.C. 221a), with any corporation, association, business trust, or other
similar organization engaged principally in the issue, flotation, underwriting,
public sale, or distribution at wholesale or retail or through syndicate participa­
tion of stocks, bonds, debentures, notes or other securities. A copy of the statutory
definitions of “affiliate” under section 2(b) of the Glass-Steagall Act is attached.
It is clear that European American Banking Corporation (EABC), New York,
New York, an Investment Company chartered under Article XII of the New
York State Banking Law, is an “affiliate” of EABTC within the meaning of
section 2(b) (2) and (3) of the Glass-Steagall Act, as EABC shares common
management with and has the same owners as EABTC.9 While EABC has the
authority under its charter powers to deal in securities,* EABC does not in fact
principally engage in any of the securities activities included within the proscrip­
tions of section 20 of the Glass-Steagall Act referred to above. Due to its being
affiliated with EABTC, a member bank, EABC is also now prohibited from
principally engaging in any such securities activities in the future notwithstand­
ing its charter powers.
Deutsche Bank, one of the six major foreign bank shareholders of EABTC, has
a 50 percent share interest in UBS-DB Corporation, New York, New York, a
securities company with membership on the Pacific and PBW stock exchanges.
This ownership does not ake UBS-DB Corporation an affiliate of EABTC,
however, since there is no common control of EABTC and UBS-DB, as Deutsche
Bank does not control EABTC within the meaning of section 2(b) of the GlassSteagall Act (it only has an indirect 18.36 percent share interest in EABTC).
The maining shares of UBS-DB Corporation are owned by the Union Bank of
Switzerland, Geneva, Switzerland, which is not a shareholder of EABTC.
Amsterdam-Rotterdam Bank, Societe Generale de Banque of Belgium, and
Societe Generale of France, whose shareholdings aggregate 52.02 percent of
the shares of EABTC, also each own substantial voting share interests in So-Gen
Swiss International Corporation (“So-Gen Swiss” ), New York New York, a securi­
ties company which is a member of the Midwest and PBW stock exchanges.
Amsterdam-Rotterdam Bank directly owns 16.4 percent of So-Gen Swiss, Societe
* Midland Bank, Societe Generale (France). Deutsche Bank, and Societe Generale de
Banque (Belgium) each own 20.125 per cent o f EABC. Amsterdam-Botterdam Bank owns
17.54 per cent o f EABC and Creditanstalt Bankverein owns 2.0 per cent o f EABC.
* Paragraph 5 o f 5 508, Article X II o f the New York State Banking Law, authorizes
investment companies to “ purchase, acquire, Invest in. and hold aU or any o f the stocks of
any corporation domestic or foreign, and to sell and dispose o f all or any stocks owned by
it. . .
An investment company may not, however, invest more than 10 per cent o f its
capital and surplus in any one corporation, nor more than 30 per cent o f its capital and
surplus in the aggregate in aU such corporations.

Generale de Banque of Belgium owns 10.0 percent of So-Gen Swiss, and Societe
Generale of France owns 13.1 percent of So-Gen Swiss. In addition, it appears
that Societe Generale de Banque may indirectly control an additional 6.4
per cent of the voting stock of So*Gen Swiss through Sofina S.A., Brussels,
Belgium, a Belgian holding company, in which it is understood that Societe Gen­
erale de Banque has a minority, but perhaps controlling, interest. Similiarly, it
is understood that Societe Generale of France may indirectly control an addi­
tional 3.3 per cent of the voting shares of iSo-Gen Swiss through its minority,
but perhaps controlling, interest in Societe Generale Alsacienne de-Banque. Thus,
it is understood that, in the aggregate, three foreign bank shareholders of EABTG
may directly or indirectly own or control a maximum of 49,2 per cent of the voting
shares of So-Gen Swiss. It appears, however, that So-Gen Swiss is controlled
by Credit Suisse, a Swiss bank, which is not a shareholder fo EABTC. Credit
Suisse owns 50.8 per cent of the outstanding voting stock of So-Gen Swiss, and
eight of So-Gen Swiss* 13 directors appear to represent Credit Suisse. The chief
executive and chief operating officers of So-Gen Swiss also appear to represent
Credit Suisse.
Under setcion 2 (b )) (2) of the Glass-Steagall Act, So-Gen Swiss would be an
affiliate of EABTC if Amsterdam-Rotterdam Bank, Societe Generale de Banque of
Belgium and Societe Generale of France controlled So-Gen Swiss, directly or
indirectly, through stock ownership or in any other manner. On the basis of the
Articles of Incorporation and By-Laws of So-Gen Swiss, the three foreign bank
shareholders of EABTC do not appear to have the power to control So-Gen
Swiss through their direct or indirect stock holdings. It also appears that the
three foreign bank shareholders of EABTC do not control a majority of the
board of directors of So-Gen Swiss, since only 5 of the 13 directors of So-Gen
Swiss appear to represent, directly or indirectly, the shareholders of EABTC.4
Counsel to EABTC has also informed staff of the Federal Reserve Bank of New
York that he knows of no side agreements relating to the voting shares of SoGen Swiss by the shareholders thereof which would otherwise give them
control of iSo-Gen Swiss. Staff is awaiting further information regarding the
ownership and control of So-Gen Swiss; that information is being furnished
from abroad and has been delayed.
With reference to these common shareholdings, it should be noted that Con­
gress did not include within the proscriptions of section 20 of the Glass-Steagall
Act substantial common holdings of stock in commercial and investment banks;
rather, it drew the line at majority ownership or control apparently because it
felt abuses were most likely to occur when a commercial bank and investment
bank were controlled by the same persons. Thus, whatever inconsistency there
may now be between the spirit of section 20 of the Glass-Steagall Act and the sub­
stantial common shareholdings in EABTC and So-Gen Swiss, on the basis of
information gathered to date, it appears that such shareholdings would not
be prohibited law.
D e f i n i t i o n o f A f f i l i a t e i n S e c t io n

S ec . 2.


of t h e

B a n k in g A ct of


As used in this Act and in any provision of law amended by this


Except where otherwise specifically provided, the term “affiliate” shall
include any corporation, business trust, association, or other similar organiza­
(1) Of which a member bank, directly or indirectly, owns or controls either a
majority of the voting shares or more than 50 per centum of the number of
shares voted for the election of it directors, trustees, or other persons exercising
similar functions at the preceding election, or controls in any manner the elec­
tion of a majority of its directors, trustees, or other persons exercising similar
functions; or
(2) Of which control is held, directly or indirectly, through stock ownership or
in any other manner, by the shareholders <of a member bank who own or control
either a majority of the shares of such bank or more than 50 per centum of the
number of shares voted for the election of directors of such bank at the preced­
4 Amsterdam-Rotterdam Bank, Societe General de Banoue o f Beleium. Societe Generale
o f France, Sofina S.A. o f Belgium, and Societe Generale Alsacienne de Banoue each appear
to fcave one representative on the board o f directors o f So-Gen Swiss. As indicated previ­
ously, Credit Suisse appears to have eight representatives.

ing election, or by trustees for the benefit of the shareholders tof any such bank;
(3) Of which a majority of its directors, trustees, or other persons exercising
similar functions are directors of any one member bank; or
(4) Which owns or controls, directly or indirectly, either a majority of the
shares of capital stock of a member bank or more than 50 per centum of the
number of shares voted for the election of directors of a member bank at the
preceding election, or controls in any manner the election of a majority of the
directors of a member bank, or for the benefit of whose shareholders or members
all or substantially all the capital stock of a member bank is held by trustees.
(12 U.S.C. 221a)
J u l y 2,1975.
Hon. G eorge W. M i t c h e l l ,
Vice Chairman, Board of Governors,
Federal Reserve Bystem, Washington, D.C.
D e a r G o v e r n o r M i t c h e l l : Thank you for forwarding a copy of your letter
dated June 20,1975, to Chairman Patman concerning the status of foreign bank
shareholders of European-American Bank and Trust Company, New York, New
York, under the Bank Holding Company Act of 1956 (“the Act” ) .
The Act defines a bank holding company to mean any company which has
“control” over any bank. One of the tests of the existence of “control” is whether
or not the company “directly” or “indirectly” exercises a controlling influence”
over the management or policies of a bank. It may be reasonably concluded that
one or more companies could each separately exercise a “controlling influence”
over a particular bank within the meaning of that term in the Act by virtue of
the holding and exercising of rights with respect to any class of voting securities
of the bank (albeit less than 25 percent of any class thereof) together with the
real impact which the company may have on the management or policies of
the bank.
I realize that the resolution of the question of whether a company exercises
a “direct” or “indirect” controlling influence over the management or policies
of a bank may vary on a case by case basis depending upon the facts which are
developed. Because of this the Act provides that the Board of Governors may de­
termine the existence of a “controlling influence” only after notice and opP<-Section l[a )^ ^ C ) of the Act does not circumscribe the requirement for a
hearing on the “controlling influence” question by placing a threshhold burden
on the Board to adduce facts which indicate some probability of success in
determining “control.” Indeed, imposition of such a requirement might pose a
question of fairness to the company in question in the sense that it might be
considered as a prejudgment of the issues, such a requirement might well be
contrary to the public interest in any case where a “controlling influence” is
present but no threshhold probability of success is sufficiently apparent to the
While the Board should not schedule hearings under 2(a) (2) (C) of the Act
for frivolous purposes, it appears dear that certain complex situations involving
matters of first impression that may have a strong precedential value would be
best served by holding a hearing on the record before an Administrative Law
Judge in preference to a purely administrative resolution of the question without
a detailed factual inquiry and a dear resolution of the “control” question.
The hearing procedure appears especially desirable in the European-American
case where significant collaterial issues under the Act turn on a resolution of the
question of “control”, the consortium mode may portend a significant breach
of the coverage afforded by the Act and no legislative recommendation is being
made to impact upon the situatino. The matter of “control” should not be resolved
by default at this early stage of the European-American case when there is an
opportunity to develop a record to determine the extent to which the present
provisions of the Act cover the situation and whether they are adequate to protect
the public interest.

W i l l ia m P r o x m ir e ,

Chairman, Joint Economic Committee.

D e p a r t m e n t o f J u s t ic e ,

Washington, B.C., July 18,1975.
Hon. W e i g h t P a t m a n ,
Vice Chairman, Joint Economic Committee,
U.S. Congress,
Washington, B.C.
D e a r C o n g r e s s m a n P a t m a n : This is in response to your letters of May 14
and May 27, 1975, concerning, respectively, the operation of European-American
Bank and Trust Co., New York, New York and the possible formation of United
Bank, Arab and French, New York.
With respect to European-American Bank and Trust Co. ( EABTC ), you
note that this state-chartered member bank is jointly owned by six large Euro­
pean Banks and recently purchased the insolvent Franklin National Bank. You
also note that a report submitted by the Department dated October 4,1974 to the
Federal Deposit Insurance Corporation on the competitive factors presented by
this acquisition did not contain any discussion of its effect on the national and
international wholesale banking markets, nor did it udertake to explain ‘‘why
the liaison of six competing banks for the purpose of dividing the American
wholesale banking market between them is not a per §e antitrust offense.” You
request that the Department of Justice conduct an investigation to determine
whether the operation of EABTC is a violation of antitrust law.
The Department's October 4,1974 report on the possible acquisition of Franklin
by EABTC focused on possible competitive effects of the transaction in retail
banking in the New York Metropolitan Area, particularly on Long Island. Our
competitive analysis was limited to retail banking because we considered the
possibility of anticompetitive effects arising out of any possible acquisition of
Franklin to be most serious in retail markets, which are limited in geographic
scope by the strong customer convenience factor. See, e.g., United States v. Marine
Bancorporation, 94 S. Ct. 2856, 2868 (1974); United States v. Phillipslurg
National Bank, 399 U.S. 350, 362-65 (1970). Our competitive report did not
discuss the potential effect of the acquisition on national or international whole­
sale banking markets because we concluded that the overall size of those markets
was so great, and the relative market positions of Franklin and EABTC therein
so small, in fact, as to make any increase in concentration in those markets
resulting from the acquisition de minimm. In short, antitrust case law on
mergers and acquisitions, and the legal and economic theories which support
these cases, did not indicate that any anticompetitive effects in wholesale
banking markets would be likely to result from EABTC's acquisition of Franklin.
Your question as to why our letter did not discuss a division of the American
wholesale banking market by six competing banks as a per se antitrust violation
appears to reflect a view that the joint ownership of EABTC by six large European
banks is, in and of itself, illegal under the antitrust laws. Of course, this question
may be considered essentially apart from the Franklin acquisition, which did
not affect the basic nature of EABTC as a joint venture, but rather increased
its size. In any case, we do not share the view that joint ventures generally, or
more particularly among banks, are illegal per se.
In United States v. Penn-OUn Chemical Co., 378 U.S. 158 (1964), the Supreme
Court considered a joint venture between two chemical companies to produce
sodium chlorate in the Southeast. The Court held that the record in that case
did not disclose a violation of the Sherman Act, but remanded the case for further
consideration of the possibility that the joint venture might violate Section 7
of the Clayton Act Recognizing that the formation of a joint venture could
have an effect on competition between the venture and its organizers, the Court
adopted a legal analysis similar to that used for mergers and acquisitions gen­
erally, i.e., whether “a reasonable likelihood of a substantial lessening of competi­
tion in the relevant market is shown”, 378 U.S. at 171. Such a test, of course,
does not constitute a per se rule of illegality. An analysis of the Penn-OUn
joint venture as an illegal agreement among competitors to divide the market
involved, based on such cases as Addyston Pipe and Steel Co. v. United States,
175 U.S. 211, and Timken Co. v. United States, 341 U.S. 593, was presented by
two dissenting Justices, but not adopted by the Court. Thus, we view the
Penn-OUn case as establishing that a joint venture formed by two or more

i a *Ar 4-i.a T)iirr>ose of competing in a new market is not a per se antitrust
3 h1 - rather ite K l i t y m^t bi tested by an analysis of its actual or
violation, ratter its i g
specific economic circumstances in
S , f t Z S r e W e a r e ^ a r e o fn o e X n ^ which would indicate thatthe
EABTC venture is part of a more comprehensive illegal arrangement affecting
the domestic or foreign commerce of the United States. Nor does it appear that
the 1oint venture, when viewed in the context of a very large market containing
nnmerous rwwerful domestic and foreign competitors, may substantially lessen
competition as defined by the courts under Section 7 of the Clayton Act. Conse­
quently, on the basis of information presently available to us, we do not believe
thnt fl'fiill scale antitrust investigation would be fruitful.
With respect to United Bank, Arab and French (“UBAF-NY” ), you note that
according to press reports, application may be made to the Suprmtendent of
Banks of the State of New York to form said bank and operate it as a joint
venture along the lines of EABTC. Prospective applicants, according to your
letter, include four United States banks (one of which is located i* New York),
and three French banks (one of which is partially owned by the other two, and
partially owned by about 24 Arab banks). You reiterated the view expres^d in
your earlier letter that the formation of this type of joint venture would constitute
a per se antitrust violation under Timken Co. v. United States, 341
Olin Co. v. United States, 378 U.S. 158, and Topeo v. United States, 405 U.S. 596.
As I noted above with respect to EABTC, we do not share the view that the
joint venture, alone and of itself, would constitute a per se antitrust violation.
Bather, the question is whether the venture may substantially lessen competition,
a prospect that seems unlikely, taking into consideration the nature of the market
involved, which contains numerous powerful domestic and foreign competitors.
We appreciate your continuing interest in antitrust enforcement.
Sincerely yours,
T h o m a s E. K attpeb ,
Assistant Attorney General, Antitrust Division.
A u g u s t 1,1975.
Hon. E d w a r d H. L e v i ,
Attorney General, Department of Justice,
Washington, D.C.
B e a r M r . A t t o r n e y G e n e r a l : On May 14,1975 I wrote you with respect to the
purchase of the Franklin National Bank on Long Island by six large European
banks, and on May 27,1975 with respect to the possible formation of the United
Bank, Arab and French in Manhattan by four American holding companies, 26
Arab financial institutions, 11 Arab and 3 French banks.
Presumably, at your request, under date of July 18th Professor Thomas E.
Kauper, Assistant Attorney General in charge of the Antitrust Division answered
both letters.
Because of the respect I have always had for your approval to antitrust matters
I write to inquire whether Professor Kauper’s answer of July 18th to my two
letters has your approval as, in my judgment, his decision is very much against
the public interest.
Frankly, I was shocked to see your antitrust division approve the acquisition
by six of Europe’s largest banks of Franklin “the leading commercial bank in
Nassau”, and “the second leading bank in Suffolk County” with 72 offices in both
Prior to the Franklin Application, the then Superintendent of Banks for the
State of New York, Harry W. Albright, Jr., denied the application of Barclays
Bank, a $24 billion bank, to acquire Long Island Trust Company, a $500 million
bank, fourth largest on Long Island with 32 offices.
The Superintendent found that approval of the application would “result
in a significant lessening of potential competition between Barclays and Long
Island Trust Company in the Nassau-Suffolk market, and in other banking
markets around the State”.
At the time of purchase Franklin was a bank of $1.37 billion. The Deutsche
Bank alone is a $24 billion bank, and the assets of the six banks total $86.8
Obviously, you are allowing six large banks to divide up among themselves
the business of Long Island’s leading commercial bank-a division of business and
a horizontal restraint

SpeaKing for six of the present Supreme Court Justices in United States v.
Topco, Inc. (1972) 405 U.S. 596, Mr. Justice Marshall says that when the restraint
Is horizontal, as it is here, it is a per se antitrust offense under Sherman One and,
since it involves a forbidden “business relationship”, the rule of reason is no
defense. This per se view is the one to which the Court returns in Topeo.
What disturbs me most about Professor Kauper’s letter of July 18th is his
statement that you do not share my view “that joint ventures generally, or more
particularly among banks, are illegal per se".
So far as the antitrust laws are concerned, this gives the green light to com­
binations of banks, domestic and foreign, to join together in the operation of
one of our American banks. Conceivably, Professor Kauper would approve our
six largest banks, Bank of America, Citibank, Chase Manufacturers Hanover,
Morgan Guaranty, and Chemicars combining together in owership of Biggs here
In Washington.
Of course Professor Kauper is right that all United States v. Penn-OUn
Chemical Co. (1964) 378 U.S. 1958 decided is that a joint venture like a merger
must be judged under Clayton Seven. However, it is of great significance that
Mr. Justice Douglas, with the concurrence of Mr. Justice Black, repeated what
Mr. Justice Black said for the Court in Timken Roller Bearing Co. v. United
States (1951) 341 U.S. 593, namely, “Agreements among competitors to divide
markets are per se violations of the Sherman Act”, so that “an actual division of
the market through the device of joint venture has. . the effect substantially to
lessen competition within the meaning of Section 7 of the Clayton Act”.
Under the circumstances, I assume that we cannot expect any move by Pro­
fessor Kauper to block the proposed United Bank, Arab and French, nor any
action against the European-American Bank and Trust Company.
It disturbs me to see any weakening of the antitrust laws in their application
to big banks, foreign or domestic, and I would like to think you do not share
Professor Kauper’s views, If you don’t, who is to present the opposite side? Are
these illegal mergers to take effect by default?
With kindest regards and best wishes, I am.
W r ig h t P a t m a n ,

Vice Chairman, Joint Economic Committee.
C o n g r e s s o f t h e U n it e d S t a t e s ,
J o i n t E c o n o m ic C o m m i t t e e ,

Washington, D.C.f August 4,1975.
Hon. G eorge W. M it c h e l l ,
Vice Chairman, Federal Reserve System,
Washington, D.C.
D e a r M r . M it c h e l l : You were very kind to write me as you did on June 26,
1975, in answer to my letter of April 24, 1975 to D r . Burns, and you may be
sure I very much appreciate your courtesy in sending to me your two staff
I am afraid you do not view the 'Sherman Act and the other antitrust laws as
an American Charter of Economic Freedom as I do. There was a time when we
doubted we could sell -the principles of our antitrust laws to the world, but since
the Treaty of Rome, and the coming of the Common Market, there is hope today
that our European cousins will see the light.
But whether the rest of the world agrees with us or not, the Sherman Act and
the other antitrust laws are the law of the land, and they are binding on Ameri­
can corporations not only in the United ‘States, but in foreign commerce as well.
We have every right to expect that foreign banks who do business here will
respect all our laws, including our antitrust laws. Accordingly, it seems quite
immaterial whether “a consortia” or “joint venture” is “a frequent form of bank­
ing organization in many foreign countries”- Under our law, as I read it, a joint
venture by its very nature is a restraint of trade on its members horizontally, and,
therefore, a per se antitrust offense for which the rule of reason is no defense.
Feeling as I do, I am appalled at your inserting a grandfather clause in your
proposed foreign bank legislation to give Congressional blessing to the Euro­
pean-American Bank in which six of Europe's largest banks with assets of $86.8
billion divide the business of Franklin, Long Island’s leading commercial bank.
What disturbs me equally is your permitting three bank holding companies (The

Bank of Tokyo, Ltd., Dai-Ichi Kangyo Bank, Ltd., and Mitsui Bank, Ltd.) to*
dodge the McFadden Act by having interests of 5 percent or less in respectively,
The Chicago-Tokyo Bank, Japan California Bank, and City National Bank of
Honolulu, all banks in a different state.
Section 3(d) of the Bank Holding Company Act cannot be read as your staff
attempts to do. It specifically prohibits the acquisition by a bank holding com­
pany of stock in an out-of-state bank, “unless the acquisition of such shares or
assets of a state bank, by an out-of-state bank holding company, is specifically
authorized by the statute laws of the state in which such bank is located, by
language to that effect, and not merely by implication”.
It is this 'bad precedent upon which the proposed United Bank, Arab and
French apparently relies to including in its ownership four American bank hold­
ing companies, 26 Arab financial institutions, 11 Arab and 3 French banks, every­
thing but a partridge and a pear tree.
You are the sole regulator of bank holding companies, and the policy of the
McFadden Act is not to permit interstate banking. Accordingly, I should ex­
pect the Federal Reserve to disapprove such an acquisition by three of these
bank holding companies (First Chicago, Security Pacific, and Texas Commerce)
regardless of the amount of their stock interests so long as McFadden represents
Congressional policy, and regardless of whether the bank in question be a state
nonmember bank.
In the case of the fourth bank holding company, Bankers Trust New York
Corporation, I would expect you, as regulator, to deny the application because it
is an antitrust offense for it to join the proposed joint venture.
Your troubles with holding companies stem primarily from your ignoring them
unless the statute compels them to apply to you. As you point out, the McFadden
Act prohibits interstate banking, and the Federal Reserve Act carries the same*
prohibition against member banks. Under these circumstances to say that the
Fed can stand idly by and allow bank holding companies to take any interest in
out-of-state banks is dead wrong. Merely because bank holding companies do
not have to apply to you for approval of an acquisition of 5 percent or less does
not authorize you to ignore such minor acquisitions when they flagrantly violate
the policy of the McFadden Act. Nor does the fact that the out-of-state bank is
a state nonmember bank authorized you, as the sole regulator of bank holding
companies, to ignore their violating the policy laid down by McFadden.
In thinking that with respect to either the United Bank, Arab and French or
European-American that you are powerless to subject the owners to the Bank
Holding Company Act unless they own 25 percent of the stock, you are making,
once again, the same costly mistake Dr. Burns made in July 1972 with the
Franklin New York Corporation when he refused my request to hold a hearing to
determine what everyone knew, but you, that Michele Sindona controlled the
bank with 18 percent of the voting shares.
In his letter to you of July 2,1975, Senator Proxmire asks you to hold a hear­
ing to determine if the six banks that own European-American each have a con­
trolling interest This, unquestionably, is what you should have done in Franklin,
and what you must do here. Have you acted on Senator Proxmire’s letter?
When enacting the Bank Holding Company Act the Senate Banking Committee*
in its Report Number 1084 says—
The committe is cognizant of the fact that under modern conditions,
it is entirely possible to control the affairs of a company without owning
25 percent or more of its outstanding voting stock.
and, in the next paragraph of its Report, the Committee “approved a provision,
which would allow the Federal Reserve Board to make a finding of control
after notice and opportunity for hearing where the company directly or in­
directly exercise a controlling influence over the management or policies of the
Moreover, the Committee on Banking and Currency of the House in its Re­
port (91-1747) says the Act, as agreed to in conference “authorizes the Federal
Reserve Board to find actual control of a bank where a company holds less than
25 percent of its stock.”
As Senator Proxmire says, you should schedule hearings before an Admin­
istrative Law Judge, and determine the question of who controls EuropeanAmerican, and in the event it applies, do likewise in the case of the United Bank,
Arab and French.
Turning now to the Glass-Steagall Act, I am sure we both can agree that thia
prohibits a commercial bank from having an investment bank as an affiliate. Mr

complaint is that permitting Deutsche Bank to have a fifty percent interest in
the investment banking firm of UBS-DB Corporation and Amsterdam-Rotterdam,
Societe Generale de Banque of Belgium, and Societe Generale of France, over a
fifty percent interest in the investment banking firm of So Gen-Swiss Interna­
tional Corporation, violates Glass-Steagall in principle, and gives these foreign
banks a competitive advantage over our American banks.
Accordingly, you have no right to admit a bank owned by these foreign banks
as a member bank in the Federal Reserve System unless these foreign bank
stockholders divert themselves of their investment banking interests.
Your foreign bank bill should also make the same provision with respect to
foreign banks who do an investment banking business directly or indirectly.
I am also informed that you have allowed Morgan Guaranty Trust Company,
through its French Edge Act Corporation, to hold a one^third stock interest in
Morgan and Cie International, S.A., a Paris investment banking firm in which
Morgan Stanley, the well known American investment banking firm, owns the
other two-thirds.
As I am sure you know, Glass-Steagall was enacted primarily to prevent the
House of Morgan from being, at one and the same time, a commercial and invest­
ment banker. Today, Morgan does in Paris, with your approval, the business
Glass-Steagall forbids it to do at home.
Moreover, I am also informed that the following subsidiaries of American com­
mercial banks are principally engaged in selling securities abroad:
Bank of America International, Ltd., London
Banque de Commerce, S.A., Brussells (owned by Chase Manhattan)
Bankers Trust International, Ltd., London
Chase Manhattan, Ltd., London
Citicorp International Bank, Ltd., London
Continental Bank, S.A., Brussels
Continental Illinois, Ltd., London
Deutsche Unionbank, Frankfurt (owned by Bankers Trust Co.)
First Chicago, Ltd., London
International Marine Banking Company, Ltd., London
Manufacturers Hanover, Ltd., London
Trinkaus and Burkhardt, Dusseldorf (owned by First National City Bank)
Wells Fargo, Ltd.* London
As I understand it, all these are either Edge Acts or subsidiaries thereof which
offer their securities abroad, principally in the Eurodollar market, to evade
registration with the Securities and Exchange Commission. However, I might
add that there is reason to believe that these banks actually handle these issues
at their home offices and merely formalize them abroad.
Because Glass-Steagall applies to corporations that receive deposits, Edge
Act Corporations, which are under your sole control, have apparently been re­
garded by you as exempt from Glass-Steagall. Though I have my doubts, in this
you may be technically and legally correct, but does it not make nonsense out of
Glass-Steagall to say that while it applies in the United States, American banks
are free to avoid it abroad?
More important, should you not, as the sole regulator of Edge Act Corporations,
forbid these American banks from engaging any longer in the investment bank­
ing business either abroad or anywhere else unless authorized by the Congress,
and placed under Securities and Exchange Commission supervision?
Once more I thank you for the careful consideration you have given to my
letter of April 24th.
With kindest regards and best wishes, I am,
W e i g h t P a t m a n , Vice Chairman.
B oard o f G overnors,
F ed eral R eserve Sy s t e m .

Washington, D.C., November 20,1975.
Hon. W r i g h t P a t m a n ,
Vice Chairman, Joint Economic Committee, U.S. House of Representatives.
Washington, D.C.
D e a r V ic e C h a i r m a n P a t m a n : This is in further response to your letter of
August 4, 1975, in which you raised several questions pertaining to the under­
writing activities abroad of Edge Corporation and their subsidiaries. In my
earlier letter to you, I indicated that a staff memorandum dealing with the legal

and regulatory aspects of such activities would be prepared. Enclosed for your
information is a staff memorandum that I believe deals extensively with the

issues you have raised.



I hope that the enclosed memorandum is responsive to the concerns addressed

in your letter. I regret any inconvenience which the delay in transmitting this

wittiMwumiiim may have caused you or your staff. The Board will, of course, be
glad to provide any additional information which you might request

Gbobgb W .

M it c h e l l .

B oard o f G o v e r n o r s o f t h e F e d e r a l R e s e r v e S y s t e m , N o v e m b e r 14,1975, S t a f f
M e m o r a n d u m o n I n v e s t m e n t B a n k i n g A c t i v it ie s A b r o a d o f E dge C o rpo ra ­
t i o n s a n d T h e i r F o r e ig n S u b s i d ia r i e s

In a letter dated August 4, 1975 to Vice Chairman Mitchell. The Honorable
Wright Patman, Vice Chairman of the Joint Economic Committee (“JEC” ).
raised several questions pertaining to the investment banking activities abroad
of Edge Act Corporations1 and their foreign subsidiaries. In particular, Vice
Chairman Patman was concerned that such activities might be in contravention
of the policies of the Glass-Steagall Act.
It is understood from the questions raised by Vice Chairman Patman and from
conversations with Dr. Arthur J. Keeffe of the staff of the JEC that Vice Chair­
man Patman would like an explanation of the legal authority under which Edge
Act Corporations and their foreign subsidiaries engage in investment banking
activities abroad that are not permissible for member banks in the United States.

Edge Act Corporations are chartered, examined, regulated and supervised by
the Board under section 25(a) of the Federal Reserve Act (the “Edge Act” ) (12
U.S.C. 611-631 (1970)). The Board has implemented its regulatory authority
over Edge Act Corporations by adopting its Regulation K (12 CFR Part 211
(1975)), which contains provisions regulating the organization, banking and
financial operations, and investments of Edge Act Corporations.
A principal purpose of the Edge Act was to facilitate the international and
foreign banking and financial operations of U.S. banks and to promote thereby
the foreign trade and commerce of the United States. Through the creation of
subsidiary corporations endowed with greater banking and financing powers
than those possessed by national banks, it was intended by the Congress that
U.S. banks would be able to compete more effectively with foreign banking insti­
tutions in U.S. trade financing and in international and foreign banking.
It was recognized by the Congress that if Edge Act Corporations were bound
by domestic banking rules in their operations abroad they would be placed at a
severe competitive disadvantage with foreign banks and the foreign trade and
commerce of the United States would not be promoted. Accordingly, in addition
to giving Edge Act Corporations broader banking powers than those permitted
domestic banks e.g., the power to purchase and sell debt securities and make in­
vestments in virtually any type of corporation, the Congress further gave Edge
Act Corporations the right “ . generally to exercise such powers
. as may
be usual, in the determination of the Board of Governors of the Federal Reserve
System, in connection with the transaction of the business of banking or other
financial operations in the countries, colonies, dependencies, or possessions in
which it shall transact business and not inconsistent with the powers specifically
granted herein.
Two statements made during consideration by the Senate
of this “usual in connection with the business of banking” clause are particularly
illustrative of Congress' intention to free Edge Act Corporations from domestic
banking rules in their operations abroad: Senator McLean, “Unless these insti­
tutions are permitted to exercise any rights now exercised by foreign institutions
doing the same business, in the opinion of the Federal Reserve Board it [a
proposal to delete the ‘usual in connection' clause] is practically destroying the
value of the bill” ; and Senator Edge, “.
surely we want to give them [Edge
and operating nnder section 25 (a ) o f the Federal Reserve Act
(12 U.S.C. 611r631 (1 9 7 0 )).

Corporations] the same privileges that competitors have to those countries when
they will inure to their benefit.” 58 Cong, Rec. 4970 (1919).
^^ ^
The Glass-Steagall Act was landmark banking legislation
mental reforms of the nation’s banking system; key among its.
four sections designed to separate commercial ^
^ose ^tter
United States banking system. A review of the legislative history of those latter
sections does not reveal any dear intent on the part of Congress to extend the
wall separating commercial and investment banking to the foreign operations of
Act, the Board has considered carefully the policies and provisions ofboth
statutes and has interpreted the Edge Act as permitting Edge Act Corporations
and their subsidiaries to engage in investment banking activities abroad but not
in the United States. The Glass-Steagall wall separating commercial and invest­
ment banking in the United States is firmly reinforced in the Boards regula­
tion of Edge Act Corporations and their subsidiaries; the Edge Act purposes
of making U.S. banks competitive abroad and promoting thereby the foreign
trade and commerce of the United States have been accomplished by pennitting
Edge Act Corporations and their subsidiaries to engage in investment banking
activities aboard, when the Board has found either specific statutory authority
granting Edge Act Corporations such powers or it has determined that such
activities are usual in connection with the transaction of the business of bank­
ing or
operations abroad. The remainder of this memorandum discusses
the particular statutory provisions of the Edge Act and Glass-Steagall Act in
more detail.

The Glass-Steagall Act
The Banking Act of 1983 was omnibus legislation, which not only dealt with
the securities activities of banks but, in addition, introduced such major bank­
ing reforms as federal deposit insurance and full branching parity between State
and national banks. The securities sections of this legislation—§§ 16, 20, 21, 32
(12 U.S.C. §§24, 78, 377, 378 (1970))—have, however, become customarily re­
ferred to as the “Glass-Steagall Act” in recognition of the efforts of Senator Glass
of Virginia and Representative Steagall of Alabama.
Section 16 (12 U.S.C. 24 H?)
Section 16 provides that national banks (as well as State-chartered member
banks)3cannot generally deal in securities and stock for their own account, nor
“underwrite any issue of securities or stock” Notwithstanding these general pro­
hibitions, section 16 does, however, permit member banks to purchase certain
approved investment securities for their own account, and generally to under­
write, deal in, and purchase for their own account obligations of the United
States or general obligations of any State or of any political subdivision thereof.
Section 20 (12 U.S.C. 877)
Section 20 proscribes a member bank from being affiliated with any firm “en­
gaged principally” in the issue, flotation, underwriting, public sale, or distribu­
tion of securities. Section 2(b) of the Glass-Steagall Act defines “affiliate” for the
purpose of section 20 as essentially forms of “majority control”.
Section 21 (12 U.S.C. 878)
Section 21 makes it a felony for individuals or firms “engaged in the business
of issuing, underwriting, selling or distributing
” securities to willfully en­
gage, at the same time, in deposit banking.
Section 82 (12 U.S.C. 78)
Section 32 generally prohibits personnel interlocks between firms “primarily
engaged” in the issue, flotation, underwriting, public sale, or distribution of se­
curities and member banks. The Board is given the authority to permit inter­
locks by general regulations when in the Board’s judgment it would not unduly
influence the investment policies of such member bank or the advice it gives its
* Section 16 is made applicable to State member banks under § 9 o f the Federal Reserve
Act (12 U.S.C. 335 (1970)}.

Federal Reserve Act
Section 25(a) (the “Edge” Act)
Edge Act Corporations are chartered by the Board under section 25(a) of
the Federal Reserve Act to engage in international and foreign banking or other
international or foreign financial operations, or in banking or other financial op­
erations in a dependency or insular possession of the United States, either direct­
ly or through the agency, ownership, or control of local institutions in foreign
countries, or in such dependencies or insular possessions (12 U.S.C. 611 (1970)).
The charter powers of Edge Act Corporations are set forth in paragraphs 5
through 8 of Section 25(a) of the Act (12 U.S.C. 615), which provide in perti­
nent part, as follows:
Each [Edge] corporation so organized shall have power under such
rules and regulations as the Board of Governors of the Federal Reserve
System may prescribe:
to purchase and sell, with or without
its indorsement or guaranty, securities, including the obligations of the
United States or of any State thereof but not including shares of stock
in any corporation except as herein provided;
and generally to exer­
cise such powers as are incidental to the powers conferred by this Act
or as may be usual, in the determination of the Board of Governors
of the Federal Reserve System, in connection with the transaction of
the bus'iness of banking or other financial operations in the countries,
colonies, dependencies, or possessions in which it shall transact busi­
ness and not inconsistent with the powers specifically granted herein
(c) with the consent of the Board of Governors of the Federal Re­
serve System to purchase and hold stock or other certificates of owner­
ship in any other corporation organized under the provisions of this
section, or under the laws of any foreign country or a colony or de­
pendency thereof, or under the laws of any State, dependency or in­
sular possession of the United States but not engaged in the general
business of buying or selling goods, wares, merchandise or commodities
in the United States, and not transacting any business in the United
States except such as in the judgment of the Board of Governors of
the Federal Reserve System may be incidental to its international or
foreign business.
(Emphasis added.)
As hereinafter discussed, the Board has interpreted these foregoing provisions
in section 25(a) of the Act to permit Edge Act Corporations and their subsidi­
aries to engage in investment banking activities outside the United States.

As quoted above, Section 25(a) of the Federal Reserve Act empowers an
Edge Act Corporation “to purchase and sell, with or without its indorsement or
guaranty, securities, including the obligations of the United States or any State
thereof but not including shares of stock in any corporation except as herein
provided. ” This language has been held by the Board to permit Edge Act
Corporations to underwrite, sell and distribute debt securities abroad. Such a
construction is clearly supported both from the “plain” or “commonly accepted”
meanings of the terms “purchase and sell” and the context in which they are used,
namely, the authorization to “purchase and sell” is contained in the same para­
graph which grants various other banking and financial powers to Edge Act
Corporations. This power to engage directly in such activities should be con­
trasted with the specific prohibitions contained in section 16 of the Glass-Steagall
Act, which section does not apply to Edge Act Corporations.
The authority granted by section 25(a) for Edge Act Corporations to under­
write and deal in securities is restricted by the requirement that Edge Corpora­
tions not purchase and sell “shares of stock in any corporation except as herein
provided.” It is specifically provided, however, in the same paragraph of section
25(a) that an Edge Act Corporation may generally exercise such additional
powers “. as may be usual, in the determination of the Board, in connection
with the transaction of the business of banking or other financial operations in
the countries, colonies, dependencies, or posessions in which it shall transact
business. * ” Construing these provisions together and in light of the purposes of
section 25 (a) of the Act to give Edge Act Corporations additional powers to make
them competitive abroad, the Board has determined that since such powers are

usual in connection with the transaction of the business of banking or other
financial operations abroad, Edge Act Corporations may also purchase and sell
i.e., underwrite and deal in, equity securities outside the United States
While the Board has permitted Edge Act Corporations to engage in investment
banking activities abroad, it has in § 211.5(a) of Regulation K specifically limited
the direct investment banking activities of an Edge Act Corporation ‘‘engaged
in banking" that is, an Edge Act Corporation which has aggregate demand de­
posits and acceptance liabilities exceeding its capital and surplus (§ 211.2(d) of
Regulation K), to those permissible under section 16 of the Glass-Steagall Act
ana to the underwriting, selling, or distributing of obligations of the national
government of a foreign country in which it has a branch or agency8The Board
has thus, by regulation, applied the direct prohibitions of section 1C of the
Glass-Steagall Act to the foreign operations of those Edge Corporations engaged
substantially in a deposit-taking business, even though section 16 does' not l.v
its terms apply to Edge Corporations.
The Board has also prohibited by general regulation (§ 211.5(b) of Regula­
tion K) all Edge Act Corporations from engaging in the business of selling or
distributing .securities in the United States (except private placements of uartic
ipations in their investments or extensions of credit) or nnderwrting anv nor
tion thereof so sold or distributed.

Under section 25(a), an Edge Act Corporation may, with the Board’s consent
acquire and hold stock of any company so long as it is not engaged iu the gen­
eral business of buying or selling goods or commodities in the United States and
does not transact any business in the United States except such as may be in­
cidental to such company's international or foreign business (12 U.S C 615) In
granting its consent for an Edge Act Coloration to acquire a controlling inter­
est iu a foreign company, however, the Board, as a condition to its consent, limits
the activities of the foreign subsidiary to those permissible for an Edge Act Cor­
poration nnder the Edge Act and Regulation K.
Thus, foreign subsidiaries of Edge Act Corporations have been permitted to
engage in investment banking activities outside the United States to the same
extent that these actvities are directly permissible for an Edge Act Corpora­
tion. It. should be noted that a foreign subsidiary of an Edge Act Corporation
•engaged iu banking” may also engage in investment banking activities abroad
eveu though, as previously discussed, its parent Edge Act Corporation is more
strictly limited in its direct activities. Consistent with the policies of the GlassSteagall Act, the Board has provided iu §211.8(c)(2 ) of Regulation K that
shares of stock in a company must be disposed of by an Edge Act Corporation as
promptly as practicable if such company should engage in the business of under­
writing, selling, or distributing securities in the United States. A foreign sub­
sidiary of an Edge Act Corporation, or indeed a company in which an Edge \ct
Corporation has only a minority share interest, may tlnis not engage in investment banking activities in the United States.
‘ The power to underwrite and deal in foreign government securities parallels that riven
foreign branchM o f member banks under section 25 o f the Federal Reserve A ct a n d th e
Board’s Regulation M. Under section 25, Congress gave the Board th eauthority to issue
regulations giving foreign branches o f member banks the right to exerclsesuch further
powers as may be usual in connection with the transaction o f the business o f tonkins i£
the p la c e s where such foreign branches shall transact business. Congress S o w e v e rfls S
specifically provided in section 26 that, accept to such limited extent ^ b i e B o a r d mav
“ ecessarywith respect to securities issued by a “ foreign State’* asdefln ed in sectton
25(b) o f the Federal Reserve Act, any such regulations may not authorize a foreign
branch o f a member bank “ to engage or participate, directly o r in d ir e c tly .t a tlie bnsines"
o f underwriting, selling or distributing securities” (12 l£s.C . 604a (1870H . The Board
has implemented the foregoing provisions by permitting a foreign branch At n
bank to underwrite, distribute, buy, and sell obligations o f the n a tS n a l^ v irn m en ^ fofth e
country to which it is located, subject to a specific prohibition that no member bank mav
hold, or be under commitment w ith respect to, obligations o f such a governm entasa result
of underwriting, dealing to, or purchasing fo r it ! own account ln an a S rega te amount
exceeding 10 per cent o f its capital and surplus (5 218.8(b) (4 ) o f R e g u la tio n ^ ? R
explicit statutory prohibition previously quoted, the Board has a?so
provided in its Regulation M that nothing in that regulation shall authorize a
except as permitted for obligations o f a national government, to engage or particiof underwriting, selling; o? k t l f b u t t o g Secu­
rities (J 213.3(c) or R egu lation M ). Foreign branches o f member banks thus mav onlv
engage in investment banking activities with respect to certain foreign governm entLci?r£
ties as contemplated by the Congress in section 25 of the Act.
fcuveinmem seeuri-


Vs previously discussed, the direct prohibitions of section 16 of the GlassStenciiU Act apply only to member banks and do not apply to Edge Act Corpora­
tions or their subsidiaries, although the Board has by regulation applied its
direct Drohibitions to Edge Act Corporations engaged in a deposit-taking business
ThU failure to include Edge Act Corporations within section 16 is consistent
^ th Congress’ view that Edge Act Corporations should have greater banking
1.0 WMS abroad in order to be competitive with foreign banks.
The Board has long followed the policy of not purporting to interpret section
« l because of its general applicability and the penal nature of its Provisions.
Howfve^ as noted above, the Board has implemented ite policies by prohibiting
E d g e A c t Corporations from engaging in any of the proscribed investment banking
“ ^W thV esj^ct^to^ctto^bo and 82 of the Glass-Steagall Act, it has been
the Board’s view that the prohibitions of neither of these sections are applicable
s o lonl as S e entire underwriting, selling, or distribution of securities by a
foreisn company takes place wholly outside the United States. This accords
with the traditional judicial principle that the legislation of Congress will not
extend beyond the boundaries of the United States unless a contrary legislative
intent appears. A review of those statutes and their legislative histories does not
reveal any clear intent on the part of Congress that sections 20 and 32 should
have extraterritorial effect and thus should be applied to include the foreign
operations of Edge Act Corporation affiliates of member banks. Absent specific
Congressional intent to apply the Glass-Steagall Act extraterritorially, the Board
1ms reviewed the question of whether such provisions should be applied to the
foreign operations of Edge Act Corporations and their subsidiaries as a policy
decision In light of Congress’ clear intent not to apply domestic banking rules
to the foreign operations of Edge Act Corporations and their subsidiaries in
order to promote the foreign trade and commerce of the United States by making
U S. banks competitive abroad with foreign banks, Congress’ specific granting
to Ed"e Act Corporations of the power to purchase and sell debt securities, Con<Tess’t8Pwific granting to Edge Act Corporations of the power to exercise addi­
tional powers which the Board determines to be usual in connection with the trans­
action of the business of banking or financial operations abroad, and Congress’
fntlure to specify an extraterritorial effect in the Glass-Steagall Act or proscribe
Kdee Act Corporations and their subsidiaries from engaging in investment bankinff activities abroad, it seems clear that the Board’s policy of permitting Edge Act
Corporations and their subsidiaries to engage in investment banking activities
.-ibroad but not in the United States is consistent with both the Edge Act and
Glass-Steagall Act and fulfills Congress’ intent in enacting both such statutes.
N o v e m b e r 26, 1975.

Geobgb W. M i t o h e i x a , Esq.,
Vice Chairman, Board of Governors,
Federal Reserve System,
Washington, D.O.
Dear Mb. Mitchell: I have your good letter of 20 November enclosing to me
your staff memorandum of 14 November and I am very grateful to you for
having it prepared.
As you doubtless know Senator Harrison A. Williams has announced that he
intends to hold hearings as the Glass-Steagall Act In that connection I am sure
vou will be interested in the letter I have written to him under the date of 25
November, a copy of which I enclose together with all its enclosures except
those you already have.
With kindest regards, I am,
W eig h t P a t m a n ,

Vice Ohairmm, Joint Economic Committee.
H on. H arriso n

N ovember 25, 1075.

A. W illia m s , Jr.,

TJ.S. Senate,
Washington, D.O.

D e a r S e n a t o r W i l l i a m s : I am delighted that your Securities Subcommittee of
Senate nanfcing is to look at the Glass-Steagall Act, and in accordance with your
invitation, I presume to suggest certain directions your study might take.

First, as you know Glass-Steagall was enacted in June 1933, and in the fall
of that year the late Winthrop W. Aldrich suggested amendments to plug loop­
holes in the Act. The Congress never enacted them, but they are as necessary
today as in 1933, and I enclose a short, dear summary of the loopholes which
appeared in Business Week, December 9,1933.
Second, Federal Beserve states that a number of our leading banks, Bank of
America, Bankers Trust, Chase Manhattan, Continental Illinois, First Chicago,
First National City, Marine Midland, Manufacturers Hanover, and Wells Fargo
with its permission engaged in the securities business overseas. The Fed appar­
ently takes the position that the Edge Act enacted in 1919 authorizes this, and
the Glass-Steagall Act enacted in 1933 does not forbid it.
I enclose a copy of a letter dated November 20, 1975 from Vice Chairman
George W. Mitchell, and a copy of a staff memorandum dated November 14,1975
of the Fed making this point, together with a memorandum prepared by a member
of my staff reaching the opposite conclusion.
Third, until recently through an Edge Act Corporation Morgan-Guaranty
held a one-third interest, and Morgan-Stanley a two-thirds interest in the invest­
ment banking firm of Morgan Cie in Paris. I wrote Vice Chairman Mitchell
at the Federal Beserve about this matter on August 4,1975 and, since that time,
J. P. Morgan Company has announced that Morgan-Guaranty is to sell its onethird interest in Morgan Cie to Morgan Stanley.
I suggest you inquire why and whether the other banks are also divesting
themselves of their foreign securities affiliates.
Fourth, I enclose the tombstone notice of the sale of a $100 million loan to Ui<’
central bank of Peru by Wells Fargo, Ltd. a so-called London merchant bank
owned by Wells Fargo through an Edge Act subsidiary. As you can see partici­
pations in this loan were sold by Wells Fargo to over 60 banks, many American.
Your Committee would do a great service if it would investigate how these
so-callcd Eurodollar loans are made and underwritten as my information is that
the commitment to make the loan is made here at the head office of each bank
in the United States, and executed abroad to evade Securities and Exchange
Commission regulations.
Franklin National Bank went down with $500 million of foreign loans that
FDIC cannot sell except at a large discount- -$14.r> million in Peru loans, $1
million from Wells Fargo, $8 and one-half million in a similar $76 million loan
led by Morgan-Guaranty. and $5 million in a similar $130 million loan led by
Manufacturers Hanover.
Query whether American banks should be permitted to make foreign loans of
this character?
The New York Magazine for December 1, 1975 states that »ur American banks
may have an exposure of as much as $25 billion in loans to less-de veloped
countries. Zaire, with over $1 billion in foreign loans, is said to have defaulted
on about $8 million of interest payments. I enclose a copy of the article.
This history repeating itself, in 1933 when Judge Ferdinand Pecora investigated
the banks for the Senate Banking Committee and the midget sat on J. P Morgan’s
lap, perhaps the worst testimony of all was the sale in .1928 b.v First National
City and Seiigman of Peru bonds which defaulted in 1931 and are not paid yet.
Fifth, when the Federal Deposit Insurance Corporation sold the principal assets
of the Franklin National Bank to six of the largest banks in Europe, it came to
my attention that the Deutsche Bank has a 50 percent interest in UBS-DB
Corporation, and that Amsterdam Rotterdam, Sociate Generale de Banque of
Belgium, and Societe Generale of France, have over a 50 percent interest in So
Gen-Swiss International Corporation.
Despite the fact that UBS-DB and So Gen-Swiss are active security dealers,
these four banks were allowed, by the Superintendent of Banks of the State of
New York, to retain their stock interests in European-American Bank and Trust
Company and, in October 1974, that concern was allowed to purchase the cream
of Franklin National’s assets and become a member of the Federal Reserve
Ignoring the fact that this purchase of the leading bank on Long Island by
six of Europe’s largest banks is as flagrant an antitrust offense as one ran
imagine, at least four of these large European banks, through UBS -DB and S<
Gen-Swiss, are also allowed to do business in America in flagrant violation of
Of course this raises the question whether foreign banks should be allowed to
do an unregulated banking business in the United States when billions of dollars
are involved.

For your information I enclose copies of my correspondence with both the Department of Justice and the Federal Reserve on this subject
Sixth, I am delighted to observe from the enclosed article in Forbes for Sep­
tember 15,1975, that your Committee is to look into the complaints of our invest­
ment bankers that here in the United States our commercial banks, under the
guise of sections specializing in corporate finance, are acting as investment bank­
ers in violation of Glass-Steagall.
I know full well from your colloquy in the Senate with Senator John Sparkman
on December 18, 1970 (Vol. 77 Cong. Record, Part 42430) that you are as con­
vinced as I am of the need for the Glass-Steagall Act.
I trust these suggestions will be of value to you, and at the appropriate time I
shall be glad to make myself available as a witness for you if you need me.
With kindest regards and best wishes, I am,
W r ig h t P a t m a n ,


Vice Chairman, Joint Bcomonic Committee.
M em o r an d u m



Question. Does the Glass-Steagall Act forbid our American banks directly or
indirectly through affiliates to underwrite securities or buy and sell them for
their own account either at home and abroad?
Answer. Yes.
leg isl at iv e h is t o r y

The purpose of the Glass-Steagall Act can clearly be seen by an analysis of
two distinct areas:
1. Legislative history of the Act,
2. Analysis of the important sections of the Act.
The Pujo (money trust) investigation of 1912-33 was, in a measure, aimed
at the use by the banks of other peoples’ monies.
The investigation of 1912-13 covered much of the same area as the investigation
<>f the commercial banks by a Subcommittee of the Senate Banking Committee in
1933 which led to the passage of the Glass-Steagall Act.
The banks feared that direct involvement in the securities business would run
afoul of the National Banking Act and, in order to avoid this, set up affiliates.
Their growth was phenomenal. Whereas, in 1927 these affiliates had been re­
sponsible for only 12.8% of all investment-banking organizations, by 1930 they
accounted for over 40% of these organizations. If banks and trust companies
were included, the 1930 figures show these affiliates accounted for over 60%.
As early as November 6, 1911, Frederick W, Lehman, then Solicitor General
of the United States, advised then Attorney General George W. Wickersham, in
an unpublished Opinion, that National City Bank had no power under the national
banking laws to set up the National City Company and authorize it to deal in
When the 3929 crash came, it was clear to many, particularly to Senate Bank­
ing that the relationship between banks and the securities business had played
a significant part in the debacle.
Senate banking investigations
A Senate Banking Subcommittee investigation was conducted from February
1931 to June 1934 by Judge Ferdinand Pecora of New York, which extended
through the 71st, 72nd, and 73rd Congressional Sessions, occupying over 35
volumes of hearings. At one point the press agent for a circus put a midget on
J. P. Morgan’s lap.
Two conclusions came from these hearings:
1. Banks are to get out of the securities business; and,
2. Their affiliates are also to get out.
In the Glass-Steagall Act. Committee' Report the aims of the Committee are
•*aid to beTo provide for the safer and more effective use of the assets of Federal
Reserve Banks and of national banking associations to regulate inter­
bank control: to prevent the undue diversion of funds into speculative

operations, and for other purposes. (Report 584, 72nd Cong., 1st Sess..
p. 1.) (Emphasis added.)
In 1932 on the Senate floor, Senator Bulkley said:
If we want banking service to be strictly banking service, without
expectation of additional profits in selling something to customers, we
must keep banks out of the investment security business. (75th Cong.
Record 9912.)
And, with respect to affiliates:
The important and underlying question is whether banking institutions
receiving commercial and savings deposits ought to be permitted at
all to engage in the investment security business. The existence of
security affiliates is a mere incident to this question. (75th Cong. Record
The affiliate problem
The Committee recognized that the affiliate had become the major device by
which commercial banks entered the investment banking business. In its Report,
for instance, the Committee says that,
machinery has been created which tends toward danger in several
directions. The greatest of such dangers is seen in the growth of ‘bank
affiliates’ which devote themselves in many cases to perilous under­
writing operations, stock speculation, and maintaining a market for the
bank’s own stock often largely with the resources of the parent bank
it would therefore appear that the affiliate system calls for the estab­
lishment of some legislative provisions designed to deal with the insti­
The Committee has determined to . . separate as far as
possible national and member banks from affiliates of all kinds.
(Emphasis added.) (Report 584, p. 14,72nd Cong., 1st Sess.)
Congressional floor debates
Once on the Senate floor Glass and his fellow Committee members clearly
emphasized those matters which had been emphasized before the Subcommittee.
Senators Bulkley makes dear that their intention was to draw from the experi­
ence in England, and separate commercial banks from the securities business:
The English banks of deposit have kept themselves strictly clear of
the investment security business
whatever we may learn from
comparison of English and German banking should lead us to prefer
the English practice under which commercial banking is strictly segre­
gated from the origination and underwriting of capital issues. (Emphasis
added.) (Cong. Rec., 72nd Cong., 2nd Sess., p. 9911.)
In this speech Senator Bulkley read a letter of Bank of Manhattan in which it
promised to confine its then security affiliate, International Manhattan Co., to
the trust business:
After mature deliberation the conclusion has been reached that it is
to the best interests of the group to follow the trend of opinion strongly
expressed in some quarters to the effect that deposit banks should not
have affiliated securities companies.
. Accordingly, the Bank of
Manhattan Trust Co. will carry on such of the activities of the Inter­
national Manhattan Co. as are consistent with the most conservative
trust company practice. (Cong. Rec., 72nd Cong., 2nd Sess., p. 9913.)
Significantly, International Manhattan Company was a so-called "Agreement
Corporation” doing primarily an overseas business. It is quite evident from this
that Senate Banking meant Glass-Steagall to outlaw both Agreement and Edge
Act Corporations from the securities business.
In determining whether the Act prohibits member and national banks from
engaging in the securities business, either directly or through affiliates, there
are at least four Sections of Glass-Steagall that are very much in point, namely,
Sections 16, 20, 21, and 32, each of which so far as material reads the same

Section 16 (now Section 24 of Title 12 U.S. Code) provides specifically that
Business of dealing in investment securities
shall be limited to
purchasing and selling such securities without recourse solely upon the
order, and for the account of customers, and in no case for its own
account, and the association shall not underwrite any issue of
How could anything be more concisely and clearly stated?
While prior to Glass-Steagall member banks bought and sold securities for
their own accounts, more frequently they acted through affiliates such as National
City Company, Chase Harris-Forbes, et al.
For this reason, as pointed out by the Supreme Court in Investment Company
Institute v. Camp, 401 U.S. 630 (1971), the Act takes specific aim at “affiliates”
Section 20 of Glass-Steagall (12 U.S.C. 377) forbids a member bank to “be
affiliated in any manner described in Section 2(b) hereof” (12 U.S.C 221(a)
subsection (b ))
With any corporation, association, business trust or other similar
organization engaged principally in the issue, flotation, underwriting,
public sale, or distribution at wholesale or retail or through syndicate
participation of stocks, bonds, debentures, notes, or other securities.
It is, however, difficult to read 2(b) of Glass-Steagall (12 U.S.C. 221(a),
subsection (b )) with sections 16, 20, 21, and 32 of Glass-Steagall (12 U.S.C
24,377 and 78).
For instance, 2(b) of Glass-Steagall begins by saying that “except where
otherwise specifically provided” the term “affiliate” shall “include” corporate
bodies of certain kinds.
As noted above, Section 16 of Glass-Steagall (12 TJ.S.C 24) specifically forbids
a member bank from buying or selling securities for its own account, or as an
underwriter, and has no exception for “affiliates”
Section 2(b), (now subsection (b) of 221(a) of 12 U.S.C.), then goes on to
say that included in the term “affiliate” is an outfit—
(1) In which a member bank “directly or indirectly” either ‘owns or
controls” fifty per cent of the voting stock, and,
(2) Whether it holds that control directly or indirectly “through
stock ownership or in any other manner”
In 1966 the section as presently written (12 U.S.C. 221(a) subsection (b )) was
amended to apply to a bank holding company which directly or indirectly “con­
trols in any manner the election of a majority of the directors of a member
In the hearings themselves a security affiliate was defined as a corporation1. A part or all the stock of which is deposited in trust for the benefit
of stockholders in the bank ,*or
2. The shares of which are sold in units in combination with shares
of the bank; or
3. A controlling interest in which is held by the same interests which
control the bank; or,
4. A controlling interest in which is held by the bank; or,
5. A controlling interest in which is held by some other security affiliate
of the bank. (U.S. Senate, 71st Cong., 3rd Sess., S. Res. 71, p. 1054.)
The emphasis on the term ucontroV* is clearly reflected in the amended defini­
tion of “affiliate” which is quoted above (221(b) of Title 12 U.S. Code). The
words “and controls in any manner” were added to this section, and this phrase
clearly reflects Congressional intent.
This much, therefore, is crystal clear. No member bank can control an “affili­
ate” that buys and sells securities for its own account or underwrites.
This clearly makes illegal the operation by the Wells Fargo National Bank of
Wells Fargo, Ltd. All the stock of that English bank is held by Wells Fargo In­
ternational Investment Corporation, all the stock of which is held by Wells Fargo
International New York, the wholly-owned Edge Act Corporation of Wells Fargo
Bank, N.A.

Mutatis mutandis, the same applies to—
Manufacturers Hanover, Ltd., London
Bankers Trust International, Ltd., London
Deutsche Unionbank, Frankfurt
(owned by an Edge Act Corporation of Bankers Trust)
Bank of America International, Ltd., London
Citicorp International Bank, Ltd., London
Trinkhaus and Burkhardt, Dusseldorf, Germany
(owned by First National City Bank (“Citibank” )
Continental Bank, S.A., Brussels
Continental Illinois, Ltd., London
International Marine Banking Company, Ltd.. London
Chase Manhattan, Ltd., London
Banque de Commerce, S.A. Brussels
(owned approximately 50 percent each by Chase Manhattan National
Bank and Banque de Bruxxelles)
First Chicago, Ltd., London
Morgan and de, Paris
(the one-third interest of Morgan-Guaranty in this French corporation
is to be sold to Morgan Stanley which now owns a two-thirds interest)
There can, of course, be no question that all these corporations are “affiliates”
of their parent banks. Nor is there any question that each is controlled by the
l>arent bank, or, in some case, by its bank holding company.
However, some of these affiliates, as Wells Fargo, Ltd., say they do not engage
in so-called “equity” financing as Morgan-Stanley does, but confine their activities
to making Eurodollar loans and syndicating participations in such loans to other
Is selling a participation in such a loan or underwriting, say a loan of $100
million to the central bank of Peru, engaging in the “business of dealing in in­
vestment securities” in violation of Glass-Steagall?
Such transactions may or may not be private placements executed abroad and
exempt from regulation by the Securities and Exchange Commission, but on any
common sense basis the banks who do this are engaging in the securities business
in violation of Glass-Steagall.
As lead bank or underwriter of the loan, Wells Fargo presumedly receives a
commission. In this it is not acting much differently from a bank that sells mutual
funds whieh the Supreme Court so roundly condemned in Investment Company
Institute v. Camp (1971) 401 U.S. 617.
Granted, however, that an affiliate be doing a securities business and that
affiliate being one a member bank “controls”: there seems no question but that
Glass-Steagall forbids such a bank to operate such an outfit.
Significantly, the statute says nothing about a member bank’s being empowered
to engage in the securities business through an Edge Act or an Edge Act sub­
Moreover, the Edge Act was enacted in 1919 and Agreement Corporations were
permitted by an amendment to the Federal Reserve Act in 1916. Thus, there is
no reason for any one to believe that in enacting Glass-Steagall the Congress
meant to authorize either Edge Act or Agreement Corporations to engage in the
securities business.
In this connection, the promise of the Bank of Manhattan Trust Co. to the
Senate Banking Committee in 1933 to confine the business of its affiliate Inter*
national Manhattan Co. to the trust business is quite significant. If the Commit­
tee condemned investments in foreign securities done at home, is there any doubt
that they would also condemn the same thing being done by an affiliate abroad?
The most one can say is that it is open to question whether a member bank
can operate a securities affiliate in which it does not have a controlling interest
or one which it operates along with other banks in a joint venture.
A somewhat similar problem came before the Supreme Court in Board of
Governors of The Federal Reserve System v. Agnew (1947) 329 U.S. 441. There
the. question was whether John Agnew could be a Director of the Patterson Na­
tional Bank while an employee of Eastman Dillon, a brokerage firm that earns
47 percent of its income as a broker, and 32 percent as an investment banker from

Section 32 of Glass-Steagall (12 U.S.C 78) forbids any employee of a firm
‘primarily” engaged in underwriting from serving at the same time as a director
of a member bank.
The argument was, that since Eastman Dillon made more money as a stock
broker, it was no “primarily” engaged in underwriting. This argument was bol­
stered by pointing out that under 2(b) of Glass-Steagall (12 U.S.C 221(a)), sub­
section (b) for the Act to apply a member bank had to have fifty percent voting
While this very technical argument was accepted by two of the C.C.A. panel,
it was flatly rejected by the District Court (274 F.Sxipp. 024) and the Supreme
Court of the United States.
In dissent at the Circuit, Judge Edgerton said:
I think Congress used the word ‘primarily’ in a sense which includes
“essentially” or “fundamentally” and is not limited to “chiefly** or
“principally.” These are all recognized senses of the word. The Oxford
Dictionary includes “essentially,” Webster’s New International Dic­
tionary includes “fundamentally,” and Funk & Wagnalls’ Standard
Dictionary includes both “essentially” and “fundamentally,’* among the
meanings of “primarily.” (153 F.2d 785, p. 795).
The Board says, and its statement is not disputed, that restricting
the application of Sec. 32 to firms whose underwriting business is first in
volume would make this section “apply to no one.” The court does not
suggest that this result, which is no result at all, is the one which
Congress intended. If the court’s position is correct, the Act of Con­
gress requires us to defeat the purposes of Congress. This seems to me
another paradox. (153 F.2d 785, p. 796.)
In reversing for an unanimous Supreme Court, Mr. Justice Douglas said:
If the underwriting business of a firm is substantial, the firm
is engaged in the underwriting business in a primary way, though by any
quantitative test underwriting may not be its chief or principal activity.
On the facts in this record we would find it hard to say that under­
writing was not one primary activity of the firm and brokerage another.
If “primarily” is not used in the sense we suggest, then the firm is not
“primarily engaged” in any line of business though it specializes in at
least two and dones a substantial amount of each. One might as well say
that a professional man is not “primarily engaged” in his profession
though he holds himself out to serve aU comers and devotes substantial
time to the practice but makes the greater share of his income on the
stock market.







Moreover, the evil at which the section was aimed is not one likely
to emerge only when the firm with which a bank director is connected has
an underwriting business which exceeds 50 percent of its total business.
Section 32 is directed to the probability or likelihood, based on the experi­
ence of the 1920’s, that a bank director interested in the underwriting
business may use his influence in the bank to involve it or its customers
in securities which his underwriting house has in its portfolio or has
committed itself to take. That likelihood or probability does not depend
on whether the firm’s underwriting business exceeds 50 percent of its
total business. It might, of course, exist whatever the proportion of the
underwriting business. But Congress did not go the whole way; it drew
the line where the need was thought to be the greatest. And the line be­
tween substantial and unsubstantial seems to us to be the one indicated by
the words “primarily engaged.” (329 U.S. 441, pp. 446^447),
From all of which one must conclude that there is grave doubt that any member
bank can have an affiliate engage in the security business even if it does not con­
trol it. Glass-Steagall expresses a policy against allowing member banks to be
affiliated in any way with investment bankers. It was a conclusion the Congress
reached after long hearings.
Perhaps the strange wording of Section 2(b) (12 U.S.C. 221(a), subsection
(b )) in defining what is an “affiliate” was a Committee oversight.

As one of the draftsmen of the Federal Reserve Act who was then on the scene
and close to Senator Carter Glass puts it :
The Senate Banking Committee, in preparing the draft of the Banking
Act of 1933, first considered the idea of regulating them (affiliates);
then thought of recognizing them and providing for their incorporation
under federal charters, but finally under the influence of public demand
swung to the idea of complete eradication of these affiliates, by requiring
the banks absolutely to separate them within a year’s time after the
passage of the Act.
That the banks were at first bitterly opposed to this kind of surgical
operation was natural. It is an excellent symptom of returning health in
the banking community that not a few of the wiser bankers have openly
recognized the harmfulness of the affiliate system, have repudiated it,
and have devoted themselves since the passage of the Banking Act of
1933 to effecting a genuine and thorough separation between the parent
institutions and their dependents. (Professor H. Parker Willis, The
Banking Act of 1938 In Operation, 34 Columbia Law Review, at pp. 701704).
At best, this is a situation in which Federal Reserve as the regulator should
heed the advice Mr. Justice Stewart gave its colleague, the Comptroller of the
Currency in Investment Company Institute v. Camp, supra, namely, not grant any
authority to a member bank to engage in any way directly or indirectly by af­
filiate in the securities business—
Until he is satisfied that the exercise of this new authority will not
violate the intent of the banking laws,
There is substantial danger that the momentum generated by initial
approval may seriously impair the enforcement of the banking laws that
Congress enacted. (401 U.S. 617 at p. 628.)
Moreover, it is of some significance that in drawing Glass-Steagall, the Con­
gress drew it both ways, to wit, against member banks and also against invest­
ment bankers. (See particularly Section 21 of Glass-Steagall, now 12 U S C
378, and 32 of Glass-Steagall, now 12 U.S.C* 78).
Congress also in Section 19 of Glass-Steagall (12 U.S.C. 61) provided that be­
fore a bank holding company can obtain a permit to vote its bank stock, it must:
(e) (1) Show that it does not own, control, or have any interest in and
is not participating in the management or direction of any corporation,
business trust, association, or other similar organization formed for the
purpose of, or engaged principally in, the issue, flotation, underwriting,
public sale, or distribution, at wholesale or retail or through syndicate
participation, of stocks, bonds, debentures, notes, or other securities of
any sort (hereinafter referred to as “securities company” ).
T^e section goeg on to compel a bank holding company holding a permit to agree
(19(e) (2) now 12 U.S.C. 61(e) (2)) neither to acquire a securities company nor
participate in its management, and also to agree (19(e)(3) now 12 U.S C 61
(e)i(3 )) that if at the time it applied for its permit it held a securities companv
to divest it within five years.
„ S&dy of ,these statutes
their legislative history ought to convince the most
doubting Thomas that the Congress of 1933 made up its mind to take banks
out of the securities business in every way shape or form and that no Congress
since the 73rd has in any way relaxed the stringent statutory prohibitions that
Congress wrote in the dark days of 1933.
It must, therefore, be concluded that the Glass-Steagall Act on its face
(a) Banks from dealing in any way in “investment securities” except
solely upon the order and for the account of customers” or for the banks’
under limitations described by the Comptroller of the Currency.
(16 of Glass-Steagall, now 12 U.S.C. 24.)
teing affiliated with any organization dealing principally
in/ ^ e
b«siness. (20 of Glass-Steagall, now 12 U.S.C. 377 read with
2 (b) of Glass-Steagall, now 12U.S.C. 221(a),subsection (b).)
77-752— 76-------15

Persons, individual firms, corporations, trusts, or similar organiza­
tions from dealing in the business of receiving deposits, and at the same time
dealing in the securities business. (21 of Glass-Steagall, now 12 U.S.C. 378.)
(<Z) Interconnections between banks and any securities company. (32 of
Glass-Steagall, now 12 U.S.C. 78.)
It must be further stated that as written, these statutory prohibitions apply
across the board to all commercial banks and all investment bankers at home and

In a staff memorandum of November 14,1975, Federal Reserve frankly admits
that, despite Glass-Steagall, it has authorized member banks to do a securities
business overseas.
It says it did so under the authority of the Edge Act of 1919 (25(a) of the
Federal Reserve Act, 12 U.S.C. 611-631), and, presumedly, the similar Agreement
Act legislation of 1916 (Section 25 of the Federal Reserve Act, 12 U.S.C. 601-664).
There are three difficulties with this argument:
First, so far as we can ascertain, in 1933 there was no problem about banks
selling securities overseas.
In his June 1968 graduate study at Rutgers of Edge and Agreement Corpora­
tions, Allen F. Goodfellow, presently Senior Foreign Banking Analyst at the
Federal Reserve, states that there were 18 corporations that came under Board
jurisdiction from 1913 to 1933 only 3 of which were Edge Act Corporations, the
other 15 being Agreement Corporations. Goodfellow says that by the early thirties
only three had survived; all were Agreement Corporations. One of these dropped
its Agreement in 1947, and another converted to an Edge Act Corporation in 1957.
Second, it is clear that banks have extensively gone into the securities business
abroad only in recent days. The staff memo of the Fed gives the false impression
that the practice antedates Glass-Steagall whereas, in truth, it is a development
of the last fifteen years.
Mr. Goodfellow states that down to 1954 there were very few Agreement oi
Edge Act Corporations in existence, and he charts the growth since 1954 as
yM r

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196 3

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1973..........................................................................; ; : :
1974. ----------------------------------


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Edge Act


4 4








In other words, down to roughly 1954 there were only 6 Agreement and Edge
Act Corporations. As late as 1960 there were only 15. Thereafter, there was a
steady increase of approximately 10 a year, until by the end of 1974 we have 103.
Under these circumstances, it ill-behooves Federal Reserve to rely on either
the 1916 Agreement Corporation Act or the 1919 Edge Act to justify their
authorizing these corporations to do a securities business.
In 1933 the Glass-Steagall Act prohibited American banks from doing a secu­
rities business, and there is no reason to read that Act as exempting banks with
either Edg or Agreement Corporations. The prohibition is on banks and their

Third, as it has done so frequently before, the Federal Reserve Board reads
into 25(a) of the Edge Act of 1919 (12 U.S.C 615) authority to permit banks to
buy and sell securities from this general language which authorizes Edge Act
Generally to exercise such powers as are incidental to the powers
conferred by this Act or as may be usual, in the determination of the
Board of Governors of the Federal Reserve System, in connection with
the transactions of the business of banking or other financial operations
in the countries, colonies, dependencies, or possessions in which it shall
transact business and not inconsistent with the powers specifically
granted herein.
Vague, general language of this sort enacted in 1919 can be of no avail when,
as we have seen, the Glass-Steagall Act enacted in 1933 so clearly prohibits com­
mercial banks from engaging in the securities business.
The Federal Reserve staff memo of November 14, 1975 concedes that the Fed
lacked statutory authority except for this vague phrase in the 1919 Edge Act.
What the Fed should have done was to come to the Congress in the sixties and
ask for the authority it lacked, not read into the Edge Act of 1919 powers taken
away from American banks by the Glass-Steagall Act of 1933.
The prohibitions, as we have seen of Glass-Steagall, are broad and all inclusive
of affiliates.
Moreover, as we have seen the Senate Banking Committee in 1933 made clear
in discussing an affiliate of the Bank of Manhattan named International Man*
hattan Company that it did not want American banks abroad to be any more in
the securities business than banks at home.
Bank of Manhattan promised the Committee that henceforth International
Manhattan would stick to the trust business and get out of the securities
In forbidding our American banks to do a security business the Congress as we
have seen was also influenced by what they then understood to be the practice
of English banks. It would have been news to them to be told that this was not the
Moreover, in writing the Act the Committee defined “affiliate” in such broad
terms that the Attorney General in a letter to the Fed felt obligated to say that:
It is nevertheless worthy of note that the Senate Committee which
reported the Bill stated a purpose to discourage “affiliates of all kinds.” I
am familiar with the statements of Members of Congress made to your
department (the Department of the Treasury) and to mine, that Con­
gress did not intend to go so far as apparently it has in the definition of
“affiliates.” However, this may be, the executive department must accept
the law as Congress has written it, leaving it to Congress to correct by
amendment any inequities which may appear. (Federal Reserve Bulle­
tin, September 1933, pp. 570-571.)
In this the Attorney General is as correct today as in 1933. Glass-Steagall
prohibits all affiliates of member banks from engaging in the securities business
at home or abroad.
[Reprinted from Business Week o f Dec. 9,1933]
A ld r ic h P l a n

Ghase National head not only tells Senate Committee that Bank Act needs
plugging up but offers a detailed program on how it can be done.
Two decades ago Senator Nelson W. Aldrich (R.I.) attempted to write a
Magna Carta for American banking by proposing the organization of “monetary
associations,” a scheme that closely paralleled the subsequent set-up of the
Federal Reserve Banks. The “monetary associations” foundered because of public
distrust of the plan’s backers.
Today, extraordinary significance is being attached to another Aldrich pro­
posal, largely because of the high esteem which the Senator’s son commands in
the face of a general collapse of public trust in banking officials.

“ n e c e s s it y

op c h a n g e ”

The program for eliminating speculation from American banking put out by
Winthrop W. Aldrich, president of Chase National Bank, is being read in the
light of his favorable impression on the Senate investigating committee to which
it is submitted, and in connection with his statement (that “no one who has ob­
served events, or is familiar with the testimony presented to your committee,
can have failed to be impressed with the necessity of change.”
Mr. Aldrich’s proposals start from the contention that the Glass-Steagall Bank­
ing Act of 1933, which so many bankers so bitterly opposed, left large loopholes
for the entry of the “spirit of speculation” into the management of commercial
banks, despite its work in separating the interests of commercial and investment
banking. Criticisms:
(1) It allows any individual (investment banker or otherwise) to act as a
director, officer, or employee of any number of commercial banks, so long as no
one of them is a national bank, thus voids the provision on interlocking
directorates *
(2) It allows any individual to act as a director, officer, or employee of a na­
tional bank as well as of two other banks—if the Federal Reserve Board issues
a permit therefor (a hazardous exception if divorcement from affiliates is to be
complete and lasting) •,
(3) It allows a member of a partnership engaged in the investment banking
business, or an officer or director of a corporation engaged in such business to
act as a director, officer or employee of any member bank, provided only that
he obtain a permit from the Federal Reserve Board—again a hazardous
(4) It allows anyone engaged in the securities business as a controlling stock­
holder in an investment corporation (so long as he does not act as a director or
officer of such organization) to act as a director, officer, or employee of any bank,
without the necessity of permit from the Federal Reserve Boards—an opportunity
for indirect affiliation of investment and commercial banking.

Having inside information on how the Banking Act of 1933 can be legally
evaded, Chase’s president has very clear ideas on how its loopholes can be legally
closed. Aldrich amendments would: (1) Expressly disqualify anyone engaged,
directly or indirectly, in the investment banking business from acting &s director
or officer of a national bank; (2) “disqualify any director, officer, or employee of
a national bank from acting as director, officer, or employee of any other bank
in the same community” ; (3) “make appropriate provision applying the same
canons of eligibility with regard to officers, directors, and employees of state
member banks, so that there shall be no unfair discrimination against national
However, Mr. Aldrich wouldn’t stop at that point. There is “a practice out
of which much embarrassment and, at times, abuse has arisen/’ which is, of
course, the banking practice of making loans to bank officers and to officers of
depositing corporations. The Glass-Steagall Act provides that any executive officer
of a member bank must report such borrowings to the chairman of the bank board.
The president of Chase, who speaks from the heart of this subject, points out
that it says nothing about what the chairman is to do with this information, or
what he is to do if he is an executive officer of the bank and wants to do a little
borrowing on his own, or what happens if there is no chairman. And he adds that
the act doesn’t prevent a bank officer from getting “embarrassing” loans from
brokers or private bankers, or other sources, without making any report.
If the committee hasn’t figured out controls for borrowing bank officers and
corporation officers who use their corporation influence as a club for private loans,
Mr. Aldrich has. Like this:
(1) Prohibit executive officers of member banks from participating, directly
or indirectly, in syndicates offering securities to the public, or in trading accounts
or pool operations in securities dealt in publicly;
(2) Impose similar prohibitions on executive officers and directors of the 12
Federal Reserve Banks;
(3) Compel all executive officers of member banks to report to their boards all
their borrowings above some nominal sums related to the size of their salaries;


(4) Compel executive officers of member banks to report to their boards of
directors all jobs they undertaken for outside interests;
(5) Put controls on loans made for “reasons of policy,” so as to keep American
banks competitive and prevent them from doing “unsound” things in their efforts
to get business.
Point 5 gets special emphasis. Loans to borrowers who are in a position to
influence other importance business of the lending bank, or to bring important
business to the bank, may be all right in some cases, but, says Mr. Aldrich, '‘the
situation would be less subject to abuse if there were added to the Banking Act
a provision that in every case where a loan is made by a member bank to individ­
uals in relations such as those specified above, a report should be made by the
lending bank to the board of directors of the customer bank or corporation of
which the borrower is an officer, or to the individual depositor or partnership for
whom the borrower acts as financial agent.”
Finally, he recommends a more exact definition of an investment affiliate and
an investment banker, and, for purposes of sound liquidation, suggests that the
existing affiliates be permitted to continue beyond June 16,1934.
All of which sets forth in an orderly and detailed way the kind of banking
reform that Senator Glass has been advocating for years.
However, even the carefully studied Aldrich plan will require for effectiveness
the corporation of the clearing houses and the exchanges. Unless they help it out
by self-imposed regulations, the chiselers will still find ways. If self-regulation
can be provided by those who know the game and if the spirit of the Aldrich pro­
posals can be put across, much of the public concern over the moral state and the
mechanics of commercial banking will be allayed. The problem of reestablishing
the commercial banks as manufacturers of credit and reducing the proportions
of the pawnshop business of making loans on securities is something else again.
[From Euromoney, June 1973]

Republic of Peru—$100,000,000—Eight-Year Loan with BANCO DE LA
NACION as Financial Agent, arranged by WELLS FARGO LT. and provided by:
American Express International Banking Corporation; Associated Japanese
Bank (International) Limited; Atlantic International Banks Limited; Banco de
Santander; Banco do Brasil S.A. London Branch; Bankers Trust Company; The
Bank of California N.A., Nassau; The Bank of Kobe, Limited; The Bank of Tokyo,
Ltd.; Banque Commerciale pour l’Europe du Nord (Eurobank) j Banque de
rUnion Europeenne S.A.; Banque de Suez et de l’Union des Mines; Banque Europeenne de Tokyo S.A.; Banque Francaise du Commerce Exterieur; Central Na­
tional Bank of Cleveland, Nassau; Cisalpine Overseas Bank Limited; Citicorp
International Bank Limited; Commerce Union Bank, Nassau; The Commercial
Bank of Kuwait S.A.K.; Credit du Nord; The Fidelity Bank; First National City
Bank; The First Pennsylvania Banking & Trust Company; Franklin National
Bank; The Fuji Bank, Limited; Fuji Bank (Schweiz) A.G.; Girard Trust Bank;
Handelfinanz Bank; Hartford National Bank, Nassau The Hokkaido Takushoku
Bank Limited; The Industrial Bank of Japan, Limited; The Industrial National
Bank of Rhode Island, Grand Cayman Branch; International Commercial Bank
Limited; Italian International Bank Limited; Japan International Bank Limited;
Kredietbank S.A. Luxembourgeoise; The Kyowa Bank, Limited; La Salle National
Bank; Libra Bank Limited; Lloyds & Bolsa International Bank Limited; The
Long-Term Credit Bank of Japan, Limited; Marine Midland Bank—New York;
Marine Midland Bank—Western, Nassau; Midland Bank Limited; The Mitsubishi
Bank, Limited; The Mitsubishi Trust & Banking Corporation; The Mitsui Bank,
Limited The Mitsui Trust & Banking Company Limited; National Bank of North
America, Nassau; The National Shawmut Bank of Boston, Nassau; The Nippon
Fudosan Bank, Limited; Orion Termbank Limited; Republic National Bank of
Dallas; Rothschild Intercontinental Bank Limited; The Royal Bank of Canada
International Ltd.; The Royal Bank of Canada; The Saitama Bank Limited; The
Sumitomo Bank, Ltd; The Tokai Bank Limited; Toronto Dominion Bank;
Ultrafin A.G.: Union Planters National Bank of Memphis; United California
Bank; United International Bank Limited; Wells Fargo Bank N.A., Nassau;
Wells Fargo Limited; and The Yasuda Trust & Banking Company Limited.

T h e B ottom : L in e — T h e B a n k s ’ B iggest W orry

Dan Dorfman


The number-one danger confronting United States banks today, according to
some knowledgeable people I spoke to recently, is neither their real-estate loans,
their holdings in municipal bonds, nor their loans to the likes of troubled W, T.
Grant Bather, it is the viability of about $25 billion in loans to less-developed
countries—a problem that’s potentially more serious to U.S. banks than to all the
others combined.
These countries include Brazil, Mexico, South Korea, Kenya, Taiwan, and
Zambia. And they’re heavily in hock to some of this country’s biggest banks, in­
cluding First National City, Chase Manhattan, Morgan Guaranty, Chemical,
Manufacturers Hanover, Bank of America, and the First National Bank of
“The *LDCs,’ as the less-developed countries are called, are top heavy in debt,
and sizable defaults could trigger a major banking crisis,” one Chicago banker
told me last week. “I’m not saying it’s going to happen, but it’s worrisome as hell.”
One LDC, Zaire, a major African borrower on the international money markets
with over $1 billion in foreign loans, has already defaulted on some interest
payments. According to some estimates, it skipped about $8 million in interest
payments dating back to last June. Among the banks which have reportedly lent
money to Zaire are Citibank, Chase, Bankers Trust, and Morgan Guaranty.
“The budding LDC crisis,” as one banker characterizes it has not gone un­
noticed in Washington. Last June, the Senate Foreign Relations Subcommittee
on Multinational Corporations, headed by Senator Frank Church, fired off a
questionnaire on their foreign operations to 35 of the country’s largest banks as a
preliminary step in an investigation of U.S. banks’ overseas activities. About
half the banks—principally the large ones—refused to answer. The committee
does have subpoena power, but for the moment, at least, it’s trying to obtain the
information from the Federal Reserve Board. “There’s enough evidence to be
concerned,” I was told, and so the Church committee will now likely call for
hearings on the whole overseas operations of U.S. banks early next year.
For an insight into the LDC problem, I sought the thinking of Arnold Safer, a
vice-president and economist for Irving Trust Company and an expert on the
subject. My timing was pretty good. Safer, a former economics professor at Long
Island University and one-time economic consultant to Westinghouse and the New
York Stock Exchange, is currently in the midst of wrapping up a bimonthly report
to the bank’s clients in which the LDC problem will be thoroughly aired.
His comments—which the bank’s clients will be reading in about two weeks—
are not encouraging. A growing number of LDCs, Safer said, face mounting
problems meeting their debt service, largely because of skyrocketing oil prices.
He sees such countries as Brazil and South Korea, and even Greece, “facing
difficulty rolling over their credits.” And he believes prospects have heightened for
defaults in Zambia, Tanzania, and Kenya.
The problem, Safer said, isn’t rising oil pricees alone. Other factors include:
Higher prices for manufactured goods purchased from the industrialized na­
tions. (These prices are up about 20 per cent in the last eighteen months.)
Recent declines in the prices of the LDC’s chief commodity exports, such as
copper, coffee, and phosphates. (The United Nations index of non-oil-commodity
prices is off about 25 per cent from the highs of late 1974.)
Declining commodity purchases from LDC countries owing to the world-wide
Unfortunately, Safer said, the countries suffering most are those that are at
the take-off stages of economic growth. He pointed, in particular, to Brazil,
Mexico, Taiwan, South Korea, and the Philippines.
Mounting problems for LDCs have been accompanied by mounting—and rec­
ord—debt. And that’s got a number of bankers scared.
For example, between 1967 and 1973, according to Safer, the LDCs borrowed
about $15 billion. On top of that, some $16 billion was borrowed by the LDCs in
just the eighteen months from December of 1973 through July of 1975. Last year,
the balance-of-payments deficit for the LDCs was $20 billion. At the end of 1974.
the LDCs had accumulated a debt of $120 billion. Safer’s estimate by year-end
1975: a jump to $160 billion.

Of an estimated $25 billion in U.S. bank loans to LDCs, Safer figures twothirds—some $17 billion—is directly related to New York City banks and their
overseas branches.
Obviously, LDCs will continue to require enormous capital needs to finance
their growth and to ensure orderly repayment of interest and principal to lenders.
But that’s easier said than done.
One bank leader, Morgan Guaranty, in a recent report on world financial
markets, pointed to the strain on the capital resources of U.S. banks. Moreover,
Morgan warned that some slowing of U.S. credit to LDCs can be expected because
“the total-risk exposure of individual banks to certain countries has grown so
rapidly in relation to bank capital. . .
Most bankers I know are optimists at heart. And Safer is no different. “I
think LDCs are a problem, but not a crisis,” he said. Safer points out that debt
expansion—in line with a country's economic growth—is a normal process. And
he believes an expanding economy in 1976 and 1977 should make it easier for the
LDCs to meet their debt obligations.
Maybe so. But what happens, I asked, if the economy turns out not to be ex­
panding over the next couple of years?
“Then you’ll probably have defaults,” replied Safer, “which could well be the
forerunner of a further erosion of bank earnings from heavy write-downs that
would likely ensue.”
Safer told me a bank—like a corporation or a government—doesn’t hang out
its dirty laundry. “And I’m not going to do it either,” he said. But then, moments
later he admitted : “I guess things could become very uncomfortable for the
banks. It really could get serious.”
[From Forbes, Sept. 15,1975]
C r a c k s I n G l a s s -S te a g a l l ?— D o t h e B a n k s W a n t to G obble U p W a l l
S t reet ?— T h e ir A m b it io n s A be P robab ly M ore M odest

As if cut-rate commissions on the brokerage side of their business weren’t
bad enough, the investment bankers are gloomy about a new threat. The com*
mercial banks, they whisper darkly, are nibbling away at the Glass-Steagall Act,
the Chinese Wall that separates the two worlds of investment and commercial
The Act, passed in 1933 in the wake of the Crash and several banking scandals,
forbade commercial banks from selling, underwriting or distributing corporate
securities. The idea was to halt conflicts of interest that could result from a bank
selling the securities of companies to which it had lent money. They could, how­
ever, deal in government and municipal securities and provide corporate advisory
Now, both the Administration and Congress, hearing the cries of the investment
bankers, are Studying The Question. Senator Harrison Williams (Dem., N.J.) has
announced that his Banking & Currency Committee will hold hearings on GlassSteagall’s adequacy this fall.
For their part, the commercial bankers protest—to quote W. J. Tozer Jr., head
of Citicorp’s Merchant (read investment) Banking Group—they’re doing nothing
very different: “It’s a natural aspect of the broad-gauge banking we are doing
Morgan Guaranty, for example, has a mergers and acquisitions (or “financial
services” ) staff that has arranged deals like the purchase of Gimbels by Brown
& Williamson Tobacco, or Quaker Oats’ takeover of Fisher-Price Toys. Citicorp’s
investment bankers advised White Consolidated on the purchase of Westingnouse’s appliance business, while its private-placement specialists arranged $180
million worth of financing in the year ended June 30. Now other banks are rush­
ing to set up investment banking departments. What’s going on?
One thing they’re doing, of course, is adding to earnings with little extra risk.
Mank bank diversifications of recent years—mortgage banking, leasing, factor­
ing—required hard capital. They looked great on the way up, but could cost a
lot on the way down.
By contrast, corporate finance consulting demands little more commitment than
some employment contract office space, phone lines and stationery; If things don’t
work out, you terminate the contracts and unplug the phones.

What can the commercial banks do better than the investment banks? Some
investment bankers argae that the commercial banks’ deal-makers wouldn’t have
the talent to make it on Wall Street Says one: “I’m not worried about the
straightforward competition; the people they’ve got aren’t what you’d call
But William Comfort who runs the corporate finance section of Citicorp’s
Merchant Banking Group, counters that the banks (and Citibank in particular)
have upgraded their staffs until they now have an edge, especially in the inter­
national deal-making area. “We’re the best channel possible to steer overseas
direct investors into the U.S. market We have not only extensive contacts in the
States, but have merchant banks in places like Thailand and Brazil. Companies
have confidence in us because they know that we’re always going to be here.”
The investment bankers most likely to be hurt, if the banks do go into the
merger, acquisition and private-placement business, are not the big underwriting
houses like Salomon Bros., Goldman Sachs or First Boston. Comments one part­
ner in a big underwriter: “They’re competing for maybe 5% or 10% of our total
business—but you’re certainly not talking about losing that much.”
Most worried are the partners in the small houses whose reputation and busi­
ness come from their skill as imaginative deal-makers. Says one: “We’re really
a custom-tailoring shop. Arranging mergers, acquisitions and private placements
accounts for maybe 40% of our business. Simple competition doesn’t bother me.
What does is the banks using their power as lenders to take away business.”
The bankers F orbes talked with seem to be aware of the dangers and im­
proprieties involved in mixing the lending and advisory functions. However, one
investment banker told of a corporate client who banked at a big New York
bank. “The bank said to my client, ‘You should get some long-term financing in
the form of a private placement with an insurance company.’ The treasurer told
me, ‘Gee, they’ve lent us all this money, so we should use their department to
do it.’ So what do they do? They use them, these guys aren’t the top pros in the
field, they miss the market, and the company never gets its money.”

But do the banks really want to get back into underwriting corporate securities
domestically? The investment bankers insist that they do, and point to the banks’
interest in getting permission to underwrite state and local government revenue
That’s hardly a foot in the door. True, some eager beavers in the banks’ corpo­
rate finance departments would like to take over the whole financial world, but
most commercial bankers see commonsense objections to underwriting corporate
securities. As Manufacturers Hanover Vice President George Armiger says, “It’s
not just Glass-Steagall; there are too many risk elements. Banks have a hard
enough time keeping people’s confidence these days, and if you underwrite and
get hurt doing it, you can have a hard time, say, rolling over your certificates of
Besides, some major U.S. banks have had sobering experiences abroad, where
they are not subject to U.S. limitations. A number of them set up London-based
merchant banking affiliates in the late Sixties. Some, like Bank of America,
Manufacturers Hanover and Wells Fargo, stuck mainly to managing big Euro­
dollar loans. But others, to their sorrow, jumped headlong into corporate financ­
ing, underwriting and speculative real estate.
Look at last year’s results—spelled out in detail not in domestic annual reports
but in hard-to-get-at British filings. Officially, merchant banks owned by Bankers
Trust and Continental Illinois just broke even. Actually, BT kept $100 million
on deposit with its subsidiary at below-market interest rates to boost the sub­
sidiary’s earnings by $3.5 million, and also made an $8-million capital infusion
to beef up sagging ratios. Continental helped out its merchant bank by buying
a $5,000 debenture from it for $15 million. Marine Midland’s merchant bank
reported a $1.4-million loss and would probably have reported more had it not
upstreamed nearly $300 million in loans, to spread the impact of its bad debts
over its parent’s much larger portfolio.
In short more freedom provides both opportunity and risk. The London experi­
ence drove that home to some U.S. banks the costly way.

O f f ic e

of t h e

A ttorn ey G en er al ,

Washington, D.C., December 29,1975.

H o n . W r ig h t P a t m a n ,

Vice Chairman■,Joint Economic Committee,
U.S. Congress, Washington, D.C.
B ea r C on g re ssm a n P a t m a n : Please accept my apology for this delayed re­
sponse to your August 1st letter which expressed your concern over the purchase
of the insolvent Franklin National Bank by European-American Bank and Trust
Company and the possible formation of United Bank, Arab and French, New
You take issue with Assistant Attorney General Kauper’s July 18 letter both
as to his understanding of applicable law and as to his analysis of the relevant
banking markets.
Concerning the former point, Mr. Kauper’s discussion in his July 18 letter
comports with my own understanding of the law. In light of the Supreme Court’s
decision in United States v. Penn-OUn Chemical Co., 378 U.S. 158 (1964), I share
Mr. Kauper’s opinion that a joint venture formed for the purpose of competing
in a new market is not illegal per se. In Penn-Olin, the Court adopted an analysis
comparable to that used for mergers and acquisitions generally, which requires
consideration of the actual or potential competitive effects of the venture in the
context of the specific markets and economic circumstances in which it occurs.
A characterization of the Penn-OUn joint venture as an illegal agreement to
divide markets, ably presented by Mr. Justice Douglas in a dissent joined in by
Mr. Justice Black, was not adopted by the Court
Concerning the latter point, absent an independent and detailed analysis of the
pertinent markets, I am of course not in a position to gainsay the specific con­
clusions reached by the Antitrust Division. The market analysis as outlined by
Mr. Kauper, however, strikes me as being fully in accord with the requirements
of a case of this nature. I specifically concur in the jiidgment that the asset size
of the joint venture is insufficient, without more, to create an unlawful restraint
of trade.
E dw ard H. L e v i ,
Attorney General.
F ebru ar y 24,1976.
Hon. E dw ard H. L evi ,
Attorney General, Department of Justice,
Washington, D.C.
D ea r M r . A tto rn ey G e n e r a l : (1) I wrote to inquire whether in your opinion
an Article 12 New York investment company such as European-American Cor­
poration is, as a matter of law a bank, and, as such, subject to the limitations
which the Glass-Steagall Act and our other banking laws impose on commercial
To aid you, I enclose a study prepared by my staff on this subject from which
you can see that an Article 12 New York investment company is identical in
operation to a commercial bank, except that it does not have ordinary checking
accounts but holds so-called “credit 'balances” withdrawable on notice. Yet New
York permits this “bank”, called an “investment company” to:
(a) buy and sell securities for its own account;
(b) be the owner and creditor of the same business firm laying itself open
to dangerous conflicts of interest;
(c) loan free of loan and reserve limits, regardless of who is the borrower
or the amount of his loan;
(d) affiliate with a firm that underwrites securities and trades in the stock
(e) be owned by foreign banks and individuals; and,
(/) branch anyhere in the United States without securing approval from
Though they hold other peoples’ money just like a commercial bank, New York
allows these investment companies to buy equities, affiliate with underwriters
and stock brokers and lend unrestrictedly to a single borrower owned by them.

(2) Moreover, In July 1972 when Michele Sindona bought an 18 percent stock
interest in Franklin National Bank through two foreign corporations, I asked
Dr. Bums to rule that his companies were subject to the Bank Holding Company
Act. He refused because the interest was not 25 percent, even though both the
statute and Regulation Y provide that any stock interest over 5 percent raises a
rebuttable presumption of control. Four of these foreign banks each own 20
percent of the stock of European-American Bank and Trust Company and the
other two hold, respectively, 17 and 2 percent.
Both Senator Proxmire and I have asked the Fed at least to hold a hearing
on the question of control before an Administrative Law Judge. To date it has
not done so. In your opinion in this proper?
(3) I need not tell you that I was very unhappy with your letter to me of
December 29th in which you say that six of Europe’s largest banks are per­
mitted under our antitrust laws to acquire the billion dollar Franklin National
Bank, even though not long ago .the Superintendent of Banks of the State of
New York thought it an antitrust offense for Barclay’s Bank to acquire the
much smaller Long Island Trust Company.
(4) I am, therefore, conditioned to receiving from you a letter saying that
Article 12 New York investment companies are not banks, and any stock interest
less than 25 percent does not constitute control subjecting the owner to the
Bank Holding Company Act.
(5) However, even though you may disagree with me, I respect you and know
you to be fair. You will, I am sure, concede that I am raising three important
points of law upon which I may be right and you wrong. Accordingly in answering
this letter would you consider how these three important points of law can be
presented to an appropriate court for decision?
(6) If your answer be that there is now no such method available, should not
our Judiciary Committees provide one? Or is your ruling, right or wrong, to
With kindest regards and best wishes, I am.
W r ig h t P a t m a n .

Vice Chairman, Joint Economic Committee.

M em oran du m

L a w — N e w Y o rk I n v e s tm e n t Co m p a n ie s C hartered U nder
A rticle 12 of t h e N e w Y o rk B a n k in g L a w s


Question. Do New York Investment Companies, chartered under Article 12 of
the New York Banking Law, violate federal banking law by engaging in an
essentially banking business?
Answer. Yes.
Just as the State of Delaware encourages corporations to incorporate there
by permitting them to draw their charters about as they please, so New York
State has built itself up as the world’s financial center by permitting certain
foreign banks to operate there virtually without regulation.
Besides allowing foreign banks to operate so-called agency offices in New
York without any loan limits or reserve requirements, New York also allows
foreign banks to charter so-called investment companies pursuant to Article 12
of the New York Banking Law.
When we add together financial transactions of foreign banks directly, their
agencies, and New York Article 12 investment companies, there is as much as
$250 billion going into and out of our banking system, for the most part, un­
regulated. This makes very difficult, if not impossible, monetary control by the
Open Market Committee of the Federal Reserve (System.
For the protection of the dollar and the financial strength of the country,
steps must be taken to subject foreign banks who do business in this country
to proper controls whether they choose to come here directly, through agencies,
or under the guise of New York Article 12 investment companies.
It does not make sense to allow foreign interests to do a banking business in
the United States that is either unregulated altogether, or partially immune to
any of the traditional bank controls—especially the loan and reserve limits to
which our domestic banks are subject.


Article 12 investment companies are empowered to perform any and ail func­
tions of “commercial” banks chartered in New York State, except that Section 509
of New York’s banking law forbids them to “engage in the business of receiving
deposits.” However, Section 509 explicitly authorizes maintenance “for the ac­
count of others, credit balances incidental to, or arising out of the exercise of its
lawful powers.
” Also, as mentioned above, unlike commercial banks, Article
12 investment companies have the power to buy and sell securities for their own
Although Article 12s call themselves “investment companies,” they are, in
truth, the equivalent of an international wholesale bank and compete on a parity
with the foreign departments of our commercial banks.
Counsel for Belgium-American Banking Corporation, an Article 12 invest­
ment corporation, before the Senate Subcommittee on Financial Institutions in
1966 let the cat out of the bag when he testified:
Article 12 refers to Article 12 corporations as investment companies,
and therefore we are an investment company. We do not do the kind of
business that a company regulated under the Investment Company Act
of 1940 does. We do much more banking buisness. (Hearings on Bills to
Amend the Bank Holding Company Act of 1956: S.2353, S.2418, and H.R.
7371, Senate Committee on Banking and Currency, 89th Cong., 2nd Ses­
sion, p.261).
The history of foreign ownership of Article 12 banks has not been spectacular.
Until 1975 no more than three Article 12 New York investment companies had
been chartered by foreign banks. In fact, this low profile seems to have been the
primary reason for the lack of attention paid to the Article 12 investment com­
panies by federal banking regulators.
In a letter dated August 13.1975 from the Federal Reserve Board to Mr. .Tames
Gargan, Acting Deputy Superintendent of Banks of New York, cmmenting on
the application of “Baer American Banking Corporation” to become the fourth
foreign-owned Article 12 investment company, the Board clearly indicated that
the “limited number of ‘banking’ investment companies”, and the fact that the
policy of New York as understood by the Board was to deny charters to future
Article 12 applicants, were prinlipal reasons why the Board had recommended
that foreism-owned Article 12 investment companies not be included under pro­
posed legislation regulating foreign banking in the United States.
The Baer application has now been granted. New York, in the interim, has
chartered a fifth Article 12 investment company, the Nordic Banking Corporation,
wholly owned by Sweden’s third largest commercial bank, Svenska Handelsbaken.
Indications are that it will be New York’s policy to invite further applications
from foreign interests.

Foreign-owned Article 12 investment companies are almoset exclusively engaged
in international wholesale banking. They compete with the international banking
departments of domestic commercial banks, other foreign banks’ agencies and
branches, and most of all, with the so-called Agreement and or Edge Act Corpora­
tions of our domestic banks.
The fact that an Article 12 investment company cannot have ordinary checking
accounts is no disadvantage because they hold credit balances upon which their
customers can draw. In this respect also they are on a parity with asreneies,
Agreement and Edge Act Corporations, none of which have ordinary checking
However, unlike Agreement or Edge Act Corporations there are no statutes
requiring Article 12 investment companies to maintain adequate reserves and
observe loan limits. Regulation K restricts Edge and Agreement Corporations
engaging in international banking business whose total demand deposits and
acceptance liabilities exceed its capital and surplus from creating liabilities
to any one customer of more than 10% of such capital and surplus.

“Moreover, aggregate outstanding liabilities at any one time must not exceed
$en times a corporation’s capital and surplus without prior permission from the
^Federal Reserve Board.
Furthermore, under Regulation K (12 C.F.R. Sec. 211.7), Edge. Act Corpora­
tions doing business in the United States may only do “such limited business
:as is usual in fjmmrfwg international commerce” Subparagraph (d) (1) to Sec.
211.7 specifies that “such limited business” does not include financing importexport transactions to the extent of advancing “expenses in the United -States
of an office or representative therein”. Article 12 investment companies, on the
other hand, are not restricted from making such working capital loans.



When Bank Nationale de Paris the largest bank in France decided to expand
its United States business to California in 1971, it had to apply for permission
from the Federal Reserve Board to become a bank holding company pursuant
to Sec. 3(a) of the Bank Holding Company Act of 1956, 12 U.S.C. Sec. 1841,
e*Bank Nationale de Paris already completely owned French-American Banking
Corporation (FABC), a New York investment company chartered in 1919 as an
Article 12 investment company. The Board ruled that under the 1970 amendments
to the Act, Article 12 investment companies were not “banks” as defined by Sec.
2(c) because FABC could not, under New York law, “accept deposits that the
depositor has a legal right to withdraw on demand”.
When the Bank Holding Company Act was amended in 1970 the Congress added
a special exemption for “any company organized under the laws of a foreign
country the greater part of whose business is conducted outside the United
States”. (Sec. 4(c) (9).
, ^
To accommodate this change, the Board in 1971 amended Regulation Y (Sec.
225.4(g)), which in part permitted domestic activity by a foreign bank holding
company if it was found to “finance and facilitate” foreign commerce. This stand­
ard is much broader than that for Edge and Agreement Corporations given
content in Regulation K (Sec. 211.7).
New York Article 12 banks, therefore, are allowed to make loans under the
facilitating foreign commerce standard which their competitors the Edge and
Agreement Corporations are prohibited from making—witness their ability to
advance to United States corporations working capital loans.
In addition, New York investment companies are subsidiaries of foreign bank
holding companies under Section 225.4(g) (2) (iv), need not exclusivley engage
in business related to foreign and international commerce, whereas all the
domestic business of Edge and Agreement Corporations under Regulation K must
be related to its foreign business.
By confining their banking business to Article 12, New York investment com­
panies, foreign banks can thereby evade the Glass-Steagall Act which confines
banks to the business of banking.
For instance, FABC organized French-American Capital Corporation (FACC)
in 1970 to invest for its own account in the securities market to make venture
capital investments and temporary short-term investments, including participa­
tions in the syndication of foreign and domestic loans. Also included in FACC’s
functions are investment advisory services, and merger and acquisition assistance.
Although the Board required that FAOC meet the requirements imposed upon
domestic bank holding companies when engaging in like activity, it allowed it to
do a securities business our commercial banks cannot do.
Section 225.4(9) (2) (iv) is a loophole for foreign banks that ought to be
dosed. They should not be allowed to do what our banks are forbidden to do
under the guise of an Article 12 New York investment company.
The parent corporation of another New York Article 12 investment company,
J. Henry Schroder Banking Corporation, likewise owns subsidiaries engaged
in investment counseling, real estate, and leasing.
Because of their false “non-bank” status under the Bank Holding Company
Act these New York Article 12 investment companies permit their foreign parents
enjoy in the United States an interstate banking presence which, as we have
seen, is denied to American banks’ Edge and Agreement Corporations, and under
the McFadden Act to our commercial banks.


European-American Bank and Trust Company (EABTC) is owned by six of
Europe’s largest banks. (Deutsche Bank, Germany’s largest, 20% ownership;
Societe Generale, one of France’s three largest, 20% ownership; Midland Bank
Group, a major London clearing house, 20% ownership; Societe Generale de
Banque, Belgium’s largest, 20% ownership; Amsterdam-Botterdam Bank, Nether­
lands’ largest, 17%+ ownership; Creditanstalt-Bankverein, Austria’s largest,
2% + ownership).
As a member of our Federal Reserve System, EABTC is subject to the loan
limits and reserve requirements of other member banks. But over a long period
these self-same six European giants have owned European-American Banking
Corporation (EABC) organized as a New York Article 12 investment company.
Indeed, EABTC and EABC share common management staff and, to a large
extent, common directors.
If EABTC cannot make a loan because of its loan limits, the management
refers customers to EABC which has no loan limits. Likewise, EABTC, as a bank,
cannot buy and sell securities for its own account, but <xf course EABC can do so,
even though it cannot underwrite securities.
The six European banks that own both EABTC and its Article 12 investment
company EABC, are also allowed ot deal as they please in our financial markets
without any regulation, and are also allowed to have subsidiary companies
that underwrite, buy, and sell securities in the American market.

A. Grandfathering would unjustifiably exempt the largest foreign interests from
regulation and supervision
Governor Mitchell, in his recent statement before the House Subcommittee on
Financial Institutions Supervision, Regulation and Insurance, stated the view
of the Fed as follows:
The Board believes that there is a potential for evasion of its pro­
posed legislation if foreign banks can readily obtain investment company
charters in lieu of agency or branch licenses. The Congress may thus
wish to consider subjecting all future investment companies that wouid
be chartered to engage principally in a commercial banking business to
the same scope of federal regulations that have been suggested for
agencies and branches in order to dose this potential ioophole. (Empha­
sis supplied.)
This is a half step towards reform. If there be “a potential for evasion” of
needed legislation, why would any bank regulator worth his salt want to preserve
“a potential for evasion” in J. Henry Schroder, French-American Banking Cor­
poration, European-American Banking Corporation, or any previously incorpo­
rated New York Article 12 investment company ?
Although this position is a step in the right direction, there is no justifiable
reason for “grandfathering” those New York investment companies already in
existence. This would allow European-American, the largest European-owned
banking group in the United States, to continue its unregulated and illegal
In the last two years the foreign New York investment company presence has
almost doubled, with no indication that this proliferation will cease. Indeed,
given the New York authorities’ receptive policy for granting new Article 12
investment company charters “grandfathering” would encourage many other
foreign banks to establish New York investment companies before the Congress
This would be clearly contrary to all efforts of the federal government to end
the impermissible advantages enjoyed by foreign banks in this country.
B. The inability to offer checking account services is irrelevant to an institution's
status as a bank
A survey of the balance sheets of United States banking institutions owned by
foreign banks located in New York for 1975 (figures provided by Governor
Mitchell with his statement) clearly indicates that although investment com-

jmhies are incapable of offering checking accounts, their liabilities to corpora­
tions and other non-bank customers, are of levels comparable to those of other
*commercial banks and branches which do receive demand deposits in the form
'of checks.
For agencies and New York Article 12 investment companies, these liabilities
are entirely in the form of credit balances, time and savings deposits, and other
In view of the kind of business New York Article 12 investment companies
actually do, and the credit balance of their customers that they hold, there can
be no valid argument that they are not “banks” subject to Federal Reserve regu­
lation merely because they do not offer ordinary checking accounts.
Section 2(c) of the Bank Holding Company Act defines “bank” as “any insti­
which (1) accepts deposits that the depositor has a legal right to
withdraw on demand, and (2) engages in the business of making commercial
loans” Despite the highly technical arguments advanced to show that credit
balances are not such deposits, they are subject to withdrawal.
Although it is difficult to understand why they would do so, the United States
maintains Treasury tax and loan accounts in these New York Article 12 invest­
ment companies, and agrees to give a week’s notice before withdrawal.
It is an outrage for the United States to deposit a cent in institutions of this
kind. It must be the United States thinks they are banks even if they are pre­
tending not to be, and it would be far better were the United States to play out
the charade and not deposit in them on the grounds they are not banks.
European-American Banking Corporation, in its promotional literature, de­
scribes itself as “an investment company with commercial banking powers orga­
nized under the banking laws of the State of New York” Why then, should it not
be regulated as such?
It is a fundamental misunderstanding of the function of traditional banking
safeguards which leads one to the conclusion, that merely because an institution
does not offer checking accounts, its failure would have no effect on the American
banking system.
The 1975 balance sheets of four Article 12 New York investment companies
indicate a net liability to other banks of 28.2% of their total assets/liability
ratio; these liabilities are ultimately depositor’s funds. Little protection is af­
forded depositors in the United States banking system if they are prohibited
from making deposits in unregulated banking institutions, but their banks are
permitted to sell their deposits to these institutions.
It is also significant to note that when Congress amended the Bank Holding
Company Act in 1966 a list was prepared by the Fed and introduced by Senate
Banking and Currency Committee Chairman Senator A. Willis Robertson of
organizations that would be covered by proposed amendments, including New
York Article 12 investment companies. (Hearing on Bills to Amend the Bank
Holding Company Act of 1956: S. 2353, S. 2418, and H.R. 7371, Senate Committee
on Banking and Currency, 89th Cong. 2nd Sess., p. 330).
C. Unregulated New York investment companies subvert Federal monetary policy
New York investment companies (as do other unregulated foreign banks doing
business in the U.S.A.) make it difficult for the Federal Reserve to control mone­
tary policy. Since their principal business is wholesale banking, the majority of
these investment companies deal in the interbank market. The Fed’s figures bear
this out. (See Tables 4a and 4b of Appendix to statement by George W, Mitchell
before the Subcommittee on Financial Institutions of the House Committee on
Banking, Currency and Housing, December 12,1975).
Absent the standard regulatory mechanisms, New York Article 12 investment
companies, are able to ignore United States monetary policy through Eurodollar
borrowings and deposits (the latter in the form of credit balances and time
deposits). Presumably, then, the only safeguard for this activity is the willingness
of the central bank in the parent organization’s country to come to the aid of a
failing investment company.
Finally, it is apparent that New York banking officials are not prepared to
halt further growth in the number of Article 12 investment companies.
The time has come for the Congress to subject these New York Article 12
investment companies to regulation by Federal Reserve. However, the Congress
should not accept any so-called “grandfather” clauses that extend the lift of these
unregulated banks beyond a reasonable period of a year or so.


The regulation of foreign banks operating in the United States has become
an issue of considerable importance and the subject of many legislative proposals
in this 94th Congress. In the past several years we have seen a proliferation of
quasi-banking institutions that totally ignore the principles and practices of
sound banking for which so many have worked so long to establish.
It is claimed by those who would have these foreign-owned banks continue
their unregulated presence that any meaningful attempts to bring them under
proper control would endanger the profits of our banking concerns abroad.
Nothing could <be further from the truth. Nowhere in the world do United States
banks enjoy anywhere near the competitive advantages of the subsidiaries,
branches, agencies or investment companies of foreign interests operating in our
domestic banking markets.
In this context, focus should be placed on New York investment companies
chartered under Article 12 of the New York State Banking Laws. Although by
law these investment companies are unable to offer standard checking account
services, the fact that they do a banking business, cannot be disputed.
The largest of these companies with over $1.5 billion in assets is the Euro­
pean-American Banking Corporation. In its promotional literature this New York
Article 12 bank announces itself as “an investment company with commercial
banking po wers organized under the banking laws of the State of New York.”
Why then should Congress or the various bank regulatory agencies allow such
institutions to be free from all legal restraints ?
Fundamentally, it is a misunderstanding of the function of traditional bank­
ing safeguards which leads one to believe, that merely because Article 12 in­
vestment companies do not hold demand deposits derived from checking ac­
counts, they therefore need not observe reserve requirements.
Moreover, New York investment companies which are foreign-owned are
heavily involved in the inter-bank money exchange markets. Little protection is
afforded depositors in the United States banking system if they are prohibited
from making ordinary checking deposits in unregulated banking institutions when
their banks are permitted to sell their deposits to these institutions.
Subject to no loan limits or reserve requirements, investment companies or­
ganized under Article 12 of the New York Banking Laws are laJble to make loans
to customers that commercial banks cannot. Moreover, they are able to buy and
sell securities for their own account. In principle, this violates the Glass-Steagall
Act and permits these investment companies to combine a banking and a secu­
rities business—something no domestic bank is allowed to do.
Although New York investment companies are empowered to engage in all the
regular activities of a commercial bank, save checking accounts, they are not
legally considered “banks” by the Federal Reserve Board and, threfore, do not
subject their foreign owners to bank holding company regulations.
What is most significant is that these New York Article 12 investment com­
panies are not subject to regulation by the Federal Reserve. They, just like for­
eign-owned bank “agencies”, which likewise refuse checking facilities, can act
as they please to channel any moneys to and from the United States through their
loans to corporations and their heavy activity in the inter-bank markets, irregardless of the policies of the Board’s Open Market Committee.
Governor Mitchell of the Federal Reserve Board has already urged that New
York Article 12 investment companies be brought under the supervision of the
federal banking regulatory agencies. However, he would grandfather all New
York investment companies now in existence.
I think this unwise. Besides allowing European-American the largest Euro­
pean-owned banking group in the United States to continue its unregulated and
illegal activities, “grandfathering” would encourage many other foreign banks to
apply for Article 12 charters before Congress could act. This trend is already
clearly noticeable with the chartering of the 4th and 5th foreign-owned invest­
ment companies in the past six months.
In the proposed “Financial Institutions Act of 1976” there is a provision which
would bring all foreign-owned branches and agencies operating in the United
States under the regulation of the proposed Federal Banking Commission. I
would like to urge that like treatment be afforded to all Article 12 New York
investment companies. It is only in contravention of the purposes, policies, and
good sense of this legislation to allow this potential loophole to exist.

Hon. E dw ard H. L ev i ,
Attorney General, Deparment of Justice,
Washington, D.C.
D ear M r . A tto rn e y G en e r a l : On November 19, 1974 at a private dedication
ceremony to which only present and former Federal Beserve people and no
Members of Congress were invited, the Board of Governors of the Federal Reserve
System has presumed to name the new $50 million dollar Federal Reserve build­
ing in this City in honor of William McChesney Martin, Jr.
Section 298d. of Title 40, United States Code, reads as follows:
“The Administrator of General Services is authorized, notwithstanding any
other provision of law, to name, rename, or otherwise designate any building
under the custody and control of the General Services Administration, regard­
less of whether it was previously named by statute”.
As I read this Section, in the absence of a naming by the Congress, the Ad­
ministrator of the General Services Administration has authority to name a
government building. My further information is that the Congress acted in Pub­
lic Law 92-520 to name the new FBI building in honor of J. Edgar Hoover.
So far as I know there has been no naming of the new Federal Reserve Build­
ing by either the Congress or the Administrator of the General Services Admin­
istration, and I cannot locate any provision in the Federal Reserve Act empower­
ing the Board of Governors of the Federal Reserve System to name the govern­
ment building they occupy. That seems clearly to be a job for the Congress and
In my opinion the main Federal Reserve building on Constitution Avenue should
be named in honor of Woodrow Wilson who created the Agency, and the new
annex, the Glass-Owen building, in honor of Carter Glass and Robert Owen who
handled the legislation.
Accordingly, I would very much appreciate your looking into this question and
advising me whether the Board of Governors of the Federal Reserve System in
thus attempting to name their new building have acted legally or illegally. If
the latter, I wish to assure you that this will not be the first instance in which the
Federal Reserve has assumed powers that the Congress has not conferred upon

W r ig h t P a t m a n ,

Vice Chairman, Joint Economic Committee.

[Reprinted from the Congressional Record, July 8, 1975]
T h ree B a n k F ail u r e s — W orst


N a t io n ’ s H ist o r y

The Speaker pro tempore (Mr. McFall). Under a previous order of the House,
the gentleman from Texas (Mr. Patman) is recognized for 30 minutes.
Mr. P a t m a n . Mr. Speaker, we have just experienced the three worst bank
failures in the Nation’s history, namely, the closing on October 18, 1973, of the
Nation’s 80th largest bank, the $1 billion United States National at San Diego;
the closing on October 8, 1974, of our 20th largest bank, the $5 billion Franklin
National Bank in New York, and the closing on January 19, 1975, of our 68th
largest bank, the $1.7 billion Security National in Hempstead, Long Island, N.Y.
Mr. Speaker, there is good reason to believe that if our banking agencies had
been on the ball none of these failures would have occurred.
Without going into detail at this time, let me say that the trouble at the United
States National in San Diego was due to President Nixon’s friend, C. Araholt
Smith, who has just pleaded nolo contendere to a 25-count indictment that accuses
him of misapplying $27.5 million and falsifying the bank records.
As long ago as 1962 a conscientious bank examiner accused Smith of similar
acts and asked that his charges be referred to the U.S. attorney. Indeed, in 1969
the Wall Street Journal in a front page article detailed many transactions between
the bank and Smith’s companies, suggesting there might be insider profits in
violation of the Federal securities laws.
It is hard to believe, Mr. Speaker, but neither the Comptroller, nor the Federal
Deposit Insurance Corporation, nor the Federal Reserve took any action. Even
when on May 31,1973, the SEC filed a civil complaint against C. Arnholt Smith
the three banking agencies did nothing.
Three successive Comptrollers of the Currency—Saxon 1961-66; Camp 196673, and Smith 1973 to date—either ignored or sidetracked the bank’s problems.
And, of course, Frank Wille at FDIO and Dr. Arthur F. Burns at the Federal
Reserve, did nothing.
In the case of the Franklin National Bank, its troubles began when it opened
offices in Manhattan and became wonse when in July 1972 control of the bank
passed to Michele Sindona. On July 19, 1972, when Sindona bought Franklin I
wrote Dr. Arthur F. Burns at the Federal Reserve and suggested to him that the
Board consider subjecting Sindona’s companies to the Bank Holding Company Act.
Bums refused and said that because Sindona held only 18 percent of the stock
instead of 25 percent that he was powerless.
Dr. Burns and his Board were the only ones in the United States that did not
know that Sindona controlled Franklin. If he had acted on my letter instead of
ignoring it there might never have been a Franklin failure.
The downfall of Franklin began when on May 1, 1974, after almost a year’s
study, the Federal Reserve said that Franklin could not afford to buy the Talcott
National Corp., a factoring outfit. From its Talcott study the Fed either knew or
should have known that Franklin, under Sindona, had produced—or more cor­
rectly manufactured—foreign exchange profits to meet its September 30, 1973,
and March 31,1974, dividends, and as sources have indicated, the bank examiner
assigned to Franklin was saying, according to my interpretation, the bank was
Many knowledgeable banking experts feel that the bank should have been
closed by the supervisory authorities, but instead the three banking agencies ap­
proved an optimistic press release, which the &EC charges was false, land in which
Sindona loosely promised to increase Franklin’s capital by $50 million.
77-752— 76------ 16

Although on May 12,1974, trading in the stock of the Franklin New York Corp.,
the bank’s holding company was suspended at its own request, in the press release
the Federal Reserve assured the world that it would provide whatever funds
Franklin needed, and it did to the tune of over $1.7 billion.
Needless to say this allowed Franklin to pay off in full uninsured advances by
large banks of Federal funds, and over $1 billion in uninsured deposits in Frank­
lin’s overseas branches. Dr. Burns saw that all the big fellows here and abroad
were paid in full at the expense of little fellows who bought stock and debentures
in the holding company thinking it was as secure as the bank.
What was precisely the trouble at Security National I do not know, but with
what I do know about what the three banking agencies did not do at the United
States National and Franklin I fear the worst.
Bad as these failures were, the trouble was compounded when on October 18,
1973, the Federal Deposit Insurance Corporation sold United States National
to the $10 billion asset Crocker National Bank, our 15th largest, and it sold
Franklin on October 8,1974, to the $2.4 billion European-American Bank & Trust
Co., our 51st largest, operated as a joint venture by the Deutsche Bank, Germany’s
largest, and five other large European banks.
Under threat by the Comptroller of the Currency to appoint a conservator, the
board of directors of Security National on January 19,1975, sold itself to Chemical
New York Corp., the holding company for the $22 billion Chemical Bank, our
Nation’s 6th largest bank.
Only 50 banks today own over half the deposits in our 14,500 banks. Selling these
three banks to such large banks intensifies our already too great concentration.
But, Mr. Speaker, this is not all. Before Frank Wille at the FDIC sold either
United States National or Franklin he met, in utmost secrecy, in a smoke filled
room with his cronies James E. Smith, Comptroller of the Currency, and Dr.
Arthur F. Burns, Chairman of the Federal Reserve Board, and decided upon the
buyer. Thereafter they presented the buyer to the Justice Department on an
emergency basis, assuring that no matter how flagrant the antitrust offense,
Justice would go along on grounds akin to national security.
_ ^
The candidates of Frank Willie at the FDIC to buy United States National
were the following:
Assets In

U .S.A.

^ 2 *7
Bank of America.................» .................................... v
United California (Part of Western Bancorp).
. . .
* | '0
Security Pacific................................................................... ...................................................................... \ \
Wells Fargo.
. .
§ •§
................................} .f?
Bank of California VPart oTBa’ nCal T r l - S t a t r C o r p o ^ ..................................................
N O TE.—Values and ranks as of December 31, 1974 and as reported in Business Week, April 21, 1975.

To its credit the Antitrust Division at Justice advised against Bank of America,
Security Pacific, and United California, so that only the others bid. The one FDIC
selected was Crocker, the Nation’s 15th largest bank with assets of $10 billion.
In the case of Franklin, Frank Wille of FDIC made an effort to interest some
17 banks, but in the end only these banks bid:
Assets in



U .S.A.

NO TE.—Values and ranks as of December 31, 1974 and as reported In Business Week, April 21,1975.

The three banking agencies agreed on European-American and this acquisition
raises some extremely serious questions. It is a joint venture of these six Euro­
pean banks:


Deutsche Bank, Germany’s largest, $24.5 billion, 20%+.
Societe Generale, one of France’s 3 largest, $20.4 billion, 20+.
Midland Bank Group, a major London clearing bank, $19.0 billion, 20%+.
Societe Generale de Banque, Belgium’s largest, $9.1 billion, 20%+.
Amsterdam-Rotterdam Bank, 3rd largest in the Netherlands, $9.6 billion % +.
Creditanstalt-Bankverein, Austria’s largest, $4.2 billion, 2%+.
N o t e .—Assets and Ranks as of December 31,1973, American Banker, July 31,
Under the statutes and Federal Reserve Regulation Y there is a rebuttable
presumption of control from so little as ownership of 5 percent of the stock of
a bank and, if need be, the Federal Reserve Board can hold a hearing and de­
termine the question of control.
Accordingly, I wrote Dr. Arthur F. Burns on April 24,1975, there was reason to
believe that these joint ventures controlled European-American, suggesting to
liim that you measure control of a joint venture in a different day from control of
the ordinary stock corporation. There is little chance that an interest adverse to
that of a joint adventurer can find expression. In this the joint venture is quite
distinct from the stock corporation.
Moreover, to the knowledge of the banking agencies at least four of these
banks own interests in American investment banking firms, a practice outlawed
for American banks by the passage in 1933 of the Glass-Steagall Act. In addition,
these six banks also own the European-American Banking Corp. which, except
for underwriting and taking commercial bank deposits, does a banking business.
Neither European-American Banking Corp. nor any of the six foreign banks
are subject to reserve requirements. All do an unregulated banking business, not
only in the State of New York, but throughout the United States in competition
with our domestic banks which are subject to reserve requirements, and forbidden
to do an interstate banking business.
Of course, Mr. Speaker, if our six largest American banks were to open a bank
in the city of New York, or elsewhere in the United States as a joint venture,
we would expect the Department of Justice to call it a per se antitrust offense
in violation of the Sherman and Clayton Acts. Certainly that is the teaching of
Timken v. United States, 378 U.S. 158 (1964), and Topco v. United States, 405 U.S.
596 (1971).
So much for the sale of Franklin to European-American.
You would not believe it, Mr. Speaker, but the Comptroller dictated the sale of
Security National to Chemical which had been endeavoring to expand further on
Long Island for some time. Acquisition of Security gave it 86 additional branches
making Chemical, from the point of view of branches, the second largest bank in
the State of New York.
Furthermore, as of December 31,1974, Security National had assets of $1.7 bil­
lion and, in point of size, was our 68th largest bank. Chemical acquires it for
$40 million. With approximately 5 million shares outstanding this comes to $7.50
per share. While the stock sold up to $33.50 in 1973, it sold down to $4 bid, $4.75
asked on January 14,1975.
In sharp contrast, Crocker paid $89 million for United States National, a
bank with only $1 billion of assets as of December 31, 1972, and EuropeanAmerican paid $125 million for the cream of Franklin’s assets amounting to $1.37
billion at the time of purchase October 8,1974.
It is no wonder, Mr. Speaker, that stockholders of Security National allege
that the Comptroller gave their bank to Chemical at such a bargain price that it
stands to make a quick $30 million.
It is interesting, Mr. Speaker, to observe how Security National was sold.
It sold itself through action of its board of directors, with the Comptroller of the
Currency certifying pursuant to section 181 of title 12 that an emergency existed,
justifying his waiving the required statutory approval by two-thirds of Security’s
stockholders. On May 9, 1975, the stockholders did approve 4,004,111 to 221,233.
A group of Security stockholders recently failed in an attempt in the courts to
void the deal.
Coming to them as a completed transaction the stockholders had no alterna­
tive. Neither did the directors. The Comptroller told them either to approve
a sale to Chemical or he would take over the bank and put in a conservator. He
held a pistol at their heads.

In effect, Mr. Speaker, what the three banking agencies have been doing is re­
jecting our traditional methods of liquidating insolvent banks. Instead, they go
together in a back room and decide to what bank they will give the troubled one.
Moreover, to induce bidding the FDIO offered to loan the purchasers—Crocker
borrowed $50 million for 5 years at 7% percent—European-American borrowed
$100 million fo r 10 years at floating rates that average 10.08 percent and has a
right to borrow $50 million more on the same terms for 8 years.
What is most disturbing, Mr. Speaker, is that the banking agencies are at lib­
erty to act in secret without any supervision. The purchase, as we have seen, is
a fait accompli and the Justice Department is asked to approve in an emergency
situation. The court is in even a worse position. It is asked to approve what
both the banking agencies and the Department of Justice have done.
It is very disturbing to me to have large hanks handled in secret this way Iby
the three banking agencies. In equity receivership, and now in chapters 10 and
11 proceedings in bankruptcy, we have modem methods by which to test plans
of reorganization to make cerain they are fair and equitable. The court in these
traditional proceedings decides before the plan takes effect, not afterwards and
on notice to the parties concerned.
For instance, because of the way the Comptroller handled the sale of Secu­
rity National, there was no opportunity for the stockholders to question the price
Chemical paid. It may well be that Chemical will make an unconscionable profit
from this sale.
In the case of the Franklin sale, a very important consideration is whether
FDIO has the right to reimburse the Federal Reserve for its advance, and obtain
a priority over unsecured creditors and stockholders of the Franklin New York
Corporation. A court might well have deep-rocked the $1.7 advance by Federal
Reserve to Franklin (Taylor v. Standard Gas and Electric Company, Claim of
Deep Rock Oil Corporation, 806 U.S. 307 (1939)) before it approved the FDIC
sale to European-American.
In truth, for the reasons stated above, the Court might well have judged the
sale to European-American improper, and the $1.7 billion advance to Franklin
as beyond the powers of the Federal Reserve.
Mr. Speaker, the Congress needs to study how the three banking agencies
handled the sale of United States National, Franklin, and Security National.
Otherwise, we will see repeated the evils that at the turn of the century existed in
equity receivership when the railroads were full of watered stock and in the
hands of the investment bankers.
It may be we should recreate the Reconstruction Finance Corporation, or de­
velop new legislation to meet this problem. What we need at the moment, how­
ever, is to ascertain whether what the three banking agencies did to dispose of
United States National, Franklin, and Security National was proper. There is
every indication it was not.
[Reprinted from the Congressional Record, Mar. 14,1975]
L et U s C o m pel P u b l ic a t io n of T ra n scr ipts of F ed’ s O p e n M a r k e t C o m m it t e e
o n t h e D a y of t h e M ee tin g , T here by S topping S ecrecy i n F ed a n d P revent
C o n d itio n s L i k e We E ndured i n t h e E a r l y T h ir t ie s B e c au se of A n drew
M ellon a n d T h a t We A re i n T oday B ecau se of D r . A r t h u r B u r n s

The Sp e a k e r pro tempore. Under a previous order of the House, the gentleman
from Texas (Mr. Patman) is recognized for 30 minutes.
Mr. P a t m a n . Mr. Speaker, while there are many matters upon which this House
divides, I would like to think that there is not one Member present who does not
agree with me that this Congress is entitled to receive from the Board of Gov­
ernors of the Federal Reserve System uncensored transcripts of the meetings of
its Open Market Committee on the day the committee meets. What that commit­
tee does, or does not do, brings this country good or hard times.
At the present time we receive an enigmatic summary 90 days after the com­
mittee meets—not even Dr. Einstein could understand that summary. At the
end of 5 years we receive a censored transcript. Sometime this year we will re­
ceive the 1970 transcript
Certainly, you can all agree with me that this is wrong as to the meetings of
the Open Market Committee from 1970 through 1974. Dr. Arthur F. Burns be­
came Chairman of the Fed in 1970. There is agreement by everyone that in the
1971-73 period the Open Market Committee, under Dr. Bums’ direction, increased

the money supply w h e n the economic indicators said the economy should be held
This is not a personal prejudice of mine. Economists from Friedman to Samuelson, newspapers from the New York Times to the Wall Street Journal, maga­
zines from Fortune to Playboy, all say this is true. Moreover, •Sanford Rose,
writing in the July 1974 issue of Fortune specifically charges that Dr. Arthur F.
Burns forced the inflationary policy on a reluctant Open Market Committee by
threatening to bring the White House down upon them.
Let us not forget that former President Nixon believes that a downturn in
the economy cost him the election of 1960. Burns warned Nixon in March 1960
that an “economic dip” was just around the corner and would reach its lowest
point in October, just before the election. He advises that two steps be taken
immediately to head off the slump—a loosening of credit, and increased spending
for national security.
At Nixon’s insistence, Eisenhower referred the matter to his Cabinet, and
the Federal Reserve, both of which declined to act on Burns’ recommendation. In
“ Six Crises” Nixon says:
Unfortunately, Arthur Bums turned out to be a good prophet. The bottom
of the 1960 dip did come in October and the economy started to move up
again in November—after it was too late to affect the election returns. In
October, usually a month of rising employment, the jobless rolls increased
by 452,000. All the speeches, television broadcasts, and precinct work could
not counteract that one hard fact.
Thereafter, the economy was No. 1 on Nixon’s “enemies list,” Sherman J.
Maisel, a member of the Federal Reserve Board from 1965-1972, states in his
recent book, “Managing the Dollar,” that the Director of the Office of Manage­
ment and Budget, George Shultz, informed the Board in 1971 that—
If an election were to be won the Federal Reserve would have to increase
the money supply at fare more than the 4.2 percent average of 1969-70.
Granted that Mr. Dooley is right and that there are lies, damn lies, and then
statistics, still it is very interesting to compare the discount rate, the prime Tate,
and the growth of the money supply under Dr. Bums with previous Chairmen:

I960........................... ____
1961........................ .....................
1962................ ..
1965............. ............______
1966........................ ......................
1971........................ ......................
1972........................ ......................

3 .1
3 .7
7 .9
6 .1
8 .7
6 .1
4 .7






5I 4






4 l|
12 ^


4 l|


4 t|




Federal funds rate


Federal discount rate


4 l|









i Federal funds rate was not available prior to 1962. Years 1970 to 1974 denote Dr. Burns chairmanship.

Exactly what do these dry statistics show? In 1972 when Nixon was running
for President the Fed held the discount rate to 4% percent, the prime rate to
under 6 percent, increasing the money supply to 8.7 percent. After election it
raised the discount rate to 8, the prime rate to 12%, and decreased the growth
of the money supply to 4.7 percent
You can judge how much this upset our economy by the changes in the prime
rate From 1929 to 1969 there were 38 changes, never more than five changes in a
single year. With Dr. Bums at the helm from 1971 to 1974 there were 151 changes,
over 37 a year, and in 1974—61.
Is it any wonder that on November 25,1974 the Wall Street Journal was forced
to say editorially:

The money supply
grew far too rapidly in 1971-1973. In blunt words
the erosion of bank capital ratios was fundamentally caused by the inflational
policies pursued by Chairman Bums.
While it is unreasonable to expect that the Fed will never make mistakes, it is
not unreasonable to require that its mistakes be based on poor business—not poor
political—judgment. It was never intended that the Fed play “step-and-fetch it”
for an incumbent Presidential candidate, and Congress should not tolerate a
situation in which it cannot satisfy itself that this has not occurred.
As I recently stated in the February issue of the American Bar Association
Journal, a copy of which I include in the Record, Dr. Arthur F. Burns has used
his position as Chairman of the Board of Governors of the Federal Reserve
System to flood the country with money to elect Richard Xixon. This was a dis­
honest thing to do when the economic indicators indicated he should have left
the economy alone.
Worse, the election over, he caused the Open Market Committee to put the
brakes on the economy too sharply, allowing unemployment to increase—liqui­
dating the real estate industry—emptying the savings banks, taxing the little
fellow, and transforming recession into depression.
Under these circumstances, do you not agree that the Congress is entitled to
see uncensored transcripts of the Open Market Committee meetings the day. the
committee meets?
Keeping the transcripts of this critical 1971-73 period from the people
amounts to a coverup comparable with Watergate. We need to see an uncensored
transcript of what was said by the Open Market Committee members.
Lest you have reservations about our rights to receive daily transcripts, let me
remind you that another election is coming in 1976. Is there any reason to sup­
pose that Dr. Bums will not act then at the Open Market Committee meetings
as he wanted to in 1960, and as he did in 1972?
As you all know since I was elected to this House in 1928, I have been a voice
crying in the wilderness for the accountability of the Federal Reserve System
to both the President and the Congress.
As all economists will tell you, it was not the stock market, but the stupid
refusal of the Federal Reserve System under Andrew Mellon to increase the
money supply that brought on the depression of 1929-33. Here we are again in
1975 with an unnecessary depression facing us because of the bad policies of the
Board of Governors of the Federal Reserve System under Dr. Arthur F. Burns.
The time has come to bring Dr. Bums and his Board to book. At least, let us
require disclosure to the Congress and the people of the proceeding of the Open
Market Committee on the day the Committee meets.
Former Board member Maisel tells us that the proceedings of the Open Market
Committee are kept secret out of “fear of political attack and public criticism.”
As he says, this is fundamentally wrong, because the more you publish about
monetary pdlicy at the time you make it, the better that policy is likely to be.
Moreover, the doings of the Open Market Committee are well known to those
who have the most to gain—the bankers. It is only the Congress and the people
who are kept in ignorance.
Let us compel publication of uncensored transcripts of the Open Market Com­
mittee on the day of the meetings so that our country will never again be in the
situation we were in during the thirties because of Andrew Mellon, and the condi­
tion we are in today because of Dr. Burns.
[Reprinted from the Congressional Record, O ct 31,1975]
D r . B u r n s S arotages C ongress T a x C u t

The Sp e a k e r pro tempore. Under a previous order of the House, the gentleman
from Texas (Mr. Patman) is recognized for 20 minutes.
Mr. P a t m a n . Mr. Speaker, the Congress has spent a great deal of time and
effort to turn our economy around and put this Nation back on the road to pros­
perity. On March 26 of this year, it passed H.R. 2166, the Tax Reduction Act of
1975 which was signed into law on March 29, providing for both a reduction in
1975 income taxes, and a $22 billion cash rebate on 1974 taxes.
The Internal Revenue Service immediately set about figuring new withholdings
and mailing rebate checks to taxpayers around the country, completing its monu­
mental task in June 1975.

its tax program, the Congress underestimated the arrogance of Dr.
Arthur F. Bums. During the period when the Congress naively thought it was
stimulating the Nation’s economy, Dr. Bums, at the Federal Reserve in the
secrecy of Federal Reserve’s Open Market Committee, was sabotaging the con­
gressional program.
, ,,
Apparently, Mr. Speaker, in Dr. Bums judgment the economy did not need the
stimulation the elected representatives in the Congress decided it did.
Of course we do not know what the members of the Open Market Committee
said, because Dr. Bums, despite my repeated requests, has refused to make
available a transcript of remarks made at the Open Market Committee meeting.
What they did is quite evident. At the meeting of June 17,1975, the Open Mar­
ket Committee voted to keep the Federal funds rate between 5 and 6 percent.
According to the minutes of this meeting:
Messrs. Bucher and Coldwell dissented from this action because they
believed that a tightening in money market conditions and the associated
increase in short-term interest rates would be premature at this time, and
they preferred to specify a lower range for the Federal funds rate than that
adopted by the Committee . Mr. Bucher, in addition, thought that primary
emphasis should be given to promoting recovery in economic activity .
Later, in June, when the stimulation of the congressional action was taking
effect and the monetary aggregates were growing, Dr. Burns recommended, and
the Open Market Committee approved, his raising the Federal funds rate to
6% percent.
To this action, Vice Chairman Mitchell and Governors Bucher and Holland
dissented. Governor Coldwell, who had dissented on June 17, concurred with
Dr. Bums.
Needless to say, Mr. Speaker, the effect of this increase was to reduce the
growth of the money supply—M-l—in July to 2.05 percent.
At the July 15, 1975 meeting, the Open Market Committee voted that the
Federal funds rate be fixed at between 5% and 6% percent, authorizing an in­
crease of half a point above the previous rate.
Governor Holland dissented again, stating that in his opinion this increase
was not warranted.
As a result of the rate increase in July, the Fed reports that the money
supply—M-l—grew at a rate of only 2.86 percent, despite the stimulus that the
tax action had given to the economy.
The preliminary figures for the September money supply—M -l—show even
a greater decline—down to 2.04 percent—and there are indication® that the
October figures will be even lower.
Clayton Fritchey, in an article entitled “Reforming The Federal Reserve,”
which appears in the October 18,1975, edition of the Washington Star, says that
Dr. Bums caused the Open Market Committee to take the action it did, because
he felt that the economy was recovering well enough without either the tax
cut, or the cash rebate.
His charge is substantiated not only by the above figures on the money supply,
but also by fragmentary reports of what was said at the Open Market Com­
mittee meeting of June 17,1975:
Some members favored a modest tightening in the period immediately
ahead in order to restrain growth in monetary aggregate.
What else was said, we do not know, and can only imagine.
But it is quite clear, as Clayton Fritchey says in his interesting article:
R eform ing


F ederal R eserve

By Clayton Fritchey
For years, actually for decades, Congress has been talking about reining in
the autonomous and often arrogant Federal Reserve Board (FRB), at least
enough to prevent it from pursuing policies that are not acceptable to the ad­
ministration, to Congress and ultimately the public. Yet little has come of it.
Nevertheless, the belief has now become so widespread on Capitol Hill and
elsewhere that the Fed has sabotaged economic recovery by its policy of tight
money and high interest rates, that the climate for FRB reform is presently
propitious enough to inspire corrective legislation.
Sen. Hubert Humphrey (D-Minn.), the influential chairman of the Joint Eco­
nomic Committee, says the time has come to shake up the FRB and make it more
responsive to Congress and the people. Next week he will introduce legislation

that would require one of the seven board members to represent labor, with an­
other for agriculture, a third for consumers and a fourth for small business.
The terms of the members would also be cut from 14 to seven years, thus en­
abling the President to appoint a majority in his first term of office. Humphrey’s
intention is to “make the board more responsive to the will of the people and
less likely to act as the high priest of finance.”
The long-simmering conflict between the Fed and Congress has been brought
to a head by what the board did after Congress voted a tax rebate of $22 billion
earlier this year to stimulate economic recovery through increasing public pur­
chasing power. There has been little recovery, however, because, in the eyes
of many economists, the FRB, led by Chairman Arthur Bums, initiated a money
squeeze that offset the tax cut.
Conservatives as well as liberals share this view. Sen. Henry Bellmon (ROkla.), who like Dr. Bums opposed the $22 billion tax rebate^ recently said to
the chairman of the Fed, “If the Federal Reserve is going to cancel out what we
in Congress do, then we’d better know about it.”
Sen. Edmund Muskie (D-Me.), chairman of the Senate Budget Committee, went
further. His message to Dr. Bums was that if the FRB “won’t provide the stim­
ulus the economy needs, then the temptation is for us (in Congress) to provide
more” through increased spending or tax reduction.
That reaction is not confined to the Senate, for over in the House the respected
chairman of the Banking Committee, Rep. Henry Reuss (D-Wis.), is also raising
the question of whether the Fed should be allowed to undermine national policy
on economic recovery, no matter how sure it is that “Papa knows best.”
What about the board of the Fed itself? The members generally act in secrfecy,
but it is known that several oppose the Bums policy of higher interest rates.
Philip ColdweU, a former president of the Dallas Federal Reserve Bank and now
a member of the Fed’s board, told Hobart Rowen of The Washington Post, “I
thought philosophically the Federal Reserve shouldn’t be in the position of negat­
ing what Congress wants to do.”
Even in the business community itself there are doubts. An authoritative
spokesman, Business Week, said, “The first faint signs of economic recovery seems
to have thrown the Federal Reserve into another fit of anxiety about future
“It is not even certain yet that an upturn has begun,” Business Week added,
“but the money managers are swinging back toward tight credit as though they
are dealing with a roaring boom.”
Dr. Bums feels justified in his course because he thinks recovery from the
recession is “proceeding satisfactorily.” That, of course, is not the view of Con­
gress or the American people, especially the 8-10 million -unemployed, and their
In fact, it is not the view either of our main foreign trading partners, such
as West Germany, for instance. The chancellor of that country, Helmut Schmidt,
frankly says that the Burns high-interest policy “gives us some pain.” It is,
he adds, “too restrictive.”
It isn’t that Dr. Bums is above politics or lives in an ivory tower. He was made
chairman of the FRB by Richard Nixon, and when Nixon wanted a boom in
1972 to insure his reelection, the Fed poured money into the system with noholds barred. It produced a boom, all -right, but what of the collapse that fol­
lowed when the money spigot was turned off after the election?
Despite hi® monetary rigidities. Dr. Bums is a giant compared to most of
President Ford’s economic advisers. His views on guaranteed employment and
controlling wages and prices are surprisingly flexible and broad-minded. Un­
fortunately, the White House listens to him only on money.
[Reprinted from the Congressional Record, Nov. 4,1975]
D r . B u r n s , a n d D r. J e k y l l


M r . H yde

The Speaker pro tempore. Under a previous order of the House, the gentleman
from Texas (Mr. Patman) is recognized for 20 minutes.
Mr. P a t m a n . Mr. Speaker, I appear today to relate to the House another
chapter in the life and times of Dr. Arthur Bums, Chairman of the Federal
Reserve System.

You will recall that on October 15,1971, by Executive Order 11627, President
Nixon created the Committee on Interest and Dividends, and charged it with
formulating and administering “a program for obtaining voluntary restraints
on interest rates.”
The President named his old friend and adviser Dr. Bums as Chairman, even
though he was then, and had been since 1970, Chairman of the Board of Governors
of the Federal Reserve System. In this capacity he also presided over the Federal
Reserve Open Market Committee. This dual role involved Dr. Burns in what
can only be described as a classic case of conflict of interest, with Dr. Bums
as a kind of Dr. Jekyll and Mr. Hyde turned loose on our American economy.
As the annexed charts clearly establish, during the life of the Committee on
Interest and Dividends, October 15,1971 to April 30,1974, the prime rate nearly
doubled from 5% percent at birth, to 10% percent at death.
Mr. Speaker, I do not call an 87 percent increase restraining interest rates.
Significantly, the only restraint was to hold the discount rate at 4% percent and
the prime rate at 5% percent until after the 1972 Presidential election—there­
after, the sky was the limit.
Who was responsible for this modest and temporary restraint? Dr. Burns, of
course, since he was playing both ends against the middle.
Our story begins on February 2, 1973, safely after the election, as the Girard
Bank of Philadelphia raises its prime rate from 6 to 6% percent, and Dr. Bums,
as Dr. Jekyll of the Committee on Interest and Dividends, demands that Girard
justify the increase.
What the Girard Bank told Dr. Bums, was simply that to obtain Federal
funds to loan would cost over 5% percent—with the prime rate at 6 percent
there was not sufficient spread for Girard to cover its overhead expense.
This made sense to Dr. Burns since, in his alter ego, Mr. Hyde of the Federal
Reserve, he had 1 month earlier raised those very rates. Indeed, he was getting
ready to push the Federal funds rate to over 10 percent in a few months. Thus,
as Dr. Jekyll, Dr. Bums had no difficulty in approving what the Girard Bank had
done, and in a February 23 letter allowed the increase. Naturally, the rest of the
banks followed Girard’s lead.
As you will note in chart I, Mr. Speaker, the Federal funds interests rate began
increasing in December 1972. This interest rate is controlled by the Federal
Reserve, operating through the Federal Reserve, operating through the Federal
Reserve Open Market Committee which sets a range of interest rates, and proceeds
to expand, or contract bank reserves, to keep the Federal funds rate within that
It should be noted, Mr. Speaker, that the Open Market Committee kept con­
ditions tight against the advice of their staff of advisers. As early as February
1973, the staff advised that reserves available to support nonbank deposits should
be allowed to grow from 0.5 to 2.5 percent.
However, the Open Market Committee decided to let these reserves shrink,
dictating that no active reserve supplying should take place unless reserves were
decreasing by more than 2.5 percent. Again, in Jnue 1973, the staff recommended
that reserves be allowed to grow from 9.5 to 11.5 percent, but once again the com­
mittee lowered the goal, this time to 8 percent.
The minutes of the June 19,1973 meeting of the Open Market Committee con­
tains the following highly revealing information:
On May 24 and again on June 8, a majority of the Committee members
concurred in recommendations by the Chairman that money market condi­
tions should be permitted to tighten still further. . .
It is crystal clear from this that Dr. Bums, as Mr. Hyde of the Federal Reserve,
was working to raise interest rates, and keep them prohibitively high. Yet, at
the same time he was masquerading as chairman of the committee to restrain
increases in the rates of interest.
There was one other bit of deception, Mr. Speaker, that Dr. Bums used to hide
his dual role in this affair—the so-called dual prime rate. Dr. Bums knew that
Congress and the people were most concerned about the effect of rising interest
rates on small businesses and consumers, and he therefore created on April 16,
1973, the diversion of a “small business prime rate.”
While in an April 16, 1973, press release it was said that if increases in the
small business price rates occur, “they are to be decidedly smaller, and are also
to be made less frequently than changes in rates on loans to large firms.” This
turned out to be a smokescreen as can be seen in chart II which shows an annual
rate of interest of over 31.5 percent from July 1973 to May 1974.

Another press release issued April 26,1973 admitted as much :
It is not likely that rates to small business in general will be lower than
rates to large business. However, the rate to a particular small business bor­
rower of high credit standing may be below rates to some large business
The “dual prime rate,” Mr. Speaker, was a sham created to hide the failure of
the Committee on Interest and Dividends to control interest rates, a failure which
can only be attributed to the use of voluntary, instead of mandatory, control.
It is clear that Dr. Burns as Mr. Hyde at the Fed was actively opposing Dr.
Burns as Dr. Jekyll at the committee. It is also clear that Mr. Hyde won, and
all of us lost.
C h a r t I.—Weekly Federal funds rates
August 7-----------------------August 14____ ______ __
August 21_______________
August 28_______________
September 4_____________
September 11____________
September 18____________
September 25____________
October 2________________
October 9________________
October 16_______________
October 23_______________
October 30.______________
November 6______________
November 13_____________
November 20_____________
November 27_____________
December 4______________
December 11_____________
December 18_____________
December 25_____________
January 1_______________
January 8---------------------January 15______________
January 22______________
January 29______________
February 5______________
February 12_____________
February 19_____________
February 26_____________
March 4________________
March 11________________
March 18________________
March 25________________
April 1_________________
April 8-------------------------April 15________________
April 22------------------------April 29------------------------May 6---------------------------May 13-------------------------May 20-------------------------May 27--------------------------

[In percent]
June 3_________________ _4.38
June 10________________ _4.48
June 17________________ _4.46
June 24________________ _4.39
July 1--------------------------- -4.49
July 8__________________ _4.61
July 15_________________ _4. 62
July 22_________________ _4.46
July 29_________________ _4.54
August 5----------------------- -4.56
August 12________________4.69
August 19________________4.87
August 26______________ _4.75
September 2---------------------4.90
September 9_____________ _4.89
September 16____________ _4.69
September 23____________ _4.93
September 30____________ _4.99
October 7---------------------- -5.15
October 14______________ _5.09
October 21_______________4.91
October 28_______________5.01
November 4--------------------- -5.06
November 11_____________ _5.25
November 18_____________ _4.89
November 25---------------------4.97
December 2_______________5.03
December 9_______________5.17
December 16---------------------5.29
December 23_____________ _5.38
December 30---------------------5.34
3.18 1973:
January 6________________5.61
January 13_______________5.66
January 20--------------------- -5.86
January 27--------------------- -6.03
February 3--------------------- -6.35
February 10---------------------6.21
February 17---------------------6.58
February 24---------------------6.79
March 3________________ _6. 75
March 19_______________ _7.02
March 17_______________ _7.13
March 24-------------------------6.95


I.—Weekly Federal funds rates—Continued

[In percent]
March 31_______________ 7.11
December 1______________
April 7.________________ 7.18
December 8______________
April 14________________ 6.84
December 15____________
April 21________________ 7.23
December 22____________
April 28________________ 7.14
December 29____________
May 5__________________ 7.43 1974:
May 12_________________ 7.60
January 5_______________
May 19_________________ 7.81
January 12.
January 19_
May 26_________________ 8.06
June 2__________________ 7.95
January 26_
February 2_
June 9__________________ 8.48
February 9__
June 16-------------------------- 8.17
February 16June 23_________________ 8.55
February 23June 30_________________ 8.59
March 2____
July 7__________________ 10.21
March 9-----July 14_________________ 9.52
July 21_________________ 10. 22
March 16----March 23----July 28_________________ 10.58
March 30___
August 4----------------------- 10.57
April 6_____
August 11----------------------10.39
April 13____
August 18______________ 10.39
April 20____
August 25----------------------10.52
April 27____
September 1------------------- 10.79
September 8------------------- 10.79
May 4______
September 15____________ 10.74
May 11_____
September 22____________10.80
May 18-------September 29____________10.84
May 25_____
October 6----------------------- 10.72
June 1--------October 13______________ 9.87
June 8_____
June 18-----October 20______________ 10.07
October 27---------------------- 9.98
June 25____
November 3_____________ 9.90
July 6______
November 10------------------- 9.71
July 13_____
November 17_____________10.03
July 20-------November 24------------------- 10.23
July 27_____

8. 81

1 The Committee on Interest and Dividends expired April 30,1974.
C h a r t I I . —Changes

in the prime rate

[In percent]

July 7__________________ __6
June 26________________ __5*4
October 20______________ __5%
August 29_________________5%
November 4_____________ __5%
October 4---------------------- ---5%
December 27_____________ __6
December 31_______________5%
January 24------------------------ 5
February 27_____________ __6%
January 31------------------------ 4%
March 26---------------------------6%
April 5_________________ __5

in the prime rate—Continued

C h a r t I I .— (

[In percent]

April 18-

June 3August 6—
August 13.
August 22.
August 28December —_
January 29______________

February 11______ --------February 19______ ______
February 25______ --------March 22_________ ______
March 29_________ ---------April 3__________ . . . . —
April 5---------------- ---------April 11__________ ______
April 19__________ ---------April 25__________ ---------May 2----------------- --------May 6___________ ______
May 10___________--------May 17___________---------June 26__________---------July 5----------------- ______
August —________ ______
September —_____ ______







1973: l
July 3__________ ________
August 6_______ ________
September 18____ -----------October 24______ ________
November —_____ ________
December —_____ ________
January 29______ ________

February 11_____________
March 9________________
April 3________________ May 2--------------------------June 26_________________
July 5__________________
August —---------------------September —____________


1 Beginning on April 16, 1973, the Prime Bate was split into a Large Business Prime
Rate and a Small Business Prime Rate. Figures for the Small Business Prime Rate from
April to July 1973 are unavailable.
Figures for the Small Business Prime Rate are average rates in effect on the last busi­
ness day o f the first full calendar week o f the month.
Large Business Prime Rate figures are shown as o f the date of change.
C h a r t I I I .— Discount

rate changes

[In percent]

July 23________________
November 11___________
November 19___________
December 13___________
December 24___________
No changes
January 15-----------------February 26___________
March 2_______________
April 23_______________


May 4__________ -------- 5%
May 11_______________ 5%-6
May 18_______________ 6
June 11_________-------- 6- 61/2
June 15------------- -------- 6y3
July 2__________ _____ 7
August 14_______ -------- 7- 73/2
August 23_______ -------- 7%
April 25_________ -------- 71/2-8
April 30_________ _____ 8

[Reprinted from the Congressional Record, Dec. 18,1975]
S top B a n k C oncentration

The Speaker pro tempore. Under a previous order of the House, the gentle­
man from Texas (Mr. Patman) is recognized for 15 minutes.
Mr. P a t m a n . Mr. ‘Speaker, it is with a great feeling of unease that I note
changes in the banking laws of the State of New York will allow statewide bank
branching as of January 1,1976.

Surely our Nation deserves a better 200th birthday present than the inevitable
further concentration of money and power that will result from this change.
It means that the large banks in Manhattan—Citibank, Chase, Morgan Guar­
anty* Chemical, Irving, Manufacturers Hanover, and Marine Midland—can in­
undate the State of New York with branches from Niagara Falls to Montauk
Point, Long Island. What chance does a small bank in Niagara Falls or Montauk
have to compete with these giants? The local bankers in these towns who own
small banks will shortly be liquidated as the owners of small comer grocery
stores were by the A. &P., Safeway, Acme, and Kroger.
The most recent figures on bank concentration are now nearly 1 year old and
they present a very grim picture. Nationally, this concentration is demonstated
by the fact that 47.05 percent of the country’s total bank deposits, Or nearly
$1 out of every $2, is deposited in 1 of 5 States, specifically New York, Cali­
fornia, Illinois, Pennsylvania, and Texas.
The 10 largest banks in New York now control 87.7 percent of the deposits in
the State. What will they control tomorrow? Inasmuch as deposits in New York
total 17.87 percent of the national total, these 10 banks control over IS percent of
the deposits in the Nation’s 12,410 banks.
Moreover, as of December 31,1974, the largest bank organization in each of the
following States controls over 20 percent of the deposits:
Percent o f

Percent o f
deposits held State:
*; deposits held
Nevada __________ ______ 56.6
Utah ___________ .x-—
Rhode Island------ — ______ 44.0
Minnesota ______ .-J— __ 28.2
Arizona — - ____ ___--------- 42.2
Oregon ______ ;__________ 39.0
Massachusetts___ Montana________26.8
California — _____ ______ 38.7
New Mexico__ - __
Hawaii_______ -__. . ..___ 35.9
South Dakota__ • „
Idaho ___________ ______ 35.7
Connecticut_____ .J__22.2
Washington_______ ______ 35.4
North Carolina_________ U 20.9
District of Columbia..______ 34.4
South Carolina___
Alaska ____ -_____ ______ 33.4
At the beginning of this year 10 largest banks in each State held deposits of
$478 billion—64.5 percent of the Nation’s total. In Illinois, which has 1,180
banking organizations, the 10 largest hold 49.7 percent of deposits. In Minne­
sota the four largest of 616 banking organizations control 56.6 percent of the
State’s $13.4 billion deposits.
Far from being alarmed by this increase in bank concentration, the, Comp­
troller of the Currency is asking Congress to permit interstate banking. This
would permit Bank of America, Citibank, Chase, Morgan Guaranty, so forth, to
branch from Manhattan to San Francisco, and from St. Paul to New Orleans.
As Ralph Nader points out, major bank holding companies already, have a net­
work of nonbanking offices:
Bank of America......................................................................... ............................................
Citicorp.............................................................................................. ............................................
Manufacturers Hanover_________________________________
Chemical_____________________________ ______________
First National of Boston__ ___________ ____ ______________

8 .1


Offices. .


336 .




Moreover, the Comptroller recently ruled that a bamk can use Customer Bank
Communication Terminals—CBCTS—free from the McFadden Act, both intra­
state and interstate. To date four U.S. district courts have ruled that the Comp­
troller is wrong, but he persists in his opinion, and it will take a decision by the
Supreme Court of the United States to stop him.
Were the Comptroller to have his way by turning a switch these big banks
could sweep the country, in the words of Ralph Nader, ‘like McDonald’s golden
About the only small business we have left in this country is the small in­
dependent bank. The rest of the economy has gone the way of the roses—three
companies make our cars, two our cans, one our computers, and one our copying
Mr. Speaker, let us keep our small independent locally owned banks and not
allow chain banks to liquidate them in the same way chain stores did yesterday.

[Reprinted from the Congressional Record, Feb. 16,1976]
W h y C a n ’ t D r . B u r n s H i t H i s M onetary T argets

The S p e a k e r pro tempore. Under a previous order of the House, the gentle­
man from Texas (Mr. Patman) is recognized for 30 minutes.
Mr. P a t m a n . Mr. Speaker, this Nation is struggling to emerge from the
worst recession since the Great Depression of the 1930’s. The one thing neces­
sary for our continued recovery and growth is confidence in the economy.
To create an atmosphere of confidence we need a moderate and steady growth
in money supply—a sensible monetary policy. Steady growth is vital. Wild
swings in the growth rate, and rapidly changing policies only lead to confusion
and, understandably, overcaution.
Mr. Speaker, Dr. Burns has set what he describes as moderate monetary
growth targets for our Bicentennial year of 4.5-7.5 percent for Mi and 7.5-10
percent for M* Naturally, I would prefer that the bottom limits of these target
ranges be set higher, but 1 am much more concerned about Dr. Burns’ ability
to hit any announced targets.
Of course, the Congress would be in a much better position to judge these
money supply projections if it had more timely data on the deliberations of the
Open Market Committee. We need to know—in specifics—what these targets
mean in terms of employment, prices, and economic growth. The Open Market
Committee receives detailed projections in these areas from its staff, but it re­
fuses to share this information with the Congress.
We cam only judge the future, Mr. Speaker, by the past. In the last two years,
Dr. Burns has not come close to hitting the growth targets he established.
In 1974 the narrowly defined money supply (Mi) grew by 4.66 percent. This
growth rate, already too low, fell in 1975 to 4.17 percent This is below the level
of growth generally accepted as necessary for a healthy economy.
In view of this past performance it is interesting to note that Dr. Bums is low­
ering from 5 to 4.5 percent the lower range of the growth target for the narrowly
defined money supply (Mi).
My own suspicions that this is a ploy to make Dr. Bums’ failures look better
was echoed by Mr. Alan Abelson who observed in the February 9, 1976 issue of
What occasions our present awe of Dr. Bums’ capacity for contrivance is
the Fed’s latest action on the monetary front You may recall that a while
back after due and sober deliberation, it set a target for growth of the
money supply of 5% to 7%% a year. For reasons not entirely dear, but
probably numbering among them sheer ineptitude, it has failed to come
anywhere near even the lower limit of that range. So, what do you do? Well,
what Dr. Bums did is simple and simply beautiful: unable to reach the
target, he lowered the target!
What is perhaps even worse is the wild fluctuations in the money supply on a
month-to-month basis. In January 1975, Mi shrank at a frightening 5.09 percent
annual rate. Just two months later it was growing at the rate of 13.24 percent
per year. This growth rate was reduced in April, but rocketed to 14.19 percent
in June, only to plummet to 3.71 percent the following month. Nor has more
recent history seen any improvement. The growth rate for Mi in October, Novem­
ber and December of last year was —0.82, 9.41 and —3.25 percent, respectively.
The following table shows the actual money supply and its growth rate for
the last 2 years—it is a bleak picture:

Total 1974........................

* Not available.


2 7 7 .7

M i growth

3 ^
3 -7
3 -7
V A -7 *A
2 -6

3 -6



4.66 .



Ms growth

. s


9 *H 2 H
S M -W
*K -m

5 K -8 M
4 K - iy 2
5^ m
5 -iy 2
8 -10 H
8 -\ m


7.0 7



Mi growth


5 -7
3 K -6 K
5M- m
5 - m




11.3 7
3 .71
- 3 .2 5

. h

6 ^ -9 K
3 -5 j|

6 -10

4 -7

Total 1975 ..........

4 .1 7 . .



Ms growth

7 K -1 0
7 -10

8 -108K
i m

9 -12

8 -\ m

§ t l8 U
m -v m

7 -10


4 .11
8 .3 }

Now the Fed, Mr. Speaker, is attempting to dismiss the Mi measurement as
being of little consequence. Dr. Burns observes that there are “profound uncer­
tainties” in the behavior of the narrowly defined money supply and that the Fed
is giving more weight to the broader measurements of the money supply such as
Unfortunately, Dr. Bums’ record in achieving his established goals for Ms
growth has been as poor as for Mi. In the past twenty-three monthes Dr. Burns
has missed his goal for Ms growth eighteen times, and only achieved his goal five
times. Of the five times he achieved his goal twice, and did so by barely reaching
the bottom of the range.
This poor performance, Mr. Speaker, on both Mi and Ms leads to one of two
possible conclusions. One conclusion for this failure is that Dr. Bums and the
Open Market Committee are incompetent and unable to attain the established
goals. The other conclusion is that Dr. Bums is setting false goals, one that he
has no intention of trying to attain in order to placate the Congress, and the
people, while he secretly operates as he pleases.
Regardless of which conclusion you believe, there is only one course of action
available—the removal of Dr. Arthur Bums from his position on the Board of
Governors. The problem lies not in the choice of targets so much as Dr. Bums’
failure to come dlose to hitting them.
In a period that required confidence in our leaders charged with responsibility
for our economic growth only the foolhardy can maintain faith in Dr. Burns.