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Address delivered to the
The State University of Iowa
March 1 7 , 1 9 3 8


Karl R. Bopp

Dean Phillips, Professors McManus and Nel­
son have stated clearly the importance of the
Federal Reserve system in the lives of all of
For the role played by the Federal Reserve
System is at the heart of the explanation of
the boom, as well as of the duration of the
ensuing slump, and the policies of the Board
as expressed in the System’s operation are
intimately connected with that explanation, (1 )
It follows, then, that the height of the
recent boom and the depth of the depression
are fundamentally the outcome of Federal
Reserve credit expansion. The recent cycle
may therefore properly be designated as a
central banking phenomenon. (2 )
How do mistakes of such magnitude occur?
I believe a key can be found in a study of the
men in charge of the system during this period.
When we speak of the Federal Reserve system, we
are speaking of more than 1 2 5 major officials.
Federal Reserve policy is determined by a balance


. G. A. Phillips, T.F. McManus, R.W. Nelson,
Banking Policy and the Business Cycle,
New York, 1 9 5 7 , p. 1 1 7 .


. Ibid., p. 1 4 0 .


of power within and among three sets of offic­
ials: first, a Baard composed of "...actual,
living men, sitting ... in the shadow of the
United States Capitol,r second, the Federal
Reserve Bank of New York controlled by f... men
who come to the front in New York as bankers ...
(and who), so to speak, belong to the master
class in banking ... usually (able to) put
their ideas over upon those of less prestige

and experience,f and third, the other eleven
Reserve banks whose officials are these men
of less prestige and experience*
Such is the highly complicated, yet human
organization known as the Federal Reserve sys­
tem. Mr. A. C. Miller of the Board recognized
that they act like human beings when he stated;
I should say *.. that action by the Federal
Reserve Board usually lies midway between
a deliberate or calculated action, such as is
taken with full appreciation of the conse­
quences, and what you may call unconscious


. 7 0 th. Congress, 1 st. session, Hearings on
H. R. 1 1 ,8 0 6 , Washington, 1 9 2 9 , p. 1 8 4 .
Ibid. . p. 127




When the reserve system was established,
apparently most of the officials were interes­
ted in cooperatively making a success of the
undertaking, Neither the Board nor the banks
wished to assume the initiative in determining
policy. The banks asked the Board for sugges­
tions as to rates, and the Board permitted the
banks a large degree of freedom as to rates.
The recent Nye-Clark investigations of
the Munitions' Industry, however, show that
conflicts soon developed. Two leading figures
in this early period came from rival financial
groups in New York, Paul M. Warburg, of the
Board, had been a partner in Kuhn, Loeb & Co,
and was sympathetic to Germany, the land of
his birth, Benjamin Strong had been President
of the Bankers Trust Co,, organized by H. P.
Davison of J, P. Morgan & Co. Both strong and
the Morgan firm were strongly pro-ally from
the beginning.

5 . 6 9 th.

Congress, 1 st. session, Hearings on
H.R . 7 8 9 5 , Washington, 1 9 2 7 , p. 6 4 7 .


As early as November 1 0 , 1 9 1 6 , Mr, Warburg
wrote a letter to Strong stating:
If the developments of the Federal Reserve
System is not to lead to a more ruthless
cracking of the whip on the part of the
Board, or an increase of its functions and
powers ... I think the boards of directors
of the Federal Reserve banks must realize
that readier cooperation with the Board is
their duty and that they should stop fussing
with policies and the interpretation of
legislation and attend to the routine
business upon a common plan and upon com­
mon principles. (6 )
On November 1 6 , 1 9 1 6 , Mr. Davison inter­
viewed President Wilson regarding a proposed
flotation by Morgans of British Treasury bills
and notes. On the next day Davison had a meeting
with the.Federal Reserve Board in which he acted
in a high-handed manner. Consequently, on Novem­
ber 2 9 , the Board, after consultation with
Wilson, issued a strong warning to the banks
and public against purchase of foreign govern­
ment securities. The aarning ruined the market
for the notes, and the proposed issue was aban­
doned. Secretary McAdoo returned to Washington,
deeply incensed at the warning of the Board.
6 . 7 4 th.

Congress, 2 nd. session, Hearings on
S. Res. 2 0 6 of the 7 5 rd. Congress, Washington,
1 9 3 7 , p, 9 9 5 8 .


On December 2 6 , Governor Harding, at the instig­
ation of McAdoo and without prior consultation
with the other members of the Board, announced
publicly that the Federal Reserve Bank of New
York had been authorized to appoint the Bank og
England as its correspondent and agent* This
announcement violated the agreement of secrecy
between Governor Strong and the Bank of England,
The reaction of the New York Bank officials may
be gleaned from the following letters:
Since I saw the Board’s announcement of
the B. of E. matter this morning I have
been hitting every ceiling in sight, and
have imagined you going entirely out of
sight. Indeed, since I received no reply
from you to my wire this a,m. I fear you
may literally have gone out of sight, (7 )
To which Strong replied;
... in all honesty I must say that a repeti0
tion of this business means that I am through
with the Federal Reserve Bank forever.
..,The possible explanations of their actions
are ... 5 th, that it was a means taken by
the Board to exhibit the strong arm in the
general direction of the affsirs of the
Federal Reserve System and suppress some­
what the independent activities of the
Federal Reserve Bank of New York and partic7

. Ibid., p. 9 5 4 8
(Pierre Jay to Strong,
December 2 6 , 1 9 1 6 ).

ularly myself. (8 )
...If the Board takes the attitude ... that
the Board alone is to be the judge of the
character and extent of the publieity, then
it becomes essential for the protection of
the management of the Reserve banks that
the Board should not be advised of confiden­
tial transactions. (9 )
I am not here interested in the technicali­
ties of the conflict, but solely in demonstra­
ting that ill-feeling existed between the Board
and the New York Bank before we entered the
War and th&t the New York Bank felt justified
in not advising the Board of all matters.
When we entered the conflict all our re­
sources - including those of the Federal Reserve
system - were enlisted to prosecute it success­
fully. The Overman Act concentrated unusual
powers in the President by providing that “For
the national security and defense, for the suc­
cessful prosecution of the war ... the President
is hereby authorized to make such redistribution
of functions among executive agencies as he may
deem necessary, Including any functions, duties
and powers hitherto by law conferred upon any

8* Ibid., p. 9 5 5 0 .
9 . Ibid., p. 9 5 5 2 .


executive department, commission, bureau, agency,
office, or officer •..” The members of the Board
quite properly interpreted this to mean that any
opposition on their part to the Treasury program
would merely mean that Secretary McAdoo would
have his father-in-law, the President, transfer
their powers to the Treasury Department. In other
words, the Board became an unnecessary cog in
the machine of government finance. Its sole
deliberative function became rubber-stamping
the Treasury Policy. The prestige of the Board
was at low ebb during the war. But the Board
was composed of active men. With their real
reason for existence gone, the members became
active in other ways. They wrote letters to
each other and became concerned about the minutiae
of operations. C. S. Hamlin kept a diary and
prepared an index-digest of the Federal Reserve
McAdoo found it much more convenient to
deal directly with the Reserve banks, especially
with Governor Strong of the New York Bank. Thus
the prestige of Strong rose as that of the Board
declined. Strong was the man who - with the


Secretary - developed policy; the Board had no
need for policy.
It was the New York Bank, therefore, which
was prepared and in position to take the leader­
ship when the operations of the Treasury ceased
to be the dominant element in the banking situ­
ation. an April 1 0 , 1 9 2 0 , Mr. Miller addressed
the governors of the Reserve banks as follows:
... By this I mean to indicate that more
and more the responsibility is getting to
be concentrated upon the Federal Reserve
banks, and within the Bederal Reserve banks,
upon you men who govern. For the first time,
as I see it, you are in a situation where
you are going to be given an opportunity
to demonstrate whether, wisely or unwisely,
you were invested with the title and the
power and the responsibility of being
...So that I, for one, as a member of the
Federal Reserve Board .., shall look to
what the governors of the twelve Federal
Reserve banks do as the main factor of
efficiency in the policy of credit control
which we can announce to be the Federal
Reserve policy for the future and by which
we are prepared to stand or fall. (1 0 )
How well did the governors discharge this
responsibility? whlch was placed upon them by
the Federal Reserve Board? Again, Mr. Miller

Mimeographed Report, p. 5 2 0 ff. In the
library of the Federal Reserve Board.

As I look back upon the period following
closely upon the termination of the war,
for about three years, the banking system
of this country ... was a good deal like
a ship at sea without adequate equipment
of rudder and compass to guide it. (1 1 )
Storms soon beset the rudderless system*
On May 1 7 , 1 9 2 0 , the Senate adopted the Resolu­
tion introduced by Senator McCormick of Illinois
Resolved, that the Federal Reserve Board
be directed to advise the Senate what steps
it purposes to take or to recommend to the
member banks of the Federal reserve system
to meet the existing inflation of currency
and credits, and consequently high prices;
and what steps it purposes to take or recom­
mend to mobilize credits in order to save
the 1 9 2 0 crop*
The Board attempted to avoid this rock of
Scylla by a deflationary, policy inaugerated at
the famous deflation Conference with the Federal
Advisory Council and the Class A directors of

the Reserve banks, held on May 1 8 , 1 9 2 0 . Again
Mr* Miller testifies:
I think one of the chief troubles with the
1 1 . 6 9 th. Congress, 1 st* session, Hearings
HR. 7 8 9 5 , Washington, 1 9 2 7 , p. 6 9 6 .
1 2 . 6 7 th. Congress, 4 th. session,
No. 5 1 0 , Washington, 1 9 2 3 ,


Senate Document


Federal Reserve system in 1 9 2 0 was hysteria hysteria in part due to the interefrence of
Congress through a Senate resolution, with
the maintenance of a well-balanced frame of
mind in the Federal Reserve system. (1 3 )
The Board soon found the good ship Federal
Reserve in the whirlpool of Charybdis when Con­
gress appointed the Joint Commission of Agricul­
tural Inquiry whose report blamed the severity
of the dspression of 1 9 2 0 - 1 9 2 1 tipon the improper
policy of the Reserve system.
Since the Board was blamed for the results
of Reserve policy, it began to assume greater
initiative in that policy. But what policy should
it adopt? It is perhaps more than a coincidence
that during the period 1 9 2 5 - 1 9 5 0 - the period
which has been most severely criticized - only
one regular member at a time was even nominally
a banker. The first of these was the nominal
banker, Daniel R. Crissinger, one of the group
from Marion, Ohio, whom President Harding brought
to Washington to round out the Ohio gang. Crissinger was the only banker member among the
regular members from May, 1 9 2 3 , until September,
1 3 . 7 0 th.

Congress, 1 st. session, Hearings on
H.R. 1 1 ,8 0 6 , Washington, 1 9 2 9 , p. 1 6 5 .



He was succeeded by Roy A. Young as the

only banker from October 1 9 2 7 , to September, 1 9 5 0 .^
The newly energized but amateur Board
adopted the policy recommended by the Secretary
of the Treasury, who had been coached by Gover­
nor Strong. The Board began to force its policy that is to say, the Strong policy - upon the
outlying Reserve banks. That was the balanee of
power in 1 9 2 7 . Two instruments were used to
ease the money market. First, the Open-Market
Investment Committee purchased large amounts
of government securities in the open-marketx
In the second half of 1 9 2 7 . Mr. Miller later
said of these purchases:
That was under Federal Reserve bank leader­
ship. I make it specific. It was an operation
that was initiated, proposed, and developed
by the Federal Reserve Bank of New York,
accepted by most of the other fcxukx Reserve
banks who participated in the discussions,
and, I regret to say, by the Federal Reserve
Board. (1 4 )
Coupled with the heavy purchases of accept­
ances it was the greatest and boldest opera­
tion ever undertaken by the Federal reserve
system, and, in my judgement, resulted in
one of the most costly errors committed by
it or any other banking system in the last
1 4 . 7 4 th. Congress, Ist. session, Hearings on
S. 1 7 1 5 and H.R. 7 6 1 7 , (Senate), Washington,


p. 6 8 9 .



years. (1 5 )
The second instrument was reductions in

rates of rediscount. On July 2 9 , 1 9 2 7 , the
Federal Reserve Bank of Kansas City reduced
its rate from 4% to

Boston and New

York Banks followed within a week, and other
Reserve banks soon fell into line. On Septem­
ber 2 , the directors of the Chicago Bank voted
not to reduce their rate. The Federal Reserve
Board, informed by telegram of this action,
split into two factions. Cunningham and McIn­
tosh of the Chicago district, James of the St.
Louis district, and Crissinger of the Cleveland
district were indignant and promptly voted not
to approve the decision of the Chicago Bank.
Hamlin and Platt dissented strongly. Governor
Crissinger notified the Bank that it would be
permitted^ to continue the 4 ^ rate only until
Tuesday, September 6 . On that day Mr. Miller
arrived in Washington and aligned himsl&f with
the dissenters. On the same day Secretary Mellon,
just returned from Europe, heard of the situ­
ation at the New York Bank. He informed Gover­
1 5 . 7 1 st.

Congress, 1 st. session, Hearings on
S. Res. 7 1 , Washington, 1 9 3 1 , p. 1 3 4 .


nor Crissinger that he disapproved forcing the
Chicago Bank into line and requested that the
Board’s decision be delayed until he reached
Washington. On the same day the Chicago Bank
notified Crissinger that a quorum of the direct­
ors could not be secured until Friday.
“Between the pointed comment of some of
the minority on this occasion, the ’obstinacy1
of the Chicago directors, and the ’interefBence1
of Secretary Mellon, Governor Crissinger’s
jealousy of his authority and zeal to demon16.
strate it were now thoroughly aroused."
Crissinger awaited the arrival of Mellon, a
motion to force the 3 \°/o rate upon the Chicago
Bank would have lost by a tie vote. Therefore,
he called an immediate meeting, did not communi­
cate Mellon’s message, and by a four to three
vote forced the Chicago Bank to decrease its
rate. Nine directors of the Chicago Bank were
opposed to the reduction; four members of the
Board were opposed to forcing the change; yet

J, M. Daiger, nDid the Federal Reserve Play
Politics, 1 In Current History, October, 1 9 3 2 ,
pp. 2 5 -3 2 . The above description is condensed
from Daiger’s article. .


the four members who favored the motion won
the battle; but they lost the campaign* In a
few days president Coolidge returned from the
Black Hills, and on September 1 5 , Secretary
Mellon (SicI )

confirmed a rumor that Governor

Cri3 singer had resigned.
The strong arm policy of the Board led
to much criticism.'; The Board was cowed into
submission; and as Mr. Miller testified:
As things then were, the Board looked for
the initiation of further measures of re­
straint to the Federal Reserve banks and
they, in turn, depended upon the leader­
ship of the Federal Reserve Bank of New
York. And New York’s leadership proved to
be unequal to the situation. (1 7 )
Briefly, then, the situation late in 1 9 2 8
may be summarized as follows: Governor Strong
died on October 1 6 , 1 9 2 8 . The Board concluded
that the leadership of Governor Harrison (Strong(s
successor) was.unequal to the situation. Yet
it had to be careful in initiating policies
because of the consequances to it of the Chicago
rate case. The Board looked to new instruments.
It began by requesting on October 5 , 1 9 2 8 , all
Reserve banks to give reasons for any suggested
I 7* Congressional Record, July 2 6 , 1 9 5 5 , p. 1 2 ,4 0 5 .


rate changes* All Reserve banks complied with

this request, exce t the Federal Reserve Bank
of New Yo^k.
On February 2 , 1 9 2 9 , the Board
sent a letter to Federal Reserve banks; and on
February 7 , it issued a warning designed to
accomplish liquidation, presumably of the stock
market. The New York Bank did not cooperate
with the Board in the use of the new instruments
of direct action and warnings.

1 8 . 7 1 st.

Congress, 3 rd. session, Hearings on
S. Res. 7 1 , Washington, 1 9 3 1 , pY 1 7 2 .

Between February 14 and May 23, 1929, the N ;w Vork bank applied for anV
increase ten times; but not until April 9 did Governor Harrison send the Board an official statement':
of the reasons for the desired increase. However, both the governor and the chairman of the bdard j
of the New York bank reviewed the situation with the Federal Reserve Board on several occasional
Gov. Harrison stated (Ibid., p. 84): “ There was never a time,* I think, when the Federal Reserve'
Board was not completely and wholly familiar with what reasons wc had.” Except f< r a particular
reason on one occasion, by one member, th: bank voted unanimously for the change, week after
week (p. 84).
In May, Governor Harrison ceased his weekly demands for a 6% rate. Instead he apparently
began a series of diplomatic negotiations. The argument which had been used by the opposition j
Board members, led by A. C. Miiler, was that “ legitimate” business should not be penalized with;
the higher rate. Harrison was finally successful when he agreed to reduce the buying rate on ac- |
ceptances by
at the same time that the discount rate was increased to b%. Apparently the j
division on the Board was Secretary Mellon, Governor Young, and Vice-Governor Platt for the ;
bank and the remainder of the Board against the ban k.j“ ^
C O Ilg rO S S

1 st. session, Hearings on S. 1 7 1 5
7 6 1 7 , (Senate),- Washington,

and H.R.
p. 9 5 5 .

On February 14, 1929, the New York bank directors voted to increase the rate
to 6 per cent. Governor H arrison, o f the bank, telephoned the Board for approval
(i. e., “ review and determ ination” ) o f the increase.*? The Hoard decided th at the:
proposal for an increase involved a national question which required study. C o n se -;
quently they voted to take the application under review for consideration. When ■
G overnor Young, o f the B oard, advised governor Harrison of this decision, the'
latter answered that the directors o f the New Y ork bank had voted th at the B o ard
should decide the m atter im m ediately; and that the directors couid not leave until
the issue had been decided. The Board viewed this imposition o f an im m ediate
decision as an unwarranted dictation o f policy by the bank to the Board. A s a :
result, the vote® o f the Board w as'unanim ous again st the increase. According to
C. S. H am lin, a member, the vote was unanimous because some of the members who
favored the rate change refused to accept the im position o f the a ‘n iid o .i by the bank.?0
H am lin’s statem ent implies that the B oard was divided in its opinion o f the wisdom
o f the rate increase per se.
On February 15, 1929, the Federal A dvisory C oun cil* passed a resolution which
backed up the position o f the board. The resolution-, in part, re a d :*
The Council believes that every effort should r e made to correct the present
situation in the speculative markets before-rése^tüig to an advance in rates. CzO
Two years later some members of the Board réjoiced in this approval o f the
Council.**- These members did. not state, however, that the Council shortly began
to change its position. On April 19 it recom m en ded^ :
Measures so far adopted have not been effective..
The Council, therefore,
recommends that the Federal Reserve Board permit the Federal Reserve banks to
raise their rediscount rates immediately and maintain a rate consistent with the
cost of commercial credit. (23)
Within another month the Council had reversed its original position entirely
and favored the banks. P art of its recommendation of M ay 21 follows:5^
The policy pursued by the Federal Reserve Board has had a beneficial effect,
due largely to the loyal cooperation of the banks of th,e country. The efforts in this
direction should be continued. The council notes, however, that while the total
amount of reserve credit used has-been reduced “ the amount of the country’s credit
absorbed in speculative security loans” has not been substantially lowered.
Therefore, the council recommends'-to Jthe Federal Reserve :Board that it now
grant permisión to raise the rediscount rates to 6 per cent to.those Federal Reserve
banks requesting it . . . thus best safeguarding commerce, industry, and agriculture.f24)

* 7 1 st* Congress, 3 rd, session, Hearings on
S. Res. 7 1 , Washington, 1 9 3 1 , pp. 1 4 2 -1 4 3 .__
2 0 . T 5 íH7 T p 7 T 7 2 .
Testimony of Mr. Hamlin: On that


ñrst application, the Board "was unanimous in rejecting it. I want to add in fairness to^ y
ciates that some who favored the application for increase, agreed that t e ccn 'tl° n 1
immediate decision could not be accepted by the Board, and therefore joine in a u
rejection of the application.” Vice-Governor Platt was in favor of increasing t e ra
in February, 1929; P * / ¿ I 5 .

2 0 -2 4 .

Sixteenth Annual Report of the Federal
Reserve Board, Washington, 1 9 3 0 , p. 2 1 8 .


These occurrences show the position o f the Council in the working R eserve j
system . Although it was designed originally as an integral part o f policy determ ina­
tion, from the beginning it has been unim portant but serves well for buck-shifting
when occasion arises.
Since the B o ard was in control, and since m ost persons expected it to stop a t
nothing to break the stocki:m arket, the speculative community watched its every
move. In M arch o f 1929 it held protracted daily sessions. On M arch 23 it held a j
Saturd ay session—a day which is usually dies non. T he Board also shrouded its
meetings in great m ystery. “ N o statem ent” was the reply to inquiring reporters.
The speculative community became hysterical, and severe declines in the m arket
occurred on M arch 25-26, whetf a large Chicago bank decided to cooperate with the
B oard by calling $50,000,000 o f loans in the Chicago m arket. The pressure spread j
a t once to New York. T h is panic was stemm ed by a member of the board o f directors j
o f the New Y ork bank in defiance o f the Federal Reserve Board. M r. M itchell, ,
head o f the N ational C ity Ban k, placed $25,000,000 at the command o f the call
m arket. T o provide against a repetition o f the T uesday ju m p in the call rate from ;
\1% to 20% he let it be known that his bank stood ready to lend th at much m ore j
in the call loan m arket. It would lend $5,000,000 at 16% , another $5,000,000 a t 1
17%, and a like amount for each succeeding rise of \% up to 20.*^"
The New York Herald Tribune on M arch 27, quoted M r. Mitchell, as having
So far as this institution is concerned we feel that we have an obligation, which is-' j
paramount to any Federal Reserve warning, or anything else, to avert, so far as lies!
within our power, any dangerous crisis in the money market. While we are averse
to resorting to rediscounting, for the purpose of making a profit in the call market,,
we certainly would not stand by and see a situation arise where motley became
impossible to secure at any price.
Although the N ational City Bank frequently borrowed in larger volume and :
for longer periods, it is significant that its borrowings from the'"Reserve B an k in- i
creased to $25,000,000 on M arch 25, and to £35,000,000 on the 2'7th. On the 28th, j
the borrowings were back to zero.8^ The Action of M r. Mitchell was regarded as
open defiance of the Board. W ithin a few days the N ational C ity B ank issued a
special bulletin which stated in part r”
, [The] Bank fully recognizes the dangers of over-speculation and endorses the
desire of the Federal Reserve authorities to restrain excessive credit expansion for
this purpose. At the same time, the bank, business generally and, it may be assumed,
the Federal Reserve banks^ whose policies over the past year have been marked by
moderation, wish to avoid a general collapse of the securities market such as would
have a disastrous effect on business.


Commercial & Financial Chronicle.March 3 0 .
p. 1 9 S 8 T
Reprinted, Ibid., p. 1 9 6 8 .
7 1 st. Congress, 3 rd. session, Hearings on
S. Res. 7 1 , Washington, 1 9 3 1 , facing p .”3 2 2 .
R. B. Westerfield, wThe Current American Con­
troversy Concerning Central Bank Policy,n
Torino, 1 9 3 1 , p. 7 4 .
7 1 st. Congress, 3 rd. session, Hearings on
S L Res. 7 1 , Washington, 1 9 3 1 , p. 1 7 5 .


2 $.


T he New Y ork bank was not alone in its disagreem ent with the Board concern^
ing rates in 1929.« Although apparently some of the Reserve banks in the a g r f
cultural areas agreed with the Board on the use o f instrum ents > s o m e o f the lam er
Reserve banks desired rate increases. As early as March 15, 1929, the Chicago Bank
made efforts to secure the approval o f the Federal Reserve Board to an increase in'
rates. On M arch 28, the Board voted unanim ously that the rate is the m ost e le c t iv e 1
instrum ent to protect credit against misuse. Several additional requests for a r a te :
increase were m ade to the Federal Reserve F o ard before M ay 31, but the B oard
did not c o n c u r .* Sim ilarly, the board of the Philadelphia bank voted to raise its
rate on M arch 26, 1929; but the change was not approved bv the Federal R eserve
B oard . On April 3, the resolution was repeated. This application expired bv lim ita
ti°n on April 6 because of the failure o f the Board to approve it. Again a t every
meeting o f the directors of the Boston bank and at one executive comm ittee m eeting
between M arch 27 and Ju n e 5 votes were passed to raise the rate from 5 to 6 per
cent. In each case the vote o f the bank directors was unanimous. When the B o ard
failed to j.p ^ r o v e ^ e se _ votes, the directors o f the Boston bank resrimWj them.ft-


B.H. Beckhart, "Grundsätzliches zur amerika­
nischen Notenbankpolitik.” In Mitteilungen
des Verbandes österreichischer Banken undBankiers/ Vienna," llV, pp. 2 6 7 ff.
5 1 . 7 1 st. Congress, 3 rd. session, Hearings on
S« Hes. 7 1 , Washington, 1 9 3 1 , p. 7 5 6 .
3 2 . Ibid., pp. 7 5 3 -7 5 §.
7 4 th Congress, 1 st. session, gearings on
S . \L7 1 5 an4 H.R. \ 6 1 7 , \Senate\, Waging upn #

T 9 3 5 y T .~ § 5 2 ^




By the beginning of 1 9 3 0 , therefore, both
the Board and the New York Bank had had their
innings. The outlying Reserve banks desired an
opportunity to influence policy. Evidence of
this is found in the reorganization of the old
Open-Market Investment Committee. The 1 9 2 7
committee which had embarked upon the exten­
sive operations later subject to so much criti­
cism, was not really a system committee but was
dominated by Governor Strong. On March 2 5 , 1 9 3 0 ,
the old committee was reorganized into the OpenMarket Policy Conference, composed of repre­
sentatives from all the Reserve banks. Resolu­
tions were passed by the committee and had to
be approved by the Board. The executive committee
could act only upon the authorization of the
full committee. This more complicated procedure
slowed up open-markst operations considerably.
Ca <1f/ect a sim>


Later the Banking Act of 1 9 3 3 ¿n treduced. an
elaborate system of checks and balances. The
Federal Open-Market Committee, which initiated
the policies, was not in position to ratify
them; the Board which ratified the policies,
was not in position to initiate them or to


insist that they be aarried out. The several
Reserve banks had power to nullify the policies
after they had been initiated and ratified.
Governor Harrison testified:
The result of that is, and I admit it, that as long as we have an open market
policy conference, which is composed of 12 different individuals from 12 differeot
parts of the country, even though we get agreement as to policy, it sometimes takes
time. The result, again, is that we sometimes have gone slower in our policy than
some of the rest of us might like to go. The corollary to it is that, having embarked
upon a program and the conditions that we desire to accomplish having been ac­
complished, and the necessity for going into reverse having arisen, we are sometimes
too slow in going into reverse, and that, I am frank to say, is an unfortunate incident
to a banking system which, however wisely conceived, must operate through 12
different reverse banks, subject to the approval of the Federal Reserve Board. o v

An example o f this occurred in A ugust, 1931. The B oard, in conference with the i
New York bank, decided that a m ajor purchase of securities was absolutely neces­
sary. The open-market comm ittee were called together. Governor M eyer, of the
Board, discussed the m atter with the members and urged the purchase of, say, 300;
millions o f Government securities. The open-m arket committee voted 11-1 to!
reduce the 300 millions to some 100 millions. The strong opposition encountered;
from some of the Reserve banks resulted in a much smaller purchase o f securities
than had been contem plated. The Board acquiesced in the limitation.

Similarly, Mr. Hamlin testified concerning
operations under the new Act:
In 1933 the matter came up again . . . I attended' a meeting at the Federal Re­
serve Bank of New York of the executive committee. Governor Harrison reported
that the Federal Reserve Banks of Boston and Chicago had passed resolutions
absolutely declining to participate in any further open-market purchases unless in :
cases of grave emergencies, and the Governor at that time was very much worked!
up. He felt that we should go ahead strongly and vigorously, and pointed out that i f :
New York did it alone—and New York, I think, was somewhat inclined to do it
it would pull its reserve ratio down to 47 per cent, leaving the reserve ratio of Chicago

3 3 . 7 2 nd.

Congress, 1 st. session, Hearings on
H.R. 1 0 ,5 1 7 , Washington, 1 9 3 2 , p . 476.
3 4 . 7 4 th. Congress, 1 st. session, Hearings on
S. 1 7 1 5 and H.R. 7 6 1 7 , (Senate), Washington.



and Boston at 70 percent. The Governor delivered an oration worthy of Demos­
thenes. He nearly drew tears to my eyes, when he told us that it was the duty of the
Board to force Boston and Chicago into line. I agreed with him entirely. I said, “ I
don’t know how we can do it, but I will go back and see what can be done.”
Then he made a very interesting suggestion-, that the Board might be able to do
that if New York-were to take practically this whole issue— the Board could require
Boston and Chicago to rediscount far New York and thus equalize the reserve
ra tio ......

Such was the status when Mr. Roosevelt
assumed office and decided to concentrate con­
trol over the banking system in Washington.
After a number of conferences with Mr. h’
the latter drafted Section II of the Banking
Act of 1 9 3 5 which was passed substantially
unchanged by the House by a vote of 2 7 1 -1 1 0 .

spent some time in Washington in the

summer of 1 9 3 6 trying to secure the background
of this Act. In the 7 5 rd. Congress the Senate
Committee on Banking and Currency consisted of
twelve Democrats and eight Republicans all
grouped into ten sub-committees. Baree Republicans:
Goldsborough (Md.), Walcott( Conn. ) i and Kean
(N.J.) were replaced by three Democrats: Maloney
(Conn.), Radcliffe (Md.), and Cutting (N.M.)*
Before the proposed Act reached the full
committee for discussion , it was referred to


Ibid., p. 9 4 8 .


the sub -committee on Monetary Policy, Banking,
and Deposit Insurance. Now, whereas the full
committee was headed by Duncan u. Fletcher,
a leader for the administration; this sub­
committee was headed by Garter Glass, an out­
spoken critic of the legislation. In addition
to Glass, the sub-committee was composed of
Bulkley and McAdoo, Democrats, luke-warm in
favor of the whole bill as a compromise to se­
cure deposit insurance; and Twwnsend, the only
remaining Republican - Wolcott having been
defeated for reelection. Senator Fletcher faced
the possibility of defeat for the Act in the
sub-committee before it even reached the whole
committee. His job was to see the Act passed
to give the administration control.
A number of possible solutions were proposed.
First, Fletcher might appoint himself as chair­
man of the sub committee. The objection to this
procedure was that it would violate Congressional
etiquette and would be a direct slap in the
face to Glass. Second, Fletcher might have
appointed himself a regular member of the sub­
committee. The trouble here was that Fletcher


would not serve under Glass. Consequently, he

hit upon another scheme.
At an early meeting of the whole committee
Fletcher noted that three members of the old
committee had been defeated in the recent elec­
tions and had been replaced by three new members.
Furthermore, the division of the whole committee
into ten sub-committees was no longer wise
because some of these sub-sommittees had com­
pleted their work. Therefore, Fletcher proposed
a complete reorganization of the sub-committees.
He could not remove members from sub-committees;
but, in-as-much as the sub-committee on Monetary
Policy was now so important, he greatly increased
its size. In short, he packed it for the adminis­
tration by increasing it from five to eight
members. Since he had to retain the old members,
the packing gave the administration three cer­
tain votes for the bill, four possible votes
for, and two certain votes against. In general,
I was informed, the votes were five to four for

For: Bankhead, Cutting, Norbeck,
Uncertain: Bulkley, Byrnes, Couzens, McAdoo
Against: Glass, Townsend.

the administration measure. Then, Bronson Gut­
ting, one of the certain votes for, was killed.
This reduced the typical vote to four for and
four against I Again Fletcher was stumped. After
careful consideration, the administration for­
ces decided upon the following stratagem, when­
ever a matter of little significance was raised,
they would make the motion to pass and lose
" y a tie vote. But whenever a matter of major
significance was raised, they permitted the
Glass faction to make the motion - which would
also lose by a tie votej
So it happened that although Glass was
able to introduce many changes in the Act, yet
the administration was able to concentrate
control of the Federal Reserve system in