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THE FEDERAL RESERVE BOARD BEFORE MARRINER ECCLES (1931-1934)
by Walker F. Todd
Walker F Todd is an assistant general counsel and research
officer at the Federal Reserve Bank of Cleveland. The
author thanks Joseph G. Haubrich. Michele S. Lachman,
Joseph C Reid. kchard C. Schiming. and James B.
Thomson for helphl comments This paper was presented
at the N'estern Economic Association International
Conference at Lake Tahoe. hevada. on June 23. 1993. A
related anicle was published by the author as "History of
and Rationales for the Reconstmaion Finance Corporation." Federal Reserve Bank of Cleveland. Ecor~omrc
J(t.~.rrtt.
vol 28. no 4 ( 1992 Quaner 4). pp 22-35
U'orkin~papers of the Federal Reserve Bank of Cleveland
are preiimlnary materials circulated to stimulate discussion
and cntical comment The views stated herein are those of
the author and not necessarily those of the Federal Reserve
Bank of Cleveland or of the Board of Governors of the
Federal Reseme System
April 1994
clevelandfed.org/research/workpaper/index.cfm
ABSTRACT
k
The political economy model followed by most orthodox,
mainstream American economists before 1931 was classically liberal,
albeit occasionally with peculiarly American permutations. After
the United Kingdom suspended convertibility of sterling into gold
(the bedrock of orthodox financial principles) in September 1931,
American economic policymakers, including President Hoover and
Eugene Meyer, governor of the Federal Reserve Board, became
increasingly unorthodox in their prescriptions. Although central
planning measures of the corporate state variety had manifested
themselves vigorously but briefly in policymaking circles during
and immediately after World War I, the Harding, Coolidge, and early
Hoover years were supposed to be a return to prewar anormalcy,m as
the slogan associated with Barding's campaign had it.
The Federal Reserve Board led the way in Hoover's rethinking
of liberal orthodoxy in the crucial year running from the summer of
1931 through the spring of 1932.
The outcome of the Board's
endeavors was an astonishing array of economic recovery initiatives
that scholars have classified, retrospectively, as corporate
statist in nature, involving direct federal government assistance
to private industry and business-labor cooperation enforced .by
governmental intervention. These changes persisted and generally
were amplified during the ~oosevelt administration's first year
(=he "First New Dealn); the departure of Eugene Meyer as governor
of the Board in early 1933 apparently did not diminish the Board's
wlll~ngnoss to pursue the planning initiatives undertaken during
=he First New Deal. By early 1934, it became apparent that the
33ard0s szaff wanted the Federal Reserve to play a role in the
a=irn~r.rs=ration
of industzial policy in rivalry with, and with a
v:gw
z 3 evenzually superseding, the parallel role of the
Rc=ms=,-uczlon Finance Corporat~on.
1
, in the :autumn of 193.4, the Board's plans were
=-,ere5
~ r , =he d i r e ~ : of
~ ~a ~hybrid of the Chicago Plan for
100 percenz reserves banklng and what we now would call orthodox
Seynes:ar.rsm by :he ar.nauntemen= :hat Marriner Eccles, a former
:
a, .. . ~ a n ~ cand
r an asslszanz to Treasury Secretary Morgenthau,
W-..,
s.;==eo5 Euaene Blatic as g~vernor of the Board. Lauchlin
---,-,. a Hayard Unlvers~zyasso=late professor who had been one
r C
=ze loadzng propontzrs of Keynes~an doctrines in the United
S=a:es a= =he time, would move wxth Eccles from the Treasury to the
aoari's Dlvlslon of Research and Statistics to supetvime the
d:v:,s:.oz0s research on monetary policy.
Eccles obtained
R=nsevel:'s
consenr to pursue l n ~ t ~ a r i v e sto centralize the
r.=ne:ary pawers of the Federal Reserve System at the Board.
7
79
'-
- -
F..Cl.
-
g
,
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OUTLINE OF
Background
I.
before 1931 (p. 11
on
American
political
ecoaomy
models
.
How the Hoover adminlstIltion (and the Federal Reserve*
11.
Board) altered the prevailing
classical liberal model, 1931.
.
early 1933 (p. 6 )
111.
.
What the Roosevelt administration (and the Federal
Reserve Board) did to alter Hoover's schemes, early 1933-late 1933
IV.
The First New Deal takes on a corporatist coloration,
with active Federal Reserve.Board assistance, late 1933-late 1934
The Board prepares for the coming
Marriner Eccles
the end of 1934 and becomes a hybrid Chicago Plan-orthodox
'Keynesian shop ( p . 47) .
VI.
Conclusion:
The Board absorbed and reflected the ideas
currenr in Washingron ar the rime (p.. 53).
Appendix:
What Herber:
economy
References ( p .
671
Hoover and Marriner Eccles knew about
clevelandfed.org/research/workpaper/index.cfm
I. Backgrotmd on a m r icaq- polf tical m c o n w modelm
before 1931.
In order to understand properly the significance of the
changes made in the supervision and regrilation of the financial
services industry in the United States during the 19306, changes
that have been undergoing almost constant reexamination since the
early 1970s, it is helpful to study the political economy models
followed by the White House, the Treasury, the Federal Reserve
Board, and mainstream American opinion during the crucial years,
1931-34. The purpose of this paper is to sketch the evolution of
the thought of the Board*s staff during the early 1930s ih the
dire=:ion
of extensive state involvement in the private economy.
Tnar evo1u:ion
was resisted (albeit decreasingly) until 1934, at
leas;
regional Federal Reserve Banks* level.
a:
-,..-,:t=s
---z-
the
Later
bezween the Reserve Banks, their congressional sponsors,
az=
c=her feaeral bank supervisory and regulatory authorities, on
--50
m e i,ar.a, and Marrrnes Eccles, the Board's
staff, and the
execx=rve branch, on the o=her hand, cannot be understood properly
w~=.L..z:z
-- -
s----,a:,
.
res:s=eS
some
background
informa:ion
regarding
the
legal,
and economlz seasons for =he objections of those who
E==les' post-1534 pslicy iziziatives.
p,a=)c3round
Karktr-oriented
economc
o-z==zncs, =haracter:s:~=
policies
of a
classical
and
market-determined
liberal world
view,
orc~nasily were favored at the center of the American political
I
speczrum, from the drafting of the Declaration of Independence
1
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through the election of 2936.
There w e r e comparatively few large-
scale peacetime interventions by the federal government in the
operations -of private
.;
markets
prior
administration.
.
to
Herbert
Hoover's
.
However, the British and continental European experiences with
I
, .
government all^ sponsored or controlled joint stock corporations and
with explicit and covert bailout mechanisms for ucisting private
corporations are quite old.
.The Bank of England (chartered in
1694). the South Seas Company (17111, and the East India Company
(especially after 1763) were all involved in one or another kind of
governmental bailout scheme
(see A. Smith
pp. 441-486 [Book V, Chapter iii] 1
.
[I9761 ,
especially
There were limited attempts,
made by Alexander Hamilton. Henry Clay, and other proponents of
1
large gavernment and of governmental protection and subsidy of
enceqrise, to imitate the European example on these shores
(Peterson
(19871 ;
pp. 198-202).
editor's
notes
in
Lodge
[1904], vol. 3,
But those explicit bailout. protection, and subsidy
scnemes usually were of limited duration and eventually either
faile5 or were abandoned, with the exceptions of the protective
,ar;f f an= =he Land gran:s
to railroad companies in the West during
-
-
,.it
sezand half of the a:nezcenth
pers2s:ed,
cen~ury. fmplicit subsidies
however. as reflected in the monetary standard debate
conceralng gold versus silver interests. creditors (gold) versus
debtors (greenbacks or sliver) , and so on (see generally 'Hicks
119611, ~ p 54-95).
.
m06el
Nonzariff protection crept into the dominant
or political economy via regulatory agencies such as the
.
-
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Interstate Commerce Commission (established
i a 18781, intended to
regulate the railroads and, later, interstate trucking, that were
soon
mcapturedm' by
enough
(Schiming
In
their
regulated
industries
119921 1 .
continental Europe,
there was
a
rising
fascination.
- throughout the nineteenth cexltury with central plaru~ing, with
.
cooperation between government and industrialists, and with social
movements that we now call corporate statism or even, in its postMussolini manifestations, fascism.'
The political economy model
of the corporate state is rhetorically inconsistent with the
classical liberal model that dominated the United States until the
1930s. However, the principal distinctive feature of corporatism,
an explicit partnership between large, incorporated businesses and
the cen:ral
government, rationally could have been expected to
as a distorted version
ernerae
the American
system whose
origins and lnstltutional structures were created by
=.ieore:lcal
.aa.rr.:l:or:
of
and whose strongest proponent was Clay. The most complete
real:za:lon
0.f this system was the governmental assistance to and
,a,- . ,
C,
C , prozec~ron of
perperually chartered corporations under
-
Rcp:tl:=an
a5m~nistra:rons after =he Civil War (see Hicks [1961),
-
p = . 3s S S 1
.
The append:%
:
o
:he
present paper contains further
d ~ s t u s s ~ oof
n the attributes of and distinctions among the various
maaels of political economy.
1
UP-b
-
-
v
r
.no f :=st grand expezrmen: w ~ t ncentral planning in the United
.-'
Szates occurred in wartlme, during years that were intellectually
clevelandfed.org/research/workpaper/index.cfm
formative
for many
principals
administrations,
as
pp.
Initially,
333-3531.
well
as
of t h e
for
Hoover: . a n d Roosevelt
Keynes
(Skidelaky
central planning
and
(19861 ,
procurement
s
operations in the United States for the Western allies during World
entry into the war 'in April 1917, were.
War I, prior to U.S
conducted by the British Treasury through the agency of J.P. Morgan
6r
CO. and a banking syndicate arranged by Morgan.'
,
After the
u.s..
.
*
declaration of war, the War Finance Corporation (WTC) was chartered
to enable the federal government to centralize, coordinate, and
fund the procurement and supply operations.
were
guided
by
an
advisory
The W C 8 s operations
commission and
were
subject
to
"preference listsm (analogous to .production quotas and output
rationing) issued by the War Industries Board, whose chairman wan
(see generally Clarkson (19241 and Todd [1992b],
Brznard Baruch
p p . 23-24).
The four directors of the wFC appointed by President
included W.P.G.
Wilson
Warding, then a member of the Federal
Rosezve Board,.and Eugene Meyer. then a New York investment banker
,
. bu:
lazrr governor (chainnanl of the Board and the first chairman
of :he
Recons=ruc: :on
Haover
(Board
vol. 4 ,
p . 364)
of
.
Finance Corporation (RFC) under president
Governors, federal Reserve B u l l e t h [19181,
Herberz Hoover, =he Belgian Relief coordinator
f = r humanztarian assistance a= the outset of World War I (Hoover
!:?S:!,
:he
pp. 152-2371, was appointed U.S. "Food Czarm (director of
Food Administration in Washington) in May 1.917 and continued to
work in comparable capacities until 1920.
conszan:ly
In those roles, Hoover
had to deal with the WFC, the War Industries Board, and
+
-
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-
the War Trade Board (ibid., pp. 240-2661.
Hoover had several unpleasant ucperiences w ~ t hthe Federal
Reserve Board during the Coolidge administration, under which he
served
as
secretary of
-
commerce (see generally Hoover 119521,
Generally, those experiences involved Hoover8s attempt.
pp. 2 28 1..
to persuade the Board, whose governor (chairman) then was Daniel.
Crissinger, a friend of former President Warding; to refrain from
backing the United Kingdom's
return to the gold standard for
scerling at the prewar parity of $4.86 per pound (1925) and later
to refrain from a U.S.
"easy moneym policy aimed at enabling the
British authorities to maintain that parity, especially after the
spring of 1927 (Hoover [1952], pp. 7-11). Hoover0s later attitude
toward the Federal Reserve System of the 1920s is summarized in the
followlng passage from his memoirs:
.
,
,,singer
was a political appointee from Marion, Ohio,
L -,
-,
,y
oF1
devoid of global economic or banking sense. The other
members of the Board, except Adolph Miller, were mediocrities,
an= Governor (Presidenz) [Benjamin] Strong (of the New York
Reserve Bank) was a men:al
annex to Europe. . I got nowhere
;arsx:ng wi:h
them] . President Coolidge insisted that the
Board had been se:,up by Congress as an agency independent of
:he aam:nis:ra:ion,
and =ha= we had no right to interfere.
(Heaver [1952], p. 9 )
.--
-t:.-.a,ry,. .
an February 1929, Hoover (by then the president-
el?==. persuaded Crass~nger'ssuc=essor as governor of the Board,
undertake
kn3wr.
as
course
"direct
jawboning" or "moral suasionm) to dissuade banks from
leni~ngfunds for "speculat~ve
" pu--poses , but a general increase ia
= h e ' ~ ~ s rrate
~ ~ or
~ : :he New York Reserve Bank's buying rate for
bankers* acteptances (precursor of the modern federal funds rate)
-
clevelandfed.org/research/workpaper/index.cfm
would have been the preferable operat-1
fnstrument (see ibid.,
pp. 16-18; Friedman and Schwartz [1963], pp. 254-2661, A8 a u l y in
his administration as midyear 1929, H o w e r 8 s iateractioam with
...
Governor.Young may have contributed substantially..tothe widening
of the division that had existed since
1927
-tween
the opiniom.&f
-
the Board and its staff , on the One hand, and some of the.Federal
Reserve Banks, on the ,other hand, on the issue of increasing the
.
discount rate, a matter that ultimately is in the hands of the
Board.
'
action,
The Board acquiesced in Hoover's
preference for "direct
a form of credit rationing, while
'
the evidence of
subsequent behavior, especially during early 1932, suggests that
the New York Reserve Bank preferred to operate through an interestrate target or other open-market methods (see Friedman and Schwartz
!1963], pp. 411-418;
Epstein and Ferguson (19841).
There is at
least some evidence that the Board' s staff, prior to 1931, did not
disagree with the New York Reserve Bank's staff as much as some
writers have contended regarding the potential efficacy of openmarket
operations.
However, substantial differences remained
bezweer. =fie Board under Hoover (which apparently was trying to do
Hoaver's bidding) and =he governor and directors of the New York
Reserve Bank.
19)
On this point,
wrth Epstein and Ferguson
compare Hoover
((19521, pp,
16-
(1984).
How tbe Hoover adminimtration (mad the Faderr1 ~ i m r r v r
altered
the prevailing
clammical liberal modal,
1931-early 1933,
If.
Board)
I
As already has been seen, favoring direct action over open6
.
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market operations constitutes a policy choice appropriate to a
positivist or interventionist political economy model
and is
inappropriate to, or at least rhetorically inconsistent with, a
classically liberal
(negatfve
liberty) model.
~ u ttoo many
conclusions should not be drawn from this single piece of evidence
regarding Hoover' s political economy models.
Board's)
actions
during
1931
and
for the
Hoover8s (and the
remainder of his
administration provide solid evidence of a growing trend, first in
the direction of mildly interventionist measures such as jawboning
industrialists, making currency support loans to foreign central
banks, and organizing syndicates of bankers willing to lend funds
to troubled banks.. Those trends subsequently emerged into fullblown governmental subsidies of the financial services industry,
railroads, and relief operations for the states.
These latter
measures began to approach, but were not yet entirely consistent
w ~ r f . . , :he
measures that one would expect to find in a corporate
szaze. Thaz consis:ency
but
even
dcl:aoza=:vt
then
was
emersed later, during the First New Deal,
not
attributable
to
conscious
~rxesses
.
'I'xver's relazlons w1:h
rearhe= a tcmlng poln:
ar=as:=r.a:
always
n
bankers and the Federal Reserve
Kay 1931.
Un=il then, apart from
lezter-wrltlns and other jawboning exercises, Hoover did
no:
zake m d ~ r e c tactionm of his own against banks or the Fed after
=fie
O = = s S t r 1929
crash. f = 1s particularly noteworthy, in light of
his s~bsequent clashes wlth Meyer and the Board's staff, that it
was Hoover who selected Eugene Meyer as governor of the Board in
clevelandfed.org/research/workpaper/index.cfm
September 1930 after Roy Young r e s i w to become governor of the
Federal ~ e s e m kBlnk of ~ o s t o n (E~&&~merve
R I ~[1930],
W
vol. 16, pp. 535, 615).
On May
7, 1931,
Hoover learned of the dire e c o n 0 ~ carrd
political circumstances in Gernuny (analogous to those of Russia in
1993) and apparently promised some form of 0.S.
assistance to
support "the efforts of liberal -minded men in Germany, Austria, and
Eastern Europe to sustain their representative governments against
the political forced besetting thema (Hoover (19521, p.
65).
Around May 13, Hoover learned . of the extraordinary efforts being
made by the Federal Reserve Bank of New York, foreign central
banks, and some of the large New York banks to prevent the collapse
of the inte-=national interbank payments system that was threatened
by a run on i h e gold and foreicn exchange reserves of Kreditanstalt
of Vienna, Ausrria's
largest bank.
Subsequent investigation
persuaded Hoover that the European banking system was afloat on
sea of kzted bills of exchange i d . , p. 7 5 )
a::itu5e
.
8
His distrustful
:oward the Board at that time is revealed in the following
passa2e from k:s
menalrs:
0: Kay 2O:h.
I called in Federal Reserve Board officials to
=:szuss our threazened economy. They intimated that I war
seeing ghosts so far as the Unlted States was concerned, and
5ctlared tha: no:k:ng
was oolng on that they and our banks
could not easily handle. (Ibad., p. 65)
By June 10, Treasury Secretary Mellon, who also was ex-officio
cha:rnan
of the Board, reversed his earlier position against U.S.
official
assistance
to the European central banks as *s
on gold
and forelgn exchange reserves spread into Germany (ibid., p. 6 8 ) .
8
clevelandfed.org/research/workpaper/index.cfm
The central banks8 loans were coordinated thzrough the Bank for
International Settlements.
The Resenre Banks lent $1.08 million
for Austria on May 30, $2 million for Hungary on June 19 (increased
to $5 million on July a ) , $25 million for Germany on June 26, and
5125
million for the Bank of -gland
on August
Governors,
.&mual Reuor€ [19311 , pp. 12-13)
-
1
(Board of
:
.
On June 5, 1931, Thomas Lamont, a J.P.
Morgan partner,
telephoned Hoover and proposed a suspension of international
payments for World War I debts and reparations.
Hoover initially
rejected Lamont8s advice, but Lamont8s files apparently show that
Lamont told Hoover that, if he would adopt Morgan's plan,
bank would hide its role and let Hoover take the credit:
your [Hoover's1 plan and nobody else's'
Fergusm
(1984)
[Tlhe
'This is
(Chernow [19901, p. 328)
.
has found evidence that Hoover's diary entries for
June 1431 subsequently were altered to make it appear that, in
fa=:,
no one but Hoover was responsible for this idea.
Sy
June 21, Hoover. adopted the Morgan plan and issued a
szacemenc proposing a one-year moratorium on all intergovernmental
deb: payments, succeeded on July 20 by a proposal for a six-month
s=ar.as::l:
'agreemen: among commertial bankers with respect to bills
cf exchange payable by banks located in Central and Eastern
European countries.
Hoover found the Board of little assistance
--
d..-.-3s this crisis, and he also found the New York Reserve Bank and
zne large commercial banks obstruc:ionist
July
20
with respect
standstill agreement (Hoover [19521, pp. 73-80)
=hen asreed to encourage :he
to
.
the
Hoover
Reserve Banks8 and commercial banks8
.
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--
-
'
- '
clevelandfed.org/research/workpaper/index.cfm
At the bankerso request, Hoover &af ted a letter on October S ,
1931, to George Harrison, ,governor of the New York Renerve Bank,
explaining. the proposal to establish the NCC
printed ibid., pp. 86-88)
.
(text of letter
Hoover saad hi-6purpose was to make a
request "for cooperation in unity of national action to assure*
credit security
. . ."
(ibid., p. 86). which could be fairly
characterized as a corporatist objective to be .achieved through
jawboning the private sector into doing what
o:herwise
would feel compelled to do.
the government
On October 6, Hoover met
with congressional leaders to discuss both his plan for the NCC and
his intention to recharter the WFC if the NCC did not suffice to
relieve the increasing illiquidity of the banking system. Hoover's
memoirs describe those leaders as "shocked at the revelation that
our government for the first time in peacetime history might have
co intervene to support private enterprise," in that case by re-
.crea=ingthe WFC as the RFC (ibid., p. 9 0 )
.
9u: aoover was hardly alone in advocating corporatist measures
in response to the European and especially the British paymcnts
crises of 1531. The Amerlcan Legion's annual convention, which met
:r.
Dtrra:
Walzer
on September 21-13, 9 3 1 , adopted resolutions that
2ppmann characterlzea as follows:
I f 1 hey would like ro see a strong central agency, like 8
revlvlfied Council of Nazional Defense [from World War I],
=ake the situation ir. hand. They do not expressly say, but it
2s lmplxed, that they would like the President and the Council
= O assume war powers and somehow to dictate national action to
Dvercome the depression. (Lippmann [1933], p. 30)
Lippmann also commented favorably upon a speech on "industrial
planningm given September 16, 1931, by Gerard Swope, president of
clevelandfed.org/research/workpaper/index.cfm
General Electric, proposing that the atitrust laws be amended or
suspended with respect to the electrical manufacturing industry,
then considered a . comparatively new,
oriented,
high-technology
industry,
cutting-edge, research-
"relatively
free
of the
accumulated bad habits of the older type of industrial management, l .
in' order to permit
planning"
for
that
the
individualismm in that
industry to "substitute cooperative
muncoordinated,
industry
unplanned,
(ibid., p.
.
disorderly
.
37-41)
swp8s
proposal, of which Hoover certainly would have been aware, through
Lippmann's newspaper columns if not directly from Swope, called for
a demonstration project to find out whether restrictions on intraindustry competition, inforhation-sharing,,and federal control of
prices could be combined to ensure greater stability of employment
and wage levels in the electrical industry.
Essentially, it was
propased "that the industry no longer operate in independent units,
bu= as a whole, according to rules laid out by a trade association
of which every unit employing over fifty men is a member
--
the
whole supervised by some Federal agency like the Federal Trade
-
.
Comm:ssronn
(Tarbell [ 1 9 3 2 ) , p. 2 2 8 ) .
Uniform accounting systems,
ir.f3zna::on
exchanges, and employee insurance plans also were to be
r e ~ x : r e d of each concern in the association (ibid.).
These are all co,-poratist ideas. Lippmann gives this analysio
of them:
[Olne cannot have industrial planning without a highly
cez=ralized con=rol of production and of prices.
What
:s more, it is, I rhink, beyond the wit of man to devise 8
system of planned industry which does not imply it.
Cenrralized control is of the very essence of planning. For
how else can "a planm be put into effect?
Planning
...
...
clevelandfed.org/research/workpaper/index.cfm
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clevelandfed.org/research/workpaper/index.cfm
proved inadequate, "the bankers agrred to go along with that
understandingm (ibid.).
Once the NCC was established, with the public support of New
york Reserve Bank Governor.George H~arrisox~,~
Meyer again took the
lead in persuading Woover that the NCC mwas not big enough or
strong enough to do what was neededm b
i
d
Pusey described
Meyer's argument to Hoover as follows:
1f we take the assets of the strong banks and freeze them in
we will make things worse, not
slow loans to weak banks,
Only
better.
The strong banks should be kept strong.
governmental action can fill the vacuum,
and it ought to
be taken soon. (Ibid.
...
...
Pusey then related the subsequent events:
Since neither the White House nor the Treasury initiated any
move in that direction [rechartering the WFC] , Meyer asked
Board, to review
Chester Morrill, secretary of the
pertinent legislation of the past and to write a bill for a
new lending agency with broad powers to stem the tide of the
depression. Board [~eneral]Counsel Walter Wyatt and Floyd R.
Harrison [assistant to Governor Meyer] also worked on the
blll.
[Pursuant ro Senate Democratic Leader Joseph T. . .
Robinson's request, the Democrats] .
. would support the
b ~ l lif Meyer wro=e ~t and ran the agency. Hoover agreed to
t h ~ s . The [RFC] bill was then modified to include the
governor of the Federal Reserve Board as an ex-officio member
[and chairman] of the RFC board of directors. The-finished
draf: went to Capitol Hill
not to the White House. (Ibid.)
. . .
.
--
Both Harr~sonand Morrill were appointed to their positions during
the ac:umn
1931 crisis, Harrison on September 16 and Morrill on
0c:ober
(Federal Rescrvc Bulletin (19311, vol.
wya:t,
7
17, p.. 5 5 7 ) .
who later drafted the narional bank conservatorship and
preferred srock purchase provisions of the Emergency Banking Act of
March 5 , 1933 (Jones [1951], pp. 21-22; Olson (19881, pp. 37-40),
ha$ loined the Board's legal division .in 1917 and had been the
Board's
general
counsel since October 1922.
Because of his
.
clevelandfed.org/research/workpaper/index.cfm
experience during World War I, Wyatt- war familiar with the WFCas
legal structure and operations and became a regular legal adviser
to the RFC while Meyer wad associated with it.
Governor Meyer became the Hoover admiaistration's principal
advocate of the RFC bill, appearing at Senate 'hearings as the first
- witness on December 18, 1931 (Pusey 119741, p. 217). Meyer and the
Board's staff clearly wanted the RFC to have extensive powers of
the type that it later acquired during the New Deal.
'
As Pusey
describes it, 'Senator Glass told Meyer that he was asking for more
power than any man ought to have, but the latter replied that he
had no interest in power for its own sake; power was important only
as it advanced.the country toward .recoverym (ibid., p. 218)
By :he
.
time the RPC Act was enacted on January 22, 1932,' Hoover
had besun to lose his classical liberal inhibitions regarding
aovernmental interference in private enterprise at an accelerating
ra:e
even according to the historical account most favorable
bu:,
=o Moyer and the Board's staff, also had begun to concentrate on
prevenzing Me.yer from dominating the RFC (ibid., pp. 218-219).
Dur~ng the RFC's formation, Meyer was a "human dynamom who
"refused to :ake
23:~
:he
RFC.
no for an answerm from the persons he was inviting
HLS wafe. Agnes Meyer, made the following diary
ezzry durlng this perlod:
'1
know the whole Wash. crowd consider
Eugene unbearably dictatorial but I doubt whether a really great
intellect ever gets anywhere with
p. 214).
soft wirdsa (Pusey 119741,
.
clevelandfed.org/research/workpaper/index.cfm
Meyer seems to have consciously at-tempted
to duplicate the WFC
in its business locations and arecruited WFC people +o staff the
RFCm (Olson I19881. p. 15).
For exa&leo
Meyes recruited Leo
Paulger, a banker with the WFC, to staff- the RFC's examinations
division.
Paulger, in turn, "drew up a list of bankers who had
'assisted him with the WFC in the 1920s and recruited many of them
to stafi local wc officesa (ibid.; Bee also Simonson and ~e-1
.
I19931 )
The principal p t r s o ~ e lcoordinators for Meyer at the RFC
were two of his mainstays at the Board
Chester
.
orr rill (Pusey (19741,.p. 219).
--
~lc&d Harrison and
Still, Hoover and Meyer
clashed several times during 1932 on both tactics and strategic.
direction, with Hoover attempting to politicize the RFC somewhat
through measures that included Whice House appointments of RFC
Meyer organized banking and
Peaera1
agair."
committees
the
Reserve distric:~ "to help the economy get into motion
in May-June 1932, with General Eleccric chairman Owen Young
sgrving as the chairman of the New York district's committee (see
ibid., p. 222; Pedrra! Reserve Bulletin 119321, vol. 18, pp. 4168
.
:x?e=:s
The Board'sk for the forma:ion
([19321, p. 221, describes the
of these committees (which on their face
would seem to be superfluous because their members were drawn from
:he
same pools of men who served as Reserve Bankso directors), 7
Acc~riing co that account, the Board's concern (ostensibly shared
by :he
Reserve Banks) was =ha= "steps should be taken to enlist the
coopera:lon
of bankers and business men in an effort to develop
.
-
clevelandfed.org/research/workpaper/index.cfm
ways and means of making effective+se of the funds which were
being made available by the open-rmrket operatione' of the System. a
The Board apparently intended that the c o d t t e e s would conduct
surveys in their districts with-the purpose of detecting what now
would be called "credit crunches,a that is, determining "to what
extent legitimate credit requirements of commerce, industry, and
agriculture were not bting supplied on account of a lack of banking
facilities or for other reasons, and
, , ,
acquainting prospective
borrowers with possible sources of credita (ibid,1
.
By July 1932, Meyeres health began to fail, and the strain
associated with enactment of the Emergency Relief and Construction
ACE of July 21, 1932 caused him, at the urging of his wife, to ask
Hoover o
:
have legislation enacted.that would remove the governor
of =he Board as ex-officio chairman of the RFC, while enabling him
rezain his position as governor (Pusey (19741, p. 225). Another
:o
RFZ-related strain that undoubtedly caused some deterioration of
Meyer's health was the collapse of the Central Republic Barik of
Chicagc in June 1932:
presrden:
of the RFC
The family of Charles Gates Dawes, the
(and former vice president of the United
Szazes morr Cool~oge),owned a contralling stake in the bank, and
.-
,
,
b--,-,owed
S90
milllon from the RFt to stop a run.'
Alzhough it is now purely con)ecture on my part, it would not
be szrprislng eventually to find documentation indicating that,
amons ozher factors causang Mr. Dawes to turn to the RFC instead of
=he Feieral Reserve for credit, the personal tensions between Meyer
I
I n h ~ capacity
s
as gove--nor of the ostensibly nonpolitical Board
17
'
clevelandfed.org/research/workpaper/index.cfm
and Dawes a s wHoover's mana at the REC woadd have made a Federal
R e s e ~ eloan nearly impossible. Support for this conjecture m y be
inferred from the following reference in Pusey:
s-
Everyone connected with the -1Dawesl loan seemed to be k e d y
aware that it would be embarrassing to the ~epublicans. .
Yet Meyer made no apology f or it.
In fact the Dawes
loan had been recommended by two Democratic directors of the
RFC [ Jone6 and ~ c ~ a r t h y ] (Ibid., p. 224)
. ,.
...
.
he ~ o a r dunder
of
the
Hoover
eyer actively participated'in the.enactment
administration's
emergency
financial
rescue
legislaation during 1932, and also supported establishment of the
NCC and the RFC.
The published sources provide evidence that t u s
legisiation was drafted and promoted mostly by the Board and its
staff, not the Reserve Banks, although some of the Reserve Banks
may have supported it.
The emergency legislation of 1932 included the first GlassSteagall Act, the Act of February 27, 1932, Public Law No. 72-44, .
which added Sections 10 (a) and 10 [b) to the Federal Reserve Act to
author~zethe Board, in unusual and exigent circumstances and when
approved by at least .five of the eight members of the Board, to
allow rediscounts for groups of member banks and to allow member
banks = o borrow for up to four months on the security of ineligibl~
paper
(
~nzludinggovernment obligations). The first Glass-Steagall
Acr aiso amended Section 16 of the Federal Reserve Act to allow
Reserve Banks to pledge aineligiblea government obligations to
seczre issues of Federal Reserve notes.
Previously, only gold and
"real billsm could be used under Section 16.'
8
clevelandfed.org/research/workpaper/index.cfm
The administration's
rescue legislation also included the
Emergency Relief and Construction Act of July 21, 1932, Public Law
NO.
72-302, [Section 210 of which added Section 13 (3) to the
~ederalReserve Act] to authorize five of the eight members of the
Board, in ~ ~ n ~ ~ sand
u a exigent
l
circumstances, to allow Reserve Banks
to
discount
neligiblen paper
(real
bills
and
government
obligations) for individuals, partnerships. and corporations (see
Todd [1993]).
In this case, interestingly, Meyer and the Board
were willing to allow the Reserve Banks to accept a role of credit
inremediation that involved. their dealing directly with the
general public, while Hoover, only ten days earlier, had vetoed a
prior version of the bill that provided for the RFC. but not the
Reserve
ganks,
to make
loans to
individuals.1°
Five
days
afterward, the Board issued a circular finding that the required
unusual and exigent circumstances existed and authorizing the
discaunts for up to
s ~ xmonths
(later extended
until
1936).
Xazkiey ( i ~ 9 7 3 1 ,p. 129) notes .that the "Board lost no time in
=m~-e-ez:: ng the s:a:u=e,"
apparently because it was then felt
tna: bus~ness concerns and individuals needed such credit.l2
-.
,ne
A=:
seeds of both the second Glass-Steagall Act (the Banking
=f June 16, 1933, PubLlc Law Na. 73-66),I2 and the Emergency
Banic~ngA c t of March 9, 1933 (Public Law No. 73-1)," were sown at
a Marc5 29, 1932 Senate Banking and Currency Cormnittee hearing on
S. 4115, which Senator Glass had introduced twelve days earlier.
Goverzor Meyer testlfled aurlng the hearing on S. 4115, and the
Board's staff prepared a lengthy memorandum for his testimony,
.......
.
.. .
clevelandfed.org/research/workpaper/index.cfm
which mainly consisted of objectioru U the bill (-a1
Rc*rrvg
in light of later controversie~is the Board,s statement that
[TJhere is already in existence an apm-market committee on
which each of the Federal reserve banks has representation.
This has come about as the result of natural development. The
board believes that it would be inadvisable to disturb this
development by crystallizing into law any particular
procedure.
The board believes that nothing further is
necessary or advisable at this time than an amendment
clarifying its power of supervision over open-market
and their
operations of the Federal reserve banks
(Ibid., p. 206)
relationships with foreign banks.
...
The Systemns Federal Advisory Council also testified in strong
opposition to the Glass bill but favored the creation of the
"liquidaring corporation," the ancestral conception of the FDIC,
stating:
-
[SJuch a corporation as is proposed should be financed
encirely by Government money, as is intended to be done in
tne case of nonmember banks. . . . In no event does the
council believe it proper to require member banks to furnish
the funds needed for such a corporation without at the same
zime giving the member banks control of such a corporation for
w k r h they are to furnlsh the capital from out of their own
zesxrces. The council furthermore suggests the possibility
of havlng the ac=iv::ies
of [the] . . . corporation taken over.
by :he [ R F C J . (Ibid., p. 223)
Ir. rhe course of =he hearing. Governor Meyer was asked whether
ir
,
,
w 3 ~ l d be advisable t 3 "unifym the banking system under federal
superv:s:an
and
regu1az:on
(presumably at
the Office
of
the
Comp=roller of the Curzency), eliminating the bank chartering and
s:perxe:scry
roles of the stares. and he offered to have the Boardor
szaff prepare a memorandum on =hat topic.
The Board's
general
cocnsel, Walrer wyazz, submizted that memorandum to the .Board on
December 5. 1932. while Hoover still was in office.
20
The Wyatt
clevelandfed.org/research/workpaper/index.cfm
-
memorandum strongly favored nationalization o f the chattering,
supervision, and regulation of banking.
It was publiuhed i a March
1933 as wConsritutionality of Legislation Providing a Uaified
commercial Banking System for the United Statesa (redera1 Resemg
pullem
[19331. vel.
19, pp.
166-186).
This memorandum was
associated with the preparation of the Emergency. Bank Holiday
p roc lama ti on
of
March
.
6,
1933
id.,
pp.
113-1141,
which
restricted to the Secretary of the Treasury the power to authorize
the performance of usual banking functions during the holiday.
AS Meyer*s biographer describes it, at some time before the
banking crisis became acute, probably between December 1932 and
February 1933, the Board
nhad its counsel
[Wyatt] prepare an
executive order declaring a national bank holiday, to be used in
case of necessityn (Pusey 119741, p. 2 3 4 )
s:a=u:o,zy
.
Wyatt derived the
authority for proclaiming the president * s emergency
powers from che Trading with the Enemy Act of World War I (Olson
[19881, pp. 3 0 3 1
--,,o=lama:ron
Meyer and the Board felt strongly that the
was necessary as the state bank suspensions gathered
momo,r,:un, rn the weeks prior to che inauguration of Franklin D.
Roasovel:
as presrder,:
(March
4,
19331, and they were frustrated
-,.,a:
iiaaver seemed :.?=lined only toward the milder remedy of
l:a::rng
wirhdrawals of currency and gold (Pusey [1974], p. 234).
i
Hoover became quite angry at Meyer and the Board during the
last
two weeks of his adminisrration because the Board kept
pressing
upon him
he idea that he should issue the stronger bank
holiday proclamation and kept rejecting Hoover's idea of an 80
clevelandfed.org/research/workpaper/index.cfm
percent federal guarantee of a l l d c p o ~ i t sto atcm withdrawals and
restore confidence (Hoover [1952], pp. 210-2131
.
Rroey describes
the situation as follows:
"By this time H o w e r o s enmity toward
Meyer was painfully evfdent.
..-
Once m o r e . the Resident and the
board were operating on different wavelengths* (119741, p. 234).
Hoover*s memoirs state, in connection with this period, that he,
- .
"concluded it [the Board]. was indeed a weak reed for a nation to
lean on in time of troublea
(
119521 , p. 212)
.
Hoover was willing to entertain the notion of an emergency
proclamation limiting withdrawals, but only if Roosevelt authorized
him to say that the president-elect also approved of it. A request
to that effect was transmitted to Roosevelt on February 1 8 , 1933
(ibid., p. 215).
action
before
he
Roosevelt was unwilling to authorize such an
was
politically
accountable
for
it
(no
*'responsibilitywithout powera) and also was annoyed with Hewer's
demand thac Roosevelt renounce "90k of the so-called New Dealm as
H~ovcr's price f'or bearing the onus of issuing the proclamation
( S c h l e s ~ n ~ e[19591,
r
p. 4 ) .
s:ill
:s =he pu:ative
of t h e
s=atu:ory
federal governmen:,
emeryezcy edifice.
The Trading with the Enemy Act, which
basis of numerous emergency powers
was a
suspect foundation for the
As Hoover wrote:
f had consulted our legal advisors as to the use of a certain
unrepealed war power over bank withdrawals and foreign
exchange. Most of them were in doubt on the ground that the
lack of repeal was probably an oversight by the Congress, and
un5er another law, all the war powers were apparently
terr.;na=ed by the peace. Secretary [of the Treasury Ogdenl
k l l s and Senator Glass held that no certain power existed.
There was danger that action under such doubtful authority
would create a mass of legal conflicts in the country and
would xncur the refusal of the banks to comply.
I then
.
clevelandfed.org/research/workpaper/index.cfm
developed the idea of my insuing an executive order under this
power, provided Roosevelt would- approve. M y legal advisors
agreed that, if he approved, it could be done becrume he could
secure ratification in r few days from his overvhelming
majority in the incoming Congress. (Hoover [ 1 9 5 2 ] , p. 205)
Another telling indictment of the legal, as distinct from the
political, basis for the emergency proclamation that the Boardns
general
counsel prepared was
the
following exchange between
Roosevelt.and Senator Glass in Roosevelt~shotel room at ll:30 on
the night before the inauguration:
[Roosevelt]: [Hoover says that the Board has asked hjm twice
within the last three days to issue an emergency proclamation,
but I told him that the governors of the states can take care
of bank closings.]
[Glass]: "Yes, I know. "
[Roosevelt]: "The previous time [that the Board asked Hoover
for the proclamation]. I sent [incoming Treasury Secretary
William] Woodin to [outgoing Treasury Secretary Ogdenl Mills
to tell him I would not give my approval to such r
proclamation.'
,
w I see. What are you planning to do?" asked Glass.
"Planning to close them, of course," answered Roosevelt.
l'You will have no authority to do that, no authority to issue
any such proclamation," protested Glass.
"It is. highly .
questionable in my mind if you will even have the authority to
close national banks
and there is no question, at all, that
you, even as President, will lack the authority to close banks
chartered by the s:ates."
" i will have that aurhoriry," argued Roosevelt.
"Under the
Enemy Trading Act, passed during the World War and never
rescznded by Congress, I, as President, will have the
authority to issue such an emergency proclamation 'for the
pcrpose, * as the A=: says, 'of limiting the use of coin and
currency to necessary purposes.'"
n ,
, 2s my unders=and:ng
=hat President Hoover explored that
avenue a year or two ago
and again during recent.days,"
sald Glass.
"Likewise, :1 is my understanding that the
Aztorney General ~ n f o m e dhim that it was highly questionable
: f , even under thls ac:, though it has never been rescinded by
Congress, the President has any such authority.
Highly
questionable because the likelihood is the act was dead with
=he signlng of the Peace TreaEy, if not before.'
"My advice is precisely the opposite.'
"Then you've
go:
some
expedient
advice," returned
Glass. .
[Glass then argued that the courts would find
the proclamation unconstitutional because it would require the
--
+ -
--
. .
clevelandfed.org/research/workpaper/index.cfm
unwarranted closing of solvent banks and because, even if all
the banks were known to be insivent,] "1 am sure such a
proclamation could not legally include banks chartered by the
states. a [Wyatt s written opinion of December 5, 1932, argued
just the contrary, that the federal governmat could close
state-chartered banks.]
~ N e ~ e r t h e l e s sdeclared
,~
Roosevelt, "1 am going to issue such
a pro~lamation.~
convinced though he [~lasslwas there had been no need for
closing the banks [Glass believed that only insolvent banks
could not withstand the
of February-March 1933) and
certain, too, the president was withwt constitutional
authority for his act, those coavictiorm were lost causes.
(Smith and Beasley (19721, pp. 341-343)
...
Hoover writes in his memoirs that if Roosevelt really believed
what he told Senator Glass late on March 3, then he should have
joined Hoover in issuing a proclamation limiting withdrawals and
issuing the 80 percent guarantee of deposits to avoid closinq the
banks:
"But closing the banks would be a Bign the country was in
the ditch.
It was the American equivalent of the burning of the
Reichstag to create 'an emergency'"
(Hoover (19521, p.
214).
However, as noted in the earlier discussion of the measures taken
f =om
the fall of 1931 onward, it was Governor Meyer and the Board's
szaff who
led = h e
way
in
finding
reasons
for proclaiming
emergencies and for pushing forward -the boldest emergency relief
schemes, against the recalcitrance of Hoover, who went along with
,.
m.. -h :ha:
he should no: have but retamed to the end the capacity
to discern excess where the Board apparently did not.
111.
Wart tho
R e m e w e Board) did to
Roomcvelt rdminimtrrtion (aad tho Imdaral
alter Boover' mchumsm, marly 1933-lrtm 1933.
As is generally known, one of President Roosevelt86 first
official acts after taking office on Inauguration Day (Saturday,
>-,.
clevelandfed.org/research/workpaper/index.cfm
March 4, 19331, was to proclaim an emergency, three-day, nationwide
banking holiday, signed and effective Monday, March 6, Late in the
preinaugural banking crisis, on March 3, the-Federal Reserve Board
and the New York Reserve-Bank's. Governor.-Rarrison had agreed that'
the ~ o a r dwould issue an order closing all the Federal Reserve
Banks. New York Governor Herbert Lehman, at the urging of Governor
Harrison, also agreed to proclaim an emergency bank holiday in New
York, and a similar action was taken i n Illinois.
Thus, the Board
had placed first Hoover and then Roosevelt in a position in which,
as a practical matter, the president could not allow Monday to
arrive without some kind of emergency proclamation (Pusey (19741;
These extraordinary actions tended to intensify the crisis
armasphere. As Schlesinger writes:
Wherher revolution was a real possibility or not, faith in a
free system was plainly waning. Capitalism, it seemed to'
many, had spent its force; democracy could not rise to
ez~nomiccrisis. The only hope lay in governmental leadership
.of a power and will which representative institutions seemed
:zp:en=
to produce. Some looked enviously on Moscow, others
on Berlin and Rome. . . . (Schlesinger (19591, p. 3 )
Sena:=rs
Cas:~gan
Cu:ting
(Colorado)
a==:.rr.ss=ra:ion,
=he
(New Mexico), La
if no:
urged
:he
Follette
Roosevelt
to
(Wisconsin), and
nationalize
the
ownersh~p, of the banking system, but
president decided not to do so because of assurances of
bankerso cooperation with his New Deal reform plans (ibid., p. 5 ) .
He 1:mi:ed
his initiative in thxs respect to federal control of the
li=ens=ng procedure
for
reopening
banks
after
the
holiday.
~i~resentative
Hamilton Fish of New York, after Roosevelt @ s first
clevelandfed.org/research/workpaper/index.cfm
' e z ~ r o q a n *oa popuouxe son a ~ 6uryueg
y
Kaua6sau13 aya ' E E ~ T ' b z q x e w
a
l o mr6aq a
selrtaofarut asoqa j o Kueu
QUP
'sKeq paxFt'nH auo
- p a u o ~ a r d3 a aqa pue (aay aqa 30 11 a l 7 ~ =ay
~ ) uoTaenrasuc2 w e e
lo3fPM
*pZPOB 3
UOlg
'papnput
aeqa srasrApe uotaerzstuturpe
SEA
q ~ r JO
w asy
6 u ~ y u a ahuo6raw3 aqa 'asoa Kue ux
..
msaua~au o f f i u ~ q s e ~
Xtorodataauoa 30 a x a a u o ~aqa u~ B u ~ s ~ r d x naeqa
s
TTP uaaq aAeq aou
tseaf 70 uaqa JO
3O > 9 6 ? ~uF
a q x n u- a
.
a108
'suo?aelrouq
'am3 o = = a m z p
-0
T P ~ T ~ P JO
X
asuozoadde aq&
* (Zzz-Oz'E 'dd ' 6 ~* l O A * [cc6t] )
aqa t q f ~ n 3UT p o a u ~ r d ST ;uo~aena?s
clevelandfed.org/research/workpaper/index.cfm
for up to one year, Reserve Banks8 l g a m to m y nonmember bank on
meligiblem collateral under Section 13 of the Federal Reservt ~ c t
thorough examinationm of
and, after inspection of collateral and
the applicant, to any nonmember bank on ineligible collateral under
the then-current version of Section 10 (b) of the Act, which still
required a finding of atanusual aird exigent circumstancesm by at
least five governors of the Board
R e ~ o r t(19331, p. 266)
.
(Board of Governors,
,
m a '
The Treasury issued numerous regulations,
licensing orders, and statements regarding the banks throughout the
month of March, and most, if not all, of them were drafted or
cleared for issuance by the Board's
B u l l e t i n [1933), vol
was
slightly
. 19, pp.
more
122-1331
enthusiastic
staff (see Federal Reserve
.
As evidence that the Board
than
the
Reserve
Banks
for
compliance with the new order of things in Washington, the March
(ibid.,
reports that
March
the
Board asked the Reserve Banks to prepare and forward a list of all
persons. wno
had withdrawn gold or gold certificates from the
.
.Reserve Banks or from member banks since February 1, 1933, .and who
ha5 no= redeposited.
ex:enoed
;are=
-.-.eser\*t
,,..-
6 ;,
,
-
W.
,..
from
had no ob]ec:ion
nanmember
banks
and
to obtaining similar
infomation
regarding
:he Board an= :he Roosevelt administration intended to do
, i z z e znf o,ma::on
C
1
:
"The board also advised them [the
awals prior to Fekrzary 1" (ibid.1 .
Nka:
W.
ln a bank on or before March 13, 1933,.
to March 27.
B a n ~ s ] :ha=
~zi=rsa:zon
1
:
abou:
Or: April 5, 1933, Presiden:
gold withdrawals soon became evident.
Roosevelt issued an executive order
'
'
clevelandfed.org/research/workpaper/index.cfm
02
'suofaaesueta p ~ o 6' S ' Q ~ ~ J ~ J paa3aj;e
J J O
aeqa ptAeq due3 le sauaha
T161 3 S d n ~
aqa 6uf~opeqseroJ -X;,'nseor~
aqt uox; osuaary e lnoq=?M
'aunoaae u6torog roj p ~ o 6a?asauop 7;euea
oa ro 'sa=e=t.;:=zaa
w o s aeqa jo Xa?xoqane atfz xapun 6ur-,exado ' ~ ~ 6' 0 7
2 y;rd~ CC
(
. d " p ? q ~ ) -Xra~o=ar
p2UnOa o 3 p U o s 30 r o ~ o dsaj 01 sppe azn:=nz=s Sutyueq aq: ;a
6uyuaqa6uoras raqarnf syq~. 'ztpas3 pue K=ua;zna ro; stseq e
rr s a u o s a? squeq o ~ o s a rprapaj oqa ;o qaoas oqa oa pappe
u a u -*soaueaswnat?~
auosard rapun asodznd yn;asn ou sar\;as
sprooq a a e n ~ r dU'F:ploq ~ 1 0 3 -repro aqa Aq parnssk. st s ~ q z
PUP 'hu06roua s?qa UT awes aqa aq pynoqs pyo6 oa eauarajar
q3.m stnztl?a
jo aanpuoa aqa 'ssaurreg u1
-puodsaz us
70U pyp'oqm sroqao aroM azaql ' ( 8 q=reW zaxje] p ~ a 6x?aq: u r
po-na A ~ f n g d ~ apup
q Alrteaunfon suozrars rno go Auew a ? ~ q [ ~ l
: s n o ~ ~ osa
3 ponuyuoa auauaaeas ssard s,Arnsaora aq&
'
ST
'd
uooq
.KO
u o f a m q a o z d A e p ~ ~ oyueq
q
hua6raua s,auap?sotd oqa rof sfseq
03 PTaq
ZaaTeM leqa LT61 ' 9 roq0330 30 33Y Auaua eqa
' ~ ~ P
aaqa
~ otog paara Aarroqano o q ~ , *sTonpFn?puT rog 001s ueqa
mzg ~ ~ T ~ T O ~aga
N ~ssT-pauTaop
M
som .8uyp~oo~, *rCuo~agprapog e
303 saya~uuodaqa 'auouuosfrdq ,ssoort OT aa dn ro
ooo.'ors
oa dn go
clevelandfed.org/research/workpaper/index.cfm
-
this April 1933 proclamation marked the end of the U.S.
gold
standard for.private international transactions. .On April 29, the
Treasury issued regulations governing domestic purchases of gold
for industrial, professional, and artistic uses and the exportation
of gold-(ibid., pp. 266.269).
pressed by political demands "for inflat-ion," l q e l y from "a
few crackpot congressmenand senators
. . .,.a few businessmen and
farm leaders organized under the title 'The Committee for the
Nation,' and a couple of starry-eyed monetary experts," Roosevelt
acceded to the demands of the inflationists on April 18 and 19 and
decided to block private exports of gold before announcing his
public acceptance of the inflationary provisions of Title I11 of
the Agricultural Adjustment Act of May 12. 1933 (amended on
ky27,
1933 1 , sponsored by Senator Elmer Thomas of Oklahoma (Moley (19391,
pp. 156-161; Federal Reserve Bulletin (19331, vol. 19, pp. 307-318,
333-3381
.
Because
the Thomas Amendment
(Title 111) passed
overwhelmingly on April 28 Ln both houses of Congress, 64 -21 in the
Stnate and 307-86 in the House of Representatives, it is unclear
=ha:
resrstance by
=he Board
prevecrlng enactment of :he
narra:ive
(:he
could have
amendment.
been
effective in
However, Raymond Moley88
best punlrshed account of the Thomas Amendment) docs
no:
ind~catethat anyone from the Federal Reserve was present at
:he
White House during the crucial debates on April 18 and 19 that
persuaaed Roosevelt to endorse the amendment.
Meyez*s biograpny tenas to confirm this version of events:
Pfzer the banks began to reopen in mid-March, Meyer no longer went
.
clevelandfed.org/research/workpaper/index.cfm
-
to the White House, asked permission to resign u goveraor of the
Board
on
(pusey
March
[1974],
24,
pp.
vol . 19, p. 273
.
and
finally
238i241;
left
Pcdcral
the Board oa May 10
Reserm Bullet
119331,
-
~ o l e ylater opined that Roosevelt , believing
congressLonally mandated monetary inflation to be inevitable, had
,
concluded that ,he should endorse the Thomas Amendment in order rnto
. .
circumvent uncontrolled inflation by C ~ n g r e a s ,but
~ Budget Director
.
Lewis Douglas
declared,
aWellr this i s the end
civilizationa (Moley (19391, pp. 160-161).
of
-
western
At about this time at
the Board,'~loydHarrison resigned as assistant to the governor on
May 15; J.F.T. 08Connor was appointed comptroller of the currency
on May 11 and became an ex-officio member of the Board;and Eugene
R. Black. governor of the federal Reserve Bank of Atlanta since
1928, was appointed governor of the Board, replacing Meyer on May
17, 1'933
(
9
119331, vol. 19, p.~
273).
The Thomas Amendment authorized the president to direct the
secreta-y of the treasury to negotiate with the Boa.rd to p e d t the
Reserve Banks to conduct open-market operations in U.S. government
obli5a:ions and to purchase up to 53 billion of securities.directly
-=om =he Treasury (all such transactions until then having been
C
res=rl==ed by
emersen=ies
sta:ute
or
intema=ionally.
to
to
the
stabilize
open
market)
the
dollar
during
economic
domestically
or
If the Reserve Banks refused to make the
purchases requested, or
if
their open-market operationa- were
inadequaze, the president could authorize the Treasury to issue up
r . 0 8 S 3 billion of inconvertible, legal-tender, agreenbacka currency
-
clevelandfed.org/research/workpaper/index.cfm
notes, to be retired over a 25-year:
.- schedule.
The president was
also authorized to issue a proclamation fixing the gold weight of
the dollar at a ratio as much as 50 percent below the prrt-1933
standard of $20.67 per ounce of gold, in grains 90 percent fh e .
There was a silver purchase section (up to $200 million) and,
finally, an amendment of Section 19 of the Federal Reserve Act to
authorize the Board, by a vote of at least five members and with
the
president ' s
approval,
to
increase
or
decrease
reserve
requirements if *an emergency exists by reason of credit ucpansion
.. ..
t19331, vol. 19, pp. 317-3181
(federal Reserve -B
On May 27, the Thomas Amendment was further amended to provide that
all coins and currencies of the United States, including Federal
Reserve notes, were legal tender; previously, those notes had only
lllawfulmoneyw status, but they were convertible into gold before
March 1933
Resolu:ion,
(ibid., pp.
336-3381.''
Congress passed a Joint
H.J.Res. 192, Public Resolution No. 73-10, on June 5,
1933. affirming this interpretation of the Thomas Amendment (ibid.,
p. 3 3 8 1 .
The Board was by no means idle during the Thomas Amendment
atbaze, however, in shaping the legislative agenda after the March
ernergrsry
was pas:.
The Glass-Steagall Act, the Banking Act of
J x e 16, 1933, was mak:ng
onward.
a
i - 4
-
s
:
1
way through Congress from mid-March
One notable insertion, made in the bill despite the
objections
of
Senator
Glass,
the
Amcrican
Bankers
Asso=;a=lon, and the Assoclatlon of Reserve City Bankers (whose
views reasonably may be taken to approximate those of the Reserve
clevelandfed.org/research/workpaper/index.cfm
-
Banks although the Board did not adopt 8n offidal position), was
the establishment'of federal deposit insurance uader Section 8 of
the bill (Flood [1992], p. 5 2 ; F e d u m e
VO~.
19,
pp.
385-401,
especially pp.
Bullctfn
387-394).
[19333,
Originally
conceived of as purely a liquidating corporation for closed banks,
the Board proposed in its March 29, 1932 -comments on the'Glass bill
that the prototype of the ~ e d e r a lDeposit Insurance Corporation
(FDIC) be limited to member banks.
The FDIC prototype also was to
be funded by $100 million of capital contributed from the Treasury
(characterized as the recapture of a franchise tax previously paid
in from the earnings of Reserve Banks) and by debentures issued in
amounts up to twice its subscribed capital, .with the Reserve Banks
being authorized to purchase the debentures up to one-fourth of
their cumulative surplus (Federal Reserve Bulleta [l932], vol. 18,
pp -
2
-
3
The Board (principally Wyatt) offered a substitute
for =he relevant section of the bill that was quite close to the
final version of the FDIC provisions of the Glass-Steagall Act.
The Boar5 =hen added, in March 1932, "This is not a propitious time
to
ask
=he
member
banks
corpsrazzon !FDIC protorypel.
to
contribute
to
the
liquidating
The banks are going through
8
very
d l f f 1 c s l . r period and to tax them for this purpose would be
8
co~s:ierable hardship on themn (ibid., p. 211).
The Federal Advisory Council, probably reflecting the Reserve
Banks' vlews at the March 29, 1932 Senate hearing, testified that,
while
rhe
Council
favored
the
creation
of
the
liquidating
corporazlon, "it should be financed entirely by Government money,
.
clevelandfed.org/research/workpaper/index.cfm
of aorrmcmbcr banks [through
as is intended to be done in the ca*
the RFC] a (ibid., p. 223)
.
The first draft of the Glaus bill,
introduced in'the Senate on January 22, 1932, would have provided
on this point as follows:
A Federal liquidating corporation was to be formed, the
capital of which would be supplied by an appropriation from ;
the Treasury and from assessments against member banks as well .
as Federal Reserve.Banks8 surpluses. This capital was .tobe
used in purchasing the assets of closed member banks, thus
speeding up payments to depositors.
(Smith and Beasley
[19721, pp. 305-3061
,
Thus, the issue to be resolved, narrowly framed, was whether the
Reserve Banks8 cumulative surplus should be used to provide part .of
the initial capitalization of the FDIC faad whether that surplus
belonged to the member banks or to the Treasury).
In :he
final Banking Act of 1933, the Board's vision was close
=o =he FDIC provisions that were enacted.
The Treasury was
requ~redto provide 5150 million of capital (actually provided by
:he
XFC), and the Reserve Banks were required to subscribe for the
.
c*--,s capital.stock "to an amount equal to one-half of the surplus
of such bankis1 on January 1, 1933."
The Reserve Banks then held
5278.6 million of total surplus (Federal Reserve B u l l e t h (19331,
vol . 15, p. 3 8 8 ; Board of Governors, -a1
Renort (19331 , p. 103)
.
The aeserve Banks, perhaps urged by their directors and member
b a n ~ s , apparently
regarded
this
stock
subscription
as
8x3
expro7riation of their funds [an involuntary exchange for unjust
campensation that had doubtful real value] .
subscr1p:ion
The FDIC stock
was effected In January 1934, when the cumulative
surplus was reduced from 5277.7 million to 5138.4 million (one-half
clevelandfed.org/research/workpaper/index.cfm
of the January 1933 surplus was taks).
Annual R e ~ o r t (19341, p. 91).
(Board of Governors,
Of the ~UbScription, $69.7 million
was paid in January 1934 and $69.7 million was noted .called for
payment on April 15
gq )
.-
.
{Federal Reserve -B
(19341, vol. 2 0 , p.
However, the Reserve Banks, apparently acting on their own
initiative, .createdan accounting =try
entitled aResen?es {Federal.
Deposit Insurance ~orporat
ion stock. self-insurance, ere. )
and
used it to charcre off entirelv the S139.3'million value of the FDIC
stock previously carried on their books in July 1934, at the close
of the same calendar quarter in which the stock subscription was
completed (ibid., p. 516)
.
This event passed without recorded
comment by the Board in either the Federal Reserve B
u or the
Board's Annual Report.
Simultaneously with the passage of the Glass-Steagall Act, the
National Industrial Recovery Act
(NIRA), also enacted June 16,
1933, was making its way through Congress but was not commented
upon In ei=her of the Board's two official publications for 1933.
In ligh: of subsequent even=s, it appears probable that the spirit
of ~nduszrialplanning was reinforced at the Board after June 1933.
far =no zhing, the NIRA, whose creation was favored by m odd
caa11z:on
of Theodore Roosevelt-Progressive Republicans, labor
iearitrs. and "Brain Tmstersm (presidential assistants) Rexford G.
Tuowell and Raymond Moley, was modeled on the activities of the old
War 2niuszzies Board of World War I and, accordingly, must have
been a::ractive
to General Counsel Wyatt, the highest-ranking World
War I holdover on the Board's staff.
Schlesinger describes how
,
clevelandfed.org/research/workpaper/index.cfm
Moley, ordered by Roosevelt to "come-up with some recommcndatioasg
on business-government cooperation plans ia April 1933, begged
General Hugh Johnson, who had been deputy to Bernard Baruch on the
War Industries Board, 'to get into the picture:
better than you.
.'Nobody can do it
You8re familiar with the only comparable thing
.that's ever been done
--
the work of the War Industries Boardwm
.
(Schlesinger (19591, pp. 96-97)
Matthew Josephson describes the principal features of the
early National Recovery Administration
Johnson's famous NRA "Blue Eaglem
--
--
whose emblem became
as follows:
The NRA introduced national planning under trade agreements
called mcodes,m which were drafted by the different trade
associatians and administered mainly by representatives of
business. The whole scheme for control of production, for
stabilizing wages, and for eliminating "unfair" competition,
wnile granting immunity from antitrust prosecution, ' was
conceived originally by President Gerard Swope of the General
Eleczric and by the U.S. Chamber of Commerce; it was modified
somewhat by granting labor a vague "bill of rights," the NRA
7 (a) clause providing for workers' representation by unions of
=heir own choosing.
Johnson declared at the start, '
"This is not an experiment in dictatorship, it is an
expefiment in coopera~ion.~ . [TJheNRA
encouraged
car:el
organization in the various industries.
Several
of the largest employers, such as Henry Ford, consulted their
lawyers and flatly refused to comply with such programs;
Sewell Avery. head of the great Montgomery Ward mail order
zazcern, . . . res1s:ed
the NRA. .
In Washington there
was a free-for-all as representatives of large and small
::~s:nesses congrega=ed ir. the capital to have their quotas of
ou:pu=,
prxces, and wages established to their liking.
;Josephson (19721. pp. 240-2501
. . .
...
...
..
..
?he history of the NRA after June 1933 is described ia
S=.L.lesrnger ( ( 1 9 5 9 1 . pp. 87-176).
s:aluarz
Johnson, Tugwell, and other
defenders of :he I R A believed that the business production
cades, combined with =he organization of labor into collective
bargaining units, would create a public sense of solidarity, of
-
clevelandfed.org/research/workpaper/index.cfm
everyone joining forces in a common enCsrpraae, a uomewhat rormnzic
notion that-derived directly from the aspirations of the Catholic
Socialism and Christian (that is, Protestant) Socialism mavemcnts
of
late-nineteenth-century Europe
-
pp. 483 514
.
A
(see Gide arrd Rist
[1913],
"Blue Eaglea parade in support of the NRA drew.
large crowds in New York City in early September 1933, and
industries submitted draft production codes to the NRA in the late
summer and early fall.
Some industries tried to hold out for
company unions instead of the independent unions required by
Section 7 [a) of the,National Industrial ~ecove* Act (Schlesinger
[I9591 , pp. 115-117, 136-1511 .
In the fall.of 1933, however, the problem of enforcing price
agreements began to undermine the NRA8s codes. Some industries had
companies
to 'break their
cartel price limits,
and other industries enforced cartel limits but competed (outside
the NRA codes) against other industries with respect to price
(ibid., pp. 119-1211.
.
To most of the public, it seemed that
control of prices and production had been ceded to big 'businesses,
which were allowed to collude in fixing prices and production
legally in cartels authorized by the NRA.
However, businesses
c~rnplaincd that the NRA inzerfered too much in their pricing
aecislons.
higher ::xed
Yielding to businesses' complaints, the NRA tolerated
prices than it o:he,-wise
might have done; this effort
to zncrease profits ravaged by the depression created a situation
in which "business could keep production down and prices upa
(ibid., pp. 122-1261.
clevelandfed.org/research/workpaper/index.cfm
-
Investigations led by Clarence Darrow (who & 77 years old)
and speeches by Senator Gerald Nye of North Dakota began to
undermine the perceived moral authority of the NRA between the fall
. ?
of 1933 and the early months of 1934.
Johnson, succumbing to the
scrain of events, became prone to emotional swings and m o r e
attracted
to
the
corporatist lines.
systematic organization
of
society
along
As Schlesinger writes:
In the end, he [Johnson] saw an agency which would absorb the
Departments of Commerce m d Labor aad arr,u.nd which the
American government and economy could eventually be rebuilt.
This conception of NRA had ambiguous potentialities. Johnson
once presented Frances Perkins [the first secretary of labor]
with a copy of Rafael10 Viglione's T h e w s ; and,
when he finally resigned [in September 19341, he invoked what
he called the "shining name" of Mussolini ia a farewell
speech. He was, of course, no Fascist. (Schlesinger (19591,
p. 153)
.
-. .
Bur Johnson, like many other business-oriented Washingtonians of
that era, did admire greatly what Mussolini appeared to have done
(much of which was a mere facade) to rebuild the Italian economy.
af=tr .World War I; such feelings were comprehensible in the era
before :he
Ethiopian War of late 1935-early 1936 (see Josephson
119721,
p. 250; Ferguson
-ras=:sc
prior to and during the NRA era is summarized well in this
(19841,
pp. 45, 85-89).
The appeal of
passage by Eugen Weber:
'
To :hose for whom optxmxsm, humanism and universalism did not
wash. who regarded economics as secondary to politics m d
found material forces less appealing than moral ones, Fascism
had to be the ideology of choice. In catastrophic times, it
~roposed a heroic society led by self-selected elites, m
egalitarianism of the merrtocratic, a revolutionary idialism
to replace historxcal materialism and a militant, modernizing
revolution that challenged the delusive dreams generated by
the rival revolution in Russia. To his admirers in the 1920s
(Freud and Churchill among them), Mussolini
offered not
an alternative to revolution but an alternative revolution
...
clevelandfed.org/research/workpaper/index.cfm
-
just as violent, as nonconformist,. as^ a ~ a a t = ~ . r d as
e that of
the left . (Weber [19941)
In February 1935, Roosevelt requested a two-year renewal of
the NRA, whose authority was to expire in June.
Most of the
public, according to Schlesinger, was lukewarm about renewal, but .
the trade associations and ~ i o r r p were loyal to the concept
(schlesinger [19591, p. 1661, ithich probably should call into
question the capacity of today's trade associations and uaions to
evaluate the workings of a market economy fairly.
Before,renewal
of the NRA could occur, the Supreme Court decided &.L.A. Schechta
Poultrv Cornoration v . United States, 295 U.S. 495 (May 27, 1935),
which
held
unconstitutional
the
delsgation
of
congressional
authority to regulate interstate commerce by the making
of codes
-.
.
that were essentially determined by trade and industry associatioas
together with the executive branch.
pas:
That was the end of the main
of the NRA experiment, but the political realignment of.
dif f e r e n z industries for and against the New Deal, based on the
proporzion of protection and subsidy that each industry believed it
could expect, continued through the 1936 presidential election
(Ferguson [1984), especially pp. 85-92; Ferguson (19911 1
Schlesinger observes, even after the
.
decision,
[The] theorists of the managed society also continued to
. "Industrial laissezconsider an NRA as indispensable. .
faire is unthinkable," [said Raymond Moley, who argued that slomething had to be done "to satisfy the need for government
intervention and industrial cooperationa; .the interests
involved in our economic life are too great to be abandoned to .
:he
unpredictable outcome of unregulated ~ompetition.~
(Quoted in Schlesinger [19591, pp. 166-1671
.
National planning advocates faced mounting crit&ism
from Brandeis-
clevelandfed.org/research/workpaper/index.cfm
-
liberal antitrust and progrowth advocates; but the following key
insight from Schlesinger's
accouat points the way toward the
arrival of Matriner Eccles and Lauchlin Currie at the Board in the
.L
fall of 1934:
"Then too a rising group.within the administration
was arguing that the key to recovery lay not in the reorganization
-
of economic structure but in fiscal policy and the- increase in
.
government spendingm (ibid. , p. 167)
After June 1933, besides concerns arising from implementation
of the NRA8s program, the Board was busy coping with the aftermatth
of the failure of the International Monetary Conference i n London
in July (see Moley t19391 , pp. 196-2691 , the aftermath of the March
banking crisis, the administration's experiment
raising the
dollar price of gold that was announced publicly in October 1933
(see Jones (19511, pp. 245-2541, and the commencement of federal
deposit insurance on January 1, 1934.
ic~rs1a:ion
d:r:ng
But there was no new
of overriaing importance to the Board or its staff
=his period after June 1933.
IV.
The Pirmt New Deal trkem on r corporrtimt c 0 1 o r a t i ~ .~
with active Federal Remerve Board rmaiataace, late 1933-late 1934.
The accounts of :he
=npr:ant
NRA that are summarized in Part I11 &e
for establ~shiag the background against which the events
described in Part IV should be considered.
From late 1933 through
lace 1934, men w i t h ~ n the Federal Reserve System or closely
ass3r:a:ed
with it
(like Senator Glass), who should have known
betzer but believed that they were doing the right thing, openly
advocated that the Federal Reserve begin to take measures that we
39
clevelandfed.org/research/workpaper/index.cfm
retrospectively would identify with-ae
then floating around Washington.
corporatist iaitiatives
Even Eccles and Curria, who rose
with the faction in the Roosevelt administration that advocated
increased government spending and an activist fiscal policy instead
of central planning, later succumbed to some of the central
planners' ideas,. creating an interesting hybrid political economy
model for the Board in the second half of the 1930s.
This hybrid.
could be described as a mixture of ideas drawn from orthodox
~eynesianism and ideas from the Chicago Plan for 100 percent
reserves banking.
president Roosevelt , under the influence of economists to whom
he was introduced by Henry -Morgenthau, Jr., who then was head of
the Farm Credit Administration, began to consider experiments in
raising =he dollar price of gold as a means of raising the price of
all commodities during the summer of 1933. Morgenthau had studied
under one of those economists, George Warren of Cornell University;
--5%
czherr were'Irving Fisher (Yale) and Frank Pearson (~o.mell).
.
.
Olsoc writes:.
In mid-August 1933, Roosevelt told Morgenthau he wanted to
devalue the dollar with gold purchases. The decision ignited
a 5::ter
debate and aemons=rated the president's independence
cf conse-rvative ideologies. Under Secretary of the Treasury
When [Secretary]
Dean Acheson frnnly opposed him. .
Wtlliam Woodin became ill in 1933, Treasury duties fell to
Acheson, although the president frequently consulted vith
Morgenthau about Treasury business.
Acheson thought the
commodity dollar [theory] was ludicrous.
Tired of
Acheson's obstructionism, Roosevelt fired him in November. By
=ha= time Roosevelt had named Morgenthau -acting secretary of
=he treasury." (Olson [19BB], p. 107)
. .
...
The
was opposition.
. . .
role in the gold-buying episode, like
.
..
clevelandfed.org/research/workpaper/index.cfm
More
opposition
came
from
the
Federal Restme .
Board.
[The new governor, Eugene Black, was] a
conservative banker and attoraey serving .am head of the
Federal Reservc Bank of Atlanta. Throughout the late 19206
and early 1930s Black had predicted a national banking =isis,
and he gained widespread recognition when those apparitions
came true. Black had close ties with the American Bankerso
Association and other financial trade groups, and he looked on
the gold buying scheme as pure foolishness. Black was not-as,
adamant about it as [Warvard professor and Morgenthau's
executi~e assistant Oliver M.1 Sprague, [Budget Director
~ewislDouglas, and Acheson, and his independence at 'the Fedw
insulated him from Roosevelt8s wrath, but he nevertheless
strongly opposed the prograrp. George Harrison of the Federal
Reserve Bank of New York, along with the entire Wall Street
investment community, thought gold buying would destroy the
money markets. (Ibid.1
. . .
Because the Federal Reserve would not take the lead in buying
gold
to
support
the
commodity
dollar
theory, Roosevelt
Morgenthau turned to Jesse Jones and the RFC to do so.
and
Jones was
shrewd enough to know that, if he opposed gold buying, he would
lost influence with Roosevelt, just as Acheson, Douglas, and
Sprague had done.
The RFC issued
$150 million of short-term
obligazions (which the Reserve Banks were forbidden by law from
to finance its gold purchases
:here was one part of gold buying that Jones loved.
L7y:hing
:hat raased so much ire on Wall Street couldn't be
all bad. . . . Late in October 1933, Jesse Jones, George
Kaw-0
--,n, and Henry Morgen:hau
met each morning at the
presiaen:'~ bed to set a gold price. The daily price was
rrrelevan: as long as :he :rend was up.. To keep speculators
c f f balance they f1uc:uated
the daily price, but the general
:rend was up, from S29.01 an ounce on October 23, 1933, to
534.06 on January 17, 1934. .
. Much to George Harrison's
chagrin, Jones used the Federal Reserve Bank of New York to
purchase gold abroad on behalf of the RFC. Harrison hated it
and Jones loved to watch him squirm. At the morning meeting.,
arnldst laughter and coin flips and silly compromises, the f o u
men reached a daily prlte. Jones and Morgenthau occasionally
wrnced at how unscienzific their methods were, but they did
rarse the price of gold and reduce the gold content of the
dollar. Eventually the RFC bought a total of more than four
mrlllon ounces of gold for S134 million. (Ibid., pp. 109-110)
An6
.
I
-
clevelandfed.org/research/workpaper/index.cfm
-
Morgenthau replaced Acheson and became undersecretary of the
Treasury and acting secretary on November 17, 1933, when Woodin
became ill. On December 13, Woodin resigned, and ~otgenthaubecame
-.
secretary and ex-officio chairman of the Federal Reserve Board on
January I, 1934 (frderal R e ~ r - e -B
[19341,~ 0 1 20, p. 6 3 .
,
On December 28, 1933, as the gold-buying program was winding d o n , . .
.
-
~orgenthauissued an order requiting the delivery of all privately.
held gold (with minor u c e p t i o i ) to R a s e m e B m k . and member
banks,. to
pp. 9-10).
be
held
for the
account
of
the Treasury (ibid.,
.
On January 16, 1934, the Roosevelt administration
introduced the bill that would become the Gold Reserve Act of
January 30, 1934; the administration terminated the gold buying
program on January 17 (ibid., p. 73 1 .
The Treasury's gold delivery order caused a great deal of
consternation among the Reserve Banks because they believed that
they had a fiduciary duty toward gold deposited with them by their*
member banks and that, in the absence of a statute -specifically.
direczing them to turn over member banks' gold to the Treasury,
they could not in goo5 conscience do so.
Governor Black was
infanned of the Resetve Banks' position on this question during a
governors' conference (apparently following the issuance of the
Treasury's order) and presented their reservations to Congress
during testimony on the Senate version of the Gold Reserve Act bill
on Janua--y 17, 1934
(ibid., pp.
73-76).
The outcomeowas a
compromise under which Section 2 ( a ) of the Gold Reserve Act
explicitly vested the Reserve Banks' t'itle to gold in the United
.
clevelandfed.org/research/workpaper/index.cfm
States
-
(that i6, the Reserve Bank8'
.
title to the gold was
transferred t,o the Treasury) and offered the Reserve Bunks gold
certificates in exchange (ibid., p. 6 3
.
The somewhat cavalier
procedmes of the Board and the Treasury with respect to the
Reserve Banks0 gold in 1933-34 still were regarded as a novelty
then, but analogous instances of the use of Reaerve Banks* cash or
other assets for the Treasury's primary b e f i t have since occurred
from time to time; consequently, Reserve Bank officials have tended
to become less sensitive to the underlying principles of this issue
than they formerly were.
The Gold Reserve Act established the Exchange .Stabilization
Fund and centered, in the Treasury the
direction
of United States
.
foreign exchange market intervention (see Todd [1992al)
also
issued
a
proclamation
Roosevelt
under the Act the following day,
January 31, 1934, permanently fixing the official price of gold at
535.00 per ounce, a devaluation of the dollar to 59.06 percent of
i
:
s
pas:-1834 and pre-1933 value of $20.67 [Blum 119591, p. 123).
The o:her
no:able
legislative events of 1934 affecting.Federal
'
Reserve operations before the arrival of Marriner Eccles were those
l e a i ~ n gto enactmen:
Arr
of former Section.13b of the Federal Reserve
!repeaied in 1958, effec:~ve
1935.
.-
ln 1 9 5 9 ) in the Act of June 19,
The background of that statute has been well summarized
by Olson :
aefsre his sudden death in 1934 [he resigned August 15 to
resume his dutles as Governor of the Atlanta Reserve Bank but
died December 191, Governor Eugene Black frequently protested
[Jesse] Jones's ommpresence in Washington financial circles
and how the RFC, not the Federal Reserve Board, war the
In New York, the
dominant force in the money markets.
clevelandfed.org/research/workpaper/index.cfm
governors of the Federal Renerve Bank [sic], pamiorlarly
George Harrison and Owen Young, expressed similar sentiments.
During the bank reconstruction process in the spring 8nd
summer of 1933, Harrison repeatedly called for an end to RFC
loans. Instead, he wanted the Federal Reserve bto make
the loans with the RFC guaranteeing them. Jones disagreed and
prevailed with the president. While [presidential advisor8
Adolph A. 1 Berle, [ ~ o m m y l Corcoran [general counsel of the
RFCI , and Tugwell wanted the RFC to become a permanent agency
controlling the flow of capital throughout the entire economy,
conservatives [like Jones, Douglas, Postmaster k e r a l James
Farley, and Senator ~lassl wanted it to remain purely a
temporary, emergency institution. (Olson [19881, p. 114)
~t
that juncture, in M
-
a 1934, Roosevelt wrote to the
chairmen of the House and Senate banking committees, expressing
concern that small businesses continued to be unable to build
"working capitalm (Hackley (19731, p. 134).
He apparently used
this phrase to mean funds available for up. to five-year terms to
meet the expenses of investment in equipment and premises (purposes
that ordinarily were ineligible for discount by Reserve Banks under
Seczion 13 of the Federal Reserve Act), and maturities that far
exceeded :he
90-day limitations under Section 13 and the 120-day
l irr,ira=ionsunder Seczion 10 (b) (an emergency provision originally
enaczed in 1932 that had been extended) i d . .
The Board,
respark-ng to Roosevelt ' s March letter, wrote to the Senate Banking
Comc::=ee
OR
April 13, 1934, that it agreed that there was a need
"for =re<:= facili:ies
for lndust-y and commerce
. . . for loans to
~rav:ie working capital for commerce and industry, and such loans
netossar~lymust have a longer maturity than those rediocountable
by Federal reserve banks" (ibld.
She
.
Board's origlnal vlslon apparently was that the Treasury
should return to the Board the 5139 million taken from the Reserve
-
clevelandfed.org/research/workpaper/index.cfm
Banks' surplus in early 1934 to fund_ part o f the FDIC's original
capital subscription and should authorize the B08rrd,
the
Reserve Banks, to organize and operate twelve regional intermediate
credit banks 'to discount commercial paper and make direct loans of
up to five years to -industrya (Olson (19881 , p. 155)
-
.
-
.
Berle is
.
credited.with originating this idea ibid. ) , but. Governor Black
appears to have been an early convert.~lthoughNew Deal planners saw the proposal as an important
step toward government control of the capital markets, the
idea had little support in Congress or in the rest of the
administration.
Berle also wanted the [intermediate
credit banks] to underwrite securities issues, a move designed
to shore up the defunct capital markets.
In the (-1
. . Hugh Johnson and W.E. Dunn, RFC-NRA liaison officer,
They wanted an
were pushing a more ambitious proposal.
intermediate government credit corporation
supervised by
staff members from the RFC, Treasury, and Federal Reserve
Board [note: nor the Reserve Banks]
to purchase marketable
securities. (Ibid.1
. . .
...
.
. . .--
--
Senator Glass did not oppose the idea of a working-capital
loan facility for the Federal Reserve, but he wanted it located at
:he
Reserve
-
Banks in order to avoid duplication of existing lending
facil~ties. Jones wanted the RFC to operate the only workingca~i=al lending programs.
Eventually, bills
embodying
~r=pasalswent to final vozes an both houses of Congress.
congressmen objected tha:
Some
the Reserve Banks should not k making
loans
in nonemergency
circumstances directly
to individuals.
0:hers
did not wish to see Reserve Bank credit used as start-up
cap~zal;they believed that working-capital loans should be made
only to established businesses (see ibid., pp. 156-157; Hackley
[19731, pp. 133-1361.
clevelandfed.org/research/workpaper/index.cfm
ft is fairly clear that, at the B g d , the Federal Reserve was
expected to take the dominant role in the new industrial lending
facilities, with the RFC making the loans only if the Reservc Banks
refused to do
80.
(Hackley [19731, p. 136).
There were slight
dissimilarities in the lending authorities of the two bodies in the
final statute b i d , but the averlap of RFC-Federal Reserve.
-
authority
in
this
instance produced
outcomes.
Over time, the RFC made most of the industrial loans,
and, in Hackley8s words, 'the
Federal Reserve .Banks
declined
to an
--
amount
substantially different
volume of such loans made by the
at first considerable
that
was
--
eventually
almost negligiblem
(ibid.).
However, as Anna Schwartz has noted, Section 1 3 although '
a
departure from [Federal ~eservel traditiona and by then dead, gave
rise in later years to the congressional and executive branches8
idea :ha:
the Federal Reserve Banks could serve as guarantors
(subjec: to Treasury reimbursement) for other types of industrial
loazs and could serve as fiscal agents for the Treasury's myriad
federal loan guarantee programs during and after World War 11
(Scnwarzz 119921 1
naer
Sez:ion
. In any event. the Reserve Banks' direct loans
13b were limited to established businesses, with
small j.~stnessesfavored, whlch satisfied one of the corporatist
ob) ec= :ves
marke=?lace.
of
reducing
and
controlling
competition
in
the
In congressional testimony in 1947, Chairman Ecclea
said =ha= at that time. the Reserve Banks had handled 3,'500 loan
appl:ta=:ons
rr.:lllon
under Section 13b, with a cumulative value of $560
(and a mean value of 5160,0001, most of them occurring
.
clevelandfed.org/research/workpaper/index.cfm
before World War 11, when the V-*an
program of federal loan
guarantees administered by the Reserve Banks became iraportant
(Federal Reserve -B
(19471 , vol. 33, p. 5 2 2 )
.
These.were the last. significant legislative developments at
the ~ederalReserve Board before the arrival of Marriner Eccles and
Lauchlin Currie in late 1934.
The events of 1934 reflected the
strains between the competing varieties of corporatism and central
planning that were present in Washington at the time.
In 1934, it
appeared that the stronger varieties would prevail, but it ia
likely that the increasing difficulties encountered by the NWt
contributed heavily to the Board's (especially the Board staff's)
abandonment of - openly corporatist solutions in favor of the new
approaches advocated by Messrs. Eccles and Currie.
V.
The Board prepare6 for the coming of Marrher dcclem at
the end of 1934 and becomem a hybrid Chicago P l a n - o r t b d o x
Keynesian shop.
~arrtnerEccles was born in 1890 into 'a prominent Utah Mormon
family :hat
acquired banking intereqts of which the First Security
Co-zporarion today is the best-known descendant. His autobiography
shouid
etonm:s:s
be
required
reading
for
all
Federal
Reserve
System
and lawyess, for boch the good and the bad in it, and is
a valuable source of ~ n ormat~on
f
on the 1930s not found
ln matnstream economic literature.
elsewhere
The descriptions of how the
Eccles family handled depositors' runs on their banks in the Mormon
Emp~reof the Inrermounra~nWest, in 1930-32, are among the best of
the genre IEccles [1951], pp. 54-70).
.
clevelandfed.org/research/workpaper/index.cfm
ÿ he
rise of Eccles to a positioein which he could influence
Federal Reserve policy and eventually become governor of the Board
began in Utah in early 1933.
Eccles joined a discussion group in
Ogden originally called the aFriedenkersr (free-thinkers), one of
whose members was Robert ~inckley,a local busiries-
who was a,
regent of the University of Utah. At Hinckley's invitation, Eccles
attended economic lectures by guest speakers sponsored by the
university in Salt Lake City and in that way rn*
Paul Douglas, then
a teacher at the University of Chicago, who gave a lecture in Salt
Lake City.
In February 1933, Eccles was invited to accompany one
of the speakers, Stuart Chase, to lunch.
Over lunch, he explained
his own theories-of how to tope with the depression to Chase, who
suggested that, the next time Eccles was in the East, he should go
New York and talk with Rexf ord
University professor.
then
Columbia
fate would have it, Eccles was scheduled
to appear before the Senate Banking and Currency Committee in late
February, and he agreed to go on to New York to meet Tugwell
.
(ibid., pp. 85-87).
Eccles' testimony before the committee included his usual
ideas, which fairly could be regarded as Keynesian, on having the
federal government incur a budget deficit deliberately in order to
provide fiscal stimulus to the economy.
Eccles also supported
8
federal bank-deposit garantee law (to be funded by an assessment
of the banks), a 52.5 billion payment by the federal government to
deposirors of failed banks, Henry Wallace's
domestic production
allotment plan to raise agricultural prices (later embodied in the
clevelandfed.org/research/workpaper/index.cfm
-
~gricultural Adjustment Act of M y 12, 19331, and a permanent
settlement of the interallied debts from World War
cancellation preferred.
Then
he
I, with
k n t to meet Tugwell (ibid.,
pp. 104-113).
When they met in New York, k f o r e Inauguration Day in 1933,
~ c c l e s gave hrgwell a copy of-his Senate .committee testimony.
ntgwell apparently expressed to Eccles his fear "that the system of
private enterprise had outdated itself and that governmental
control. of the whole economic plant in an immediate and direct way
might be necessarya (ibid., pp. 114-115). After the inauguration,
Eccles corresponded with acquaintances in Washington about U.s
ideas on what ought to be done. He sent a telegram to Senator John
inflationary finance1
supporter
Townsend
aavocazing a
SS
billion Treasury bond issue
April
purchased in ito
enzirety by the Federal Reserve in order to bring about "controlled
ir.fla:ionN
(ibid., pp. 122-1231.
=he viability
1
:
Eccles was skeptical regarding
and theoretical soundness of the NRA, believing that
tenoed to promote monopolistic practices (price cartels) and did
Ir::ie
:o relieve the suffering of the unemployed. The NRA, Eccles
though:.
would
cause an
"inventory boomm without
ag;rc?a:e
purchasing paver (ibid., pp. 125-1261.
increasing
Araund Oczober 10, 193 3, Jesse Jones telephoned First Security
to reques:
that
E.G.
Bennett, one of Eccles'
colleagues in
managemen=, take the vacanr Republican director's seat at the RFC.
Tugwell, =hen in Washington, separately asked Eccles to come East
for another discussion.
Arriving around November 1, Eccles met
clevelandfed.org/research/workpaper/index.cfm
Tugwell at the Department of Agridt-,
and they agreed to have
dinner that night at the Shoreham Hotel with Wenry Wallace, H
a
m
.
Hopkins , Jerome Frank, and Georgt Dern (ibid., pp. 128-131)
The
.
..>..
Washington officials were ready to receive-the gospel of unbalanced
budgets from its foremost western preacher.
[Tlhey needed more than the.doctrine of Cbriotiaa charity to
advance what they wanted to do an the face of strong political
resistance. They needed arguments on how a planned policy of
adequate deficit financing - could serve the humanitarian
objective with which they were most directly concerned; and
second, how the increased production and employment that the
policy would create was the only way a depression could be
ended and a budget balanced. (Ibid., p. 131)
The dinner group decided that Eccles should work on Treasury
Undersecretary Dean Acheson, who was "open to argumentn on the
Eccles believed that his arguments did-
balanced-budget question.
win Acheson over to his side, but Acheson resigned and was replaced
by Morgenthau a few weeks later.
Then Eccles met Secretary of the
Interior Harold Ickes , who apparently wanted to ask him to take
cnarse of the adminis:ra:ion*s
public housing program.
.
.
Eccles
returned to Utah but, in mid-December 1933, he was asked to return
to Washing:an
the following month to meet with Morgenthau, the'new
Treaszry secretary.
accepted)
mone:a-y
a posi:lon
A
few weeks later, he was offered
as assistant
and credit ma=:ers,
(and
to Morgenthau in charge of
beginning February 1, 1934, So last
until June 1935 (ibid., pp. 136-1431.
By March 1934, Eccles was working as Morgenthau8s liaispn to
the a5~rnistrationcomrni:=ees
working on housing matters. There he
met win? ield Riefler, a Board economist who had been working on
legislative matters since early 1932. Riefler, Eccles, and others,
SO
-
-
clevelandfed.org/research/workpaper/index.cfm
working together on the President's EmcrrgaCy Committee on Housing,
established the Federal Housing Authority in June 1934.
Riefler
devised the principle of' the federal loan guarantee for housing,
later used
in
a
host
federal lending programs (ibid., pp.
of
In June 1934, Eugene Black resigned as governor of the Board.
~orgenthautold Eccles in
st
name to Roosevelt as Black's
that he had put f o m a r d Ecclese
replacement.
In September, at a
meeting with Roosevelt, Eccles said that he would accept the
appointment
only
if
fundamental
changes
were
in
made
organizational structure of the Federal Reserve System.
the
Whcn
Roosevelt asked what the nature of those changes might be, Eccles
asked for a month's
changes.
delay to prepare a memorandum of requested
Eccles wrote :
[Ilt was not until November 4 [1934] that I had another
mee:ing
with the President. I brought to it a memorandum I
had prepared in the meantime with the help of Lauchlin Curtie,
:nen a member of the "Freshman Brain Trust in the .Treasury
Dcpar:ment.
This memorandum, which led to the Banking Act of
1935, is now deposited among the Roosevelt papers. It should
have more than passing interest to the historians of the
epoch. . (Ibid., pp. 365-1661
f ,-.see;,.
---PC.
- ,e,
p..
a Ha-varQ 3c:versr:y
associate professor, already was
re=ag.-.:zed as one of Amcrlca's
foremost Keynesian economists.
C~rrreappears to be the principal source of one of Eccles' pet
zhear~es,which was char, for effective monerary control, it wan
necessary to cen:ralite
:he
~ o a y . Cusrie advocated :hat
con:rol
of :he
creation of money in one
such a body have no more than three or
four policymakess (Phillips [I9931; Currie (19341 , p. 159)
51
.
Eccles
clevelandfed.org/research/workpaper/index.cfm
-
recounts that he put foward this idea.d u b g &s
November 4, 1934
presentation to Roosevelt:
[After describing the capacity of the twelve Reserve Banks to
obstruct policies desired by the Board) A more effective way
of diffusing responsibility and encouraging inertia and
indecision could not very well have been devised. Yet it
seemed to suit the New York Federal Reserve Bank, through
which private interests in the New York financial district
exercised such enormous influence over the national economy.
Ref o m of the foregoing situation was clearly indicated.
Responsibility over o p e n - m k e t operations had to be unified.
in character and vested in a clearly identifiable body.
(Eccles [1951], p. 171)
-.
~t was Eccles* belief, in which Currie, a native of Canada who
did not fully appreciate the . constitutional merits of the U . S .
system of checks and balances, apparently concurred (Currie [1934],
.
p. 156) that
Over the years, practices had grown up inside the System which
had reduced the Reserve Board in Washington to impotence. The
syszem had criginally been designed to represent a blend of
prlvace and public interests and of decentralized and
cenzralized authorities, but this arrangement had become
unbalanced. Private interests, acting through the Reserve
Banks, had made the System an effective instrument by which
przvate interests alone could be served.
The Board in
Washington.,on the ocher hand, which was supposed to represent
and safeguard the public interest, was powerless to do so
under the existing law and in the face of the opposition
offered by =he me3 who ran the Reserve Banks throughout the
couzzry. (Ec=les 119511. p. 166.)
3 e s r i e s reoryaalring :he
relazionship between the Board and the
Reserve aaaks, Eccles wanzed =o expand the effective eligibility of
banks' asse:s
to serve as col1a:eral
for borrowings at the Reserve
Banks and even to deleze =he exis:ing
(
:he
5. , p . 1 71
.
exls:ing
Sec=lon
20
In the end, the compromise effected was to retain
eligibill=y
(b),
eligibility provisions
added
to
language
the
but
Federal
to
make
Reserve
permanent
Act in 1932.
'-
clevelandfed.org/research/workpaper/index.cfm
Section 10 (b) authorized Reserve Banks to lead on any "sound
assetsm without regard to 'the
maturitym of aos.ts
n a r r o w form or calcndu date of
(ibid., p. 172).
Roosevelt listened to Eccles~presentation of the memorandum
for two hours and then told him that he would nominate him to
k
Governor of the Board. The appointment was announced November lo,
9
(ibid., p. 175)
.
,
~ffective November 15, ' ~ c c l e swas appointed
a member of the Board and was designated governor; Lauchlin -ie
"was appointed by the Board as assistant director of the Division
of Research and Statistics.
...
[I]t is contemplated that the
work of the division involving research in the monetary field will
come under Dr. Curriem (ibid.1
.
On December 1, Lawrence Clayton,
a lifelong friend of Eccles from Utah, was appointed assistant to
=he governor, functioning as his principal administrative assistant
(fedoral
[1934], vol.
up. 2 5 - 3 1 ) .
20, p. 779; Eccles [1951],
The stage was set for the Board to become the focus of
=he etonomic and legislative drama of the second half of the 1930s,
featuring the Banking- Act
of
1935, the doubling of reserve
'
re~~irements
in 1936-37, the overhaul of discount-window policies,
an5 =fie regulatory agreement of 1938 (see Philzips 11993) ; Schiming
!l9531;
Simonson and Hempel (1993)).
.
Conclumim: The Board abmorbed and reflected the idmrm
current i n Wrmhington a t the time.
I.-. =he history of polirical economy theory, it generally is
bqlieved that a taste for centralization of authority, cooperation
and
information-sharing to
reduce
competition,
restraint
of
,
clevelandfed.org/research/workpaper/index.cfm
production' to maintain prices and pr~fits, md the coercion of
labor by the state into conformance with this design, all die hard
once they become embedded in the administrative apparatus of the
.A
state.
The occasional reappearance and even persistence of some
mildly corporatist ideas at the Board siace the 1930s might .b;t
, -
explained by the hypothesis that such ideas, once having gained
sway there in 1931-34, simply have reappeared whenever the economic
and political conditions were right.
The post-1934 melding of
those ideas with the Eccles-Currie hybrid Keynesian model (-ie
in particular being a strong proponent of some of the ideas of the
Chicago Plan for 100 percent reserves banking) might not have
altered the corporatist conceptions of key staff members, or
tempered their influence well into the 1940s, as much as one might
think.
For example. E.A. Goldenweiser, the director of the Board's
research and statistics division during the period studied here ,
was no fascist, but he presided over or participated' in all: the
events described in this paper.
1919,
became director of research in 1927, remaining' in that
pasir~c,r,un:il
snar:ly
He joined the Board's staff.in
2945.
and retired in 1946.
.
In November 1944i
before his rezlrement. he gave a speech anticipating the
poszGar system of govemmen=al regulation, planning, guarantees,
and cor.:rols
convezs:an
that he thought necessary to sustain the peacetime
of the domes:~c
economy.
learned from the NRA experience:
The speech reflects lkssons
He wanted to increase, not
rehuce, industrial competition in order to hold prices down. for
'
clevelandfed.org/research/workpaper/index.cfm
example, and to encourage labor to organize indepcadeatly so as to
defend its own interests.
But the spcech also display.
to learn other lessons from the 1931-34 era.
a failure
For uumple,
Goldenweiser advocated that the federal -governmentprovide a system
of 9arantees for individual citizenso standard of living, together
with the regulations and controls necessary to achieve such a
living
standard
pp. 112-121).
(see Federal Reserve B u l e t a [19451, wl. 31,
Walter Wyatt, like Goldenweiser, was a long-time
senior Board staff member who played a prominent role in the events
of 1931-34 and who remained in his position until after World War
If.
Wyatt joined the Board in 1917, became general counsel in
The director of research and the
1922, and retired in 1946.
general counsel had great influence at the Board during and afser
1931, and their successors in office exercise comparably great
i~fluencetoday. Surely the experiences of Goldenweiser and Wyatt
in the early 1930s must have colored the advice they gave to Eccles
and k ~ s
assiscants throughout the rest of their careers.
Most
the intellectual sponsorship
increased central
pia~zlngand directLon of Federal Reserve System policies, as well
as
=he
Z~ssez:,
"moral suaslon" used
usually are :raced
against
regional Reserve Banks'
back to the early efforts of Marriner
Etcles and Uuchlrn Currle at the Board after November 1934 b e e
Schlming [19931).
The dominant role of the Federal Reserve in
formulating bank supervisory policy usually is traced back to the
efforts of Eccles and Leo Paulger, the chief bank examiner, in 1937
and 1938 (see Simonson and Hempel (19931).
clevelandfed.org/research/workpaper/index.cfm
I have attempted in this paper t-paint
out that most of the
framework for ,and precedents affecting current ~ e d e r a l Renerve
lending policies were created during the period in question, 193134, with only minor changes after - Qwernor-Eccles arrived on the
scene.
It is not my contention that increased open-market or
lending operations by the Reserve ~ankdduring that period would
have been a bad idea from a strictly quantitative perspective or
that
they
would
have
failed
to
'
alleviate
some
unnecessary
suffering; rather, I am contending that, irrespective of the
potential quantitative outcomes, the underlying motives for the
initiatives that actually were attempted before Eccles and Currie
arrived were primarily corporatist. Thus, those initiatives ought
to have been suspect and still should be suspect whenever the
s=azuzory legacy of
1931-34 is invoked in emergency
sizuations
Interestingly,
today.
the
Federal
lending
Reserve
Act
amtr.5mer.z~
enacted during this period have commonly been treated in
wask:r:;==n
co,-poza=is:
as received =ruth, with little or no suspicion of
:sin=, even
though the philosophical and economfc
theory bases of those s:a=utes
w i z f . :he
appeared to be completely at odds
;rrnriples of laisset faire and increased competition that
---3ar:ly
found favor in Washington after 1980 or so.
W i l e memaries were still fresh, it was generally understood
:ha= :hese
1931-34 statuzes and policy initiatives were logically
in=ans:s=en= with competizive, laissez-faire notions. For example,
=he Federal Advisory Council made the following recomendat~ionon
September 18, 1934, at the close of the period studied here:
.
-
clevelandfed.org/research/workpaper/index.cfm
The Council feels that 8 careful distinctioa should be made
bctween fundamental changes in-the Federal Reserve System
itself and those remedial changes which are necessary or
desirable as a result of inconsistencies and lack of clarity
inevitably resulting from the haste with which important
emergency legislation was enacted in recent sessions of
congress. In view of the careful study, the prolonged debate
and the thorough consideration which were given to the subject
.
before the Federal Reserve Act.was adopted in 1914, the
council is convinced of the importance of having the act
carefully reviewed prior to-further fundamental alterations..
(Board of Governors,
11934) , p. 204)
. .
m
-
-
~t might be well to exercise a comparable degree of caution with
respect
to
novel
interpretations
of
long-settled
statutory
doctrines today, when the relevant memories no longer are fresh.
The wisdom of reflecting carefully before acting is illustrated by
the following passage from Hannah Arendt's
magnum opus on the
problem of totalitarianism, where she notes the persistence over
:ime
of political economy models long thought dead:
[:]here
remains the fact that the crisis of our time and its
central experience have brought forth an entirely new form of
-a3vernment which as a potentiality and an ever-present danger'
1s only too likely to stay with us from now on, just as other
f 3 m s of governmen: which came about at different historical
rcoments and rested ,on different fundamental experiences have
s:ayed
with mankind
regardless of
temporary defeats
- - monarchies, and republics, tyrannies, dictatorships, and
aespo:ism.
(Arend: [I9731, p. 478)
1
'
-..-.
--,-ng :he period szudied here, a generally classical liberal
.-
w=r-z
v:ew
r=r?=ra:e
:he
d..-.
s:ate
.
by a rather strong conception of the
wizhin 1mpor:ant
Federal Reserve
pol:r:ral
..
was supplar.:ed
Board.
Washington institutions, including
The appeal
of
such corporatist
economy models to the Board and to its senior staff
:he
1930s was unaers:andable
in the context of the time and
piace and, more than anything else, probably reflected a sense of
urgency to do something, almost anything, to get the U.S. economy
.
clevelandfed.org/research/workpaper/index.cfm
moving forward again.
-
Eccles and m i e dragged the Board away
from the corporatist world view (which might have -iohed
even
without their intervention because of the general disrepute into
which the NRA was sliding by the time they arrived at the Board)
and toward what one.of my colleag~cs has termed *a Keynesian
aggregate interventionist sensibilitym instead.
But both before.
and after becoming ensconced at the Board, Eccles tended to succumb
to the temptation to centralize power within the Federal Reserve
System at the Board and at the expense of the Reserve Banks,
without entirely.dismantling the corporatist structures created
within the System between 1931 and 1934.
Bearing
mind Hannah
warning,
helpful
become aware of what actually happened at the Board during 1931-34
and ro understand why events took place the way they did.
It is
necessary to remain watchfully wary regarding similar policy
res?ozses to present and future events if the System and the nation
spared
of reliving the worst aspects
this
.
clevelandfed.org/research/workpaper/index.cfm
Appendix:
What Berbart Howor mad W
I
t
r
h
u Icclrs Lnw about
political ocoao=y
It may appear to some readers that the distinctions among
classical liberalism, corporatism, and orthodox Keynesianism are
imperfectly drawn in this paper.
In this regard, it might be
helpful to refer to the definitions of these terms in the New
Palaravc and
also
(Dahrendorf (19871
to the
definitions there of
and wlibertym. (Ryan [I9871)
'liberalismw
.
To construct from the palarave working definitions of these
terms for the purposes of this paper, it is -enough to state that
modern classical liberalism began in the revolutions and civil wars
of Great Britain in the seventeenth century and maintains the
sanctity of individual political and economic liberty under the
rule of law.
Liberty or freedom, in turn, is a negative concept:
the absence of coercion, or what Senator Robert A. Taft called the
"liberry of the individual to think his own thoughts and live his
own life as he desires to think and livem (quoted in Kennedy
[:9621
,
p.
2351..
Economic
liberty ordinarily would
require
observance of the principles. of free trade and the absence of
pro=e=:lon
and subsidy.
C r r f i 0 5 ~ x Kevnosia~ism appears to be
pr:x:ples,
bu:
derived from liberai
Robbins ((L9351, pp. 1 4 5 - 1 4 6 1 disputes this point
and places it much closes to central planning than to any liberal
~ d e a . Keynesian gove=-nmen:al inte-vent ions restrict the operations
of che market
as a consequence of deliberate economic policy
aczions of the central government; unless carefully circumscribed,
such intenrentions can become the normal policy instrument of
.
clevelandfed.org/research/workpaper/index.cfm
-
central planning, which was Bobbiru' (1934) point, and also Hayekes
.
(1944)
(See also.Kowalik [I9871 on .central planning. .)
Cornoratism or comarate statism is 'a
set of political
doctrines aimed at organizing civil society on the basis of
professional and occupational representation in chambers called
Estates or Corporations
...
[maintaining] that class conflict is
not inherent in the capitalist system of production and ownership
relations.
Corporatism has its ideological roots mainly in
nineteenth-century French and Italian Catholic social thought, as
well as in German romanticism and idealisma (Halevi [ig87]).
Berlin finds that the origins of corporatism in nineteenth-century
continental European Catholic social thought were derived from the
wri:ings
of the French legitimist exile, Joseph de Maistre, who
placed power at the top of his scale of values and derived his
ideal social structure from Plato's council of guardians in
.~e~ubl:-,,"a vision
. . .
detestable to those who truly value human
freo5orr." (Beslin [19921, pp. 170-174; see also Gide and Rist
. pp.
[19:3]
483-515. for a his~oryof similar economic doctrines
The decline of classical liberalism in English political
e = a r , ~ m ypreceded. an5 may have been a principal cause of, the final
expanslor, of =he Br2::sh
cen:ury
(see, among
Empire at the end of the nineteenth
ozhers.
Pakenham [1991); Hodgart [1977],
pp. 25-43; Dangerfield (19701; Hobson (1965), pp. 94-109).
mains:ream
The
views of the Founding Fathers of the United States were
class~=ally liberal.
Some of them read Adam Smith, and the
clevelandfed.org/research/workpaper/index.cfm
uofbar ufaaunoutraauf aqa ut s u o t a o u a s q o auapuadapu~uo paseq aran
6urpu-
paauqua
a3afiap pue 6utuuofd anoqe stzap? ,ue?saUI(ax,
X ~ f s r a z a 3 Aaqa
p~
'aasea
~ j a q a oa
UMO
arou
sjq = e ~ a
axasrw
clevelandfed.org/research/workpaper/index.cfm
-
NOTES
Alternative names for the earlier aad simpler focms of
1.
this
political
model
economy
include
Christian
soci.lism,
b
corporativism, or corporatism, but there are subtle distinctions
among these three terms.
It is generally acknowledged that, for
Americans, Benito Mussolini8s rise to power in Italy (1922 was the
event that.focused public attention on his brand of corporativism,
which he called Fascism.
See Chernow (1990), esp. pp. 277-286;
Trevelyan
(1994).
(1993); Weber
For a good summary of the
.
attributes of corporatism, see Halevi (1987)
of modern
corporatism,
see
Berlin
For
(19921, pp.
the
origins
91-174; B a d a
(1975), esp. pp. 56-57; Arendt (1973), esp. pp. 267-459; 'and Gide
and Risz (1913), esp. pp. 483-515. For useful distinctions between
corporatism and patrimonialism as practiced in Latin America, see
Penna (1988), pp. 137-163.
For an analysis of how the corporate
s=a=e might be manifested in the United States today, see Gross
ll986-1.
For an exzremely useful comparative analysis of the
evolution of fascism in Izaly and Germany, albeit one written from
a Marxisz perspective, see Guerln
ar=:=le
13
a on
.
(1939)
For a contemporary
"Reserve Bank Policy and Economic Planning,. see
Reed (1933).
2.
See Clarkson (1924); Tansill (19381, pp. 79-81, 90-113;
fhernov (1990), pp. 186-191; Dos P ~ S S O S(19621, pp- 220-2273.
plazr.:n?
Lippmann mainzained a generally positive view of economic
during the Hoover-New Deal years.
See generally Lippmann
(10341 , a book drawn from Lippmann*s ~ o d k i nMemorial Lectures at
.
clevelandfed.org/research/workpaper/index.cfm
Harvard University, and L i p p m a ~ ([19331, pp.
Question of a. Planned Society,'
330-3341, .The
in which he properly =presses
-
doubt that then-Governor o'f New York Franklin Roosevelt really had
anything particular in mind when he endorsed 'planningn or 'the
Planned Societyn in a May 1932 Democratic Party campaign speech.
-
Lippmann's rhetoric on planning is a hodgepodge of afreedomn this
and
rn
justicen that,
much
less
coherent
than
most
of
his
intellectual output, but his synpathies on this subject clearly lay
with those advisers pushing both Hoover and Roosevelt toward fairly
vigorous governmental intervention in the private economy.
way, Tarbell
By the
(I19321, pp. 276-2331 gives a longer account of
Young's and Swopeas ideas .on industrial planning.
Hoover
4.
(1952), pp. 84-98; Friedman and Schwartz (1963),
.
p. 320; Pusey (19741, pp. 217-219; and Butkiewicz (1992)
See Hoover's statement upon enactment and the text of the
5.
RFC Act in Board of Governors, federal Reserve Bulletin (19321,
3
.
18,
.
PP.
Benito
6.
-
-8.9-90, 9 4 - 9 9 .
.
p. c=s-w..7
-,
,,,onie
Mussolini
organized
the
Istituto
per
la
Indus=riaie (IRI1 in January 1933 to accomplish, with
respe=: to large business trusts in Italy, some of the functions
=ha= the RFC performed for
*
J..--ec
LI.
L
States.
insurance
companies and banks in the
The f lrs: of Mussolini' s three great 'autonomous
s o ~ i e t i e s ,subsidized
~
by the Italian Treasury as nconvalescent
homes" for weak enterprises, was Sofindit, she Society to Finance
*
,=ar;ar.
Industry, founded in October 1931. The other great Italian
t
society of this type was the Italian Investment Institution (IMI),
'
clevelandfed.org/research/workpaper/index.cfm
founded in November 1931, to make t e n - y e a 10-
to industry on the
security of company stock (Guerin f19391, pp. 218-220).
At the
same time that-Mussolini was organizing Sofindit, Lippaan, in a
September 18, 1931 article, - c~rmnented favorably on industrial
planning in America as advocated by Messrs. Young aad Swope of
-General Electric.(Lippmam [19331, pp. 37-41)
.
Tarbell's laudatory
.
book on Young, with specific praise,for his ideas on industrial
*
planning, was published in June 1932.
7. Three of the nine New York Reserve Bank directors (Young,
Wiggin, and Woolley) also were-members of the New York district's
banking and industrial committee, for example.
Compare Board of
Governors, M n u a l 'Report (19321 , p. 291, with Federal Reserve
Bullcrin (19321, vol. 18, p. 416.
:o
Thomas Ferguson has speculated
author that the industrial committees were organized to
:he
channel
and
control
bankers'
and
industrialists8 publicized
-
opi~igns while the reflation of late 1931-early 1932, aimed at
&
reeLezziz3 Hoover, was ended.
See Jones (19519, pp. 72-01; Pusey (19741, pp. 222-224;
8.
Ols=n (L9889. pp. 17-19.
See Board of Governors, Annual R e ~ o r a (19321, p. 19 [text
5.
c,C at:]
;
federal Reserve Sulletin (1932). vol. 18, pp. 141-144;
Hackiey (1973). pp. 100-11s.
10.
.
.
See Hackley (1973) pp. 127-130; Federal Reserve B u e t j g
(19321, vol. 18. pp. 473-474, 518-527 [text of Section 210 is at
-i
523) ; Olson (1988). p. 19.
1 .
Hackley (19739
. p.
129.
In this regard, both Hoover's
-
clevelandfed.org/research/workpaper/index.cfm
veto of the earlier RFC Act amendment and the Boarde@ endorsement,
in this case, of Federal Reserve loans to individual@ reflected
their approximate political economy models:
Hoover was still
clinging to some tattered remnants of laissez-faire principles
regarding individuals while grandly subsidizing corporations (and
established ones, at that) , while the Board was centralizing
decision-making authority and establishing -direct relationships
between that center and individuals.
The latter way was the road
to industrial planning and corporatism.
Hoover cleared the path,
and the Board wanted to pave it.
12.
See
text
at
~ o a r dof Governors, m a 1 R ~ D O ~(1933),
L
pp. 272-295.
See
text
Board
Governors,
pp. 261-265.
14.
See generally Todd (1992b); Olson (19801, pp. 35-40;
Moley (19391, pp. 148-155. The text of the emergency proclamation
is
1,-. F e d e r a l
Resc-rve 9u31e:in
(19331, vol. 19, pp. 113-114; the
texz of t h e Emergency Banking Act of March 9, 1933, Public Law No.
ibid.,
Ferguson
notes that two
1awyers
for Standard Oil of New Jersey were
L-
=he Trading wizh the Enemy Act of 1917 to the attention of
CIw- -CI.
d.b,-b.,
"C.
instrumental in
=he ~ncomingRoosevelt aaminiszration as a possible statutory basis
for =he March 1933 emergency proclamation.
15.
when
1
:
The Board probably did ,not favor the Thomas Amendment
was enacted, and it has been of two minds about the
smen5ment at various times since the end of World War 11.
(The
,
clevelandfed.org/research/workpaper/index.cfm
last statutory vestige of the Thomas 3rmcndmcnt expired in 1981.)
But the Board included Representative Robert Luce's minority views
on the legal-tender aspects of the amendmeat in
, P A ! = ~
l e a (1933) ' ~ 0 1 .19, pp. 3370338~which should bC read by
persons interested in doctrines of constitutional interpretation
involving strict construction and original intent.
16.
See
also
Blum
(19591, pp.
65-75, and Jones (1951),
pp. 245-254, for other first-hand accounts of the gold-buying
episode-of October 1933-January 1934.
17.
See
the
text of former Section l3b in Hackley (1973);.
pp. 224-227. The Act of June 19, 1934 also authorized the Board to
construct for itself a new headquarters building in the District of
Columbia, with the expenses to be paid by an assessment on the
Reserve
Banks.
That building has officially been named the
M a r r ~ n e rEccles Building.
,
,
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n e 0-S
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g
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