America’s Money Machine

THROUGHOUT THE FIRST YEAR of his administration Roosevelt clung to his policy of a balanced budget and fiscal integrity, but it became increasingly apparent that the condition was stronger than the theory. The condition was the political demand that government powers be used to restore the economy and get more people back to work.

It was at this juncture that there appeared on the scene a figure who was ideally suited to resolve this dilemma and to provide Roosevelt with a less assailable philosophical framework than the Warren thesis had proved to be. This was Marriner S. Eccles, a millionaire banker and capitalist of Ogden, Utah, whose various banks and financial enterprises had managed to stay afloat during the storms that raged during 1931 and 1932.

Eccles’ novel views attracted the attention of Rexford Tugwell, one of the Roosevelt “brain trust,” then Under Secretary of Agriculture, who invited him to Washington for a conference.

It was a time when the tensions within the New Deal were strong, with Acheson, Sprague and Warburg holding the conservative fort and Warren, Hopkins and Wallace, supported by men like La Follette and Norris in the Senate, urging more vigorous government action. A friend of Eccles, a former governor of Utah, George Dern, was Secretary of War and Eccles’ partner, E. G. Bennett, had been appointed a director of the newly created Federal Deposit Insurance Corporation. The liberals were in a dilemma. There were already doubts as to the efficacy of the gold buying policy. As Eccles stated,

Eccles’ arguments and personality made an impression upon his listeners. Tugwell undertook to introduce him to various New Deal powers, and in February he was appointed special assistant to Morgenthau (who had meantime become Secretary of the Treasury) to deal with monetary and credit matters.

Eccles promptly found much to bite into. The elements of the Eccles philosophy had already been in involuntary practice. The President’s budget balancing program had gone with the wind in his budget message of January 13, 1934, and the Treasury was faced with the problem of raising funds. To give employment, a Civilian Conservation Corps for reforestation work had been authorized March 31 of the year before to provide work for some 250,000 jobless male citizens between the ages of 18 and 25. In May the Federal Emergency Relief Act appropriated $500 million for relief projects, and at the same time the Agricultural Adjustment Act, to which the Thomas amendment had been an attachment, established subsidies to farmers. Later in the same month the Tennessee Valley Authority was created and authorized to construct dams and power plants, and to develop economic and social well-being in the Tennessee Valley region. In June the Homeowners Refinancing Act created the Home Owners Loan Corporation to refinance home mortage debts for non-farm owners; it was provided with $200 million capital stock and authorized to issue $2 billion in bonds. In June also the Public Works Administration was established for the construction of roads, public buildings and other projects, for which a fund of $3,300 million was authorized. In October the Commodity Credit Corporation was created under the Agriculture Adjustment Act with authority to draw upon the Reconstruction Finance Corporation for funds to extend loans to farmers on their crops. In November the Civil Works Administration was established as an emergency unemployment relief program for the purpose of putting four million jobless persons to work on federal, state and local made-work projects. By the time it terminated in March of 1934 it had spent more than $933 million on 180,000 works projects. In February of 1934 the Civil Works Emergency Relief Act authorized $950 million for use by the Federal Emergency Relief Administration until the end of the fiscal year 1935 for operating the program of civil works and direct relief. Also in the same month the Export-Import Bank was established under powers already granted to encourage the flow of overseas commerce by financing trade with foreign nations.

Having abandoned for the time the idea of a balanced budget, Roosevelt was now ready for the proposals of the more extreme wing of his advisers that the government launch a massive public works spending program. Eccles belonged to this wing along with Harry Hopkins, Federal Relief Administrator; Rexford G. Tugwell, Under Secretary of Agriculture; and Harold Ickes, Secretary of the Interior; but his views were somewhat muffled by the conservative influences in the Treasury, particularly those of Lewis Douglas, Director of the Budget, and Thomas Jefferson Coolidge, who had replaced Acheson as Under Secretary, as well as by Morgenthau’s insistence that all Treasury opinion offered to Roosevelt be funneled through himself.

Eccles apparently made such an impression upon the President in his exposition of his theories that Roosevelt decided at once to appoint him as Governor of the Federal Reserve Board despite the opposition of Carter Glass, whose antagonism to Eccles was steadily mounting. On November 10, Eccles’ appointment was announced and on November 16 he was sworn in as a recess appointee; but Glass’s opposition succeeded in deferring Senate confirmation until the following April.

As Governor of the Federal Reserve Board, Eccles now began to reform the internal administration to draw more authority to himself while waiting action by the Congress on the bank legislation which Roosevelt had appointed an inter-departmental committee to draft.

His first assault was on the Federal Advisory Council. This was the body of twelve bankers, elected by the directors of each Federal Reserve bank to represent and speak for the private banking system. The Council had issued a public statement calling for a prompt balancing of the budget. Eccles at his first meeting with the Council demanded that the Council clear its statements with the Board. The demand aroused opposition but was accepted. Eccles now moved to abolish the Committee on Legislative Program and in doing so incurred the hostility of George Harrison, Governor of the New York Federal Reserve bank. Under the threat of the Roosevelt influence the Board agreed to its abolition, and Eccles now became the spokesman for the Board on legislation.

Early in February the Administration presented the draft of new banking legislation on which the interdepartmental banking committee had been working. It immediately roused the antagonism of Carter Glass, whose allergy to Roosevelt was only less than his antipathy to Eccles, and both were aggravated by the neglect to consult him on the bill or even to show him an advance copy of the bill.2 Although the bill was introduced in the House on February 5, by Congressman Steagall, Glass refused to have anything to do with it, and in the Senate it was sponsored by Senator Duncan U. Fletcher. Glass, as chairman of the subcommittee having jurisdiction, did not schedule hearings until April 19. The House meantime had concluded its hearings on April 8.

The bill, which became the Banking Act of 1935, was presented in three titles. The first dealt with matters relating to deposit insurance and need not detain us here. Title III dealt with technical amendments to the banking laws. Title I and Title III were brought into the bill to serve political strategy. Title I liberalized the insurance assessments to the advantage of participating banks, and Title III extended the grace period for the repayment of loans which banks had made to their executives during the emergency. The core of the bill was Title II, and as it was a reflection of Eccles’ views, it is useful here to quote the pertinent passages of his memorandum of November 4:

First: That the power over open-market operations, which has such great bearing on the supply of reserves and the volume of money and credit, should be taken away from the privately run Federal Reserve banks, acting through their governors; that the power should be vested in an Open Market Committee of the Federal Reserve Board in Washington; that this committee of the Board should have the right to initiate open-market policies and be responsible for their execution and results.

Second: That the separate office of chairman of the board of directors of a Reserve bank should be abolished and its functions merged with those of the governor; that by law the governor should be made the formal as well as the actual head of the Reserve bank; that he should be chosen annually, and the Federal Reserve Board be empowered to approve or reject any nomination of a governor made by Reserve bank directors.

Title II aroused not only the opposition of Glass, but the conservative banking element generally. At one point it was hinted to Eccles that he might obtain his confirmation as Governor of the Federal Reserve Board if he would abandon Title II. Glass, as a strategy, inverted the usual procedure of hearing Administration witnesses first, and on the pretext that James P. Warburg had to make a boat for Europe began by hearing the opposition, beginning with this ex-New Deal adviser.

Warburg’s views were echoed by a long list of witnesses including representatives of the Economists’ National Committee on Monetary Policy, and authorities like Professor E. W. Kemmerer of Princeton; H. Parker Willis; and O. M. W. Sprague, who had only just resigned as adviser to the Treasury.

Owen D. Young, who followed James Warburg on the stand, came to the heart of the proposal in pointing out that it was an attempt to force revolutionary changes in the Federal Reserve System under the pretext of an emergency. He stated:

I know of no emergency, either expressed or prospective, which requires legislation now. Everything which can be done by the Federal Reserve System to relieve the depression either has been or is now being done. . . . The only justification that I know of for new legislation now of the character proposed is to centralize responsibility so that we can better control another boom. I venture the opinion that we have ample time for study before that power is needed.

My chief objection, Mr. Chairman, to the pending bill—and this is a very basic objection—is that it sets up in fact a central bank and destroys the regional system under which we have operated for so long. . . .

Eccles’ answer to this argument, which he stated in a speech at Scranton on May 5 and when he was finally called to testify on May 10 was that if the country did not approve the government’s spending program, the place to curtail that program was through the ballot and not through the Federal Reserve System. So far as the German inflation was concerned, he pointed out that if the German government was prepared to appropriate money it was equally prepared to change the Reichsbank law if necessary.

Glass managed to delay action on the bill by absenting himself from the Senate until a crisis arose over the July 1 deadline by which bankers were expecting relief under Title III. Presidential influence was again brought to bear on July 2 and the bill eventually went to the President in August and was signed August 23.

The bill, as enacted, contained most of what Eccles wanted, except the dilution of the requirements of eligibility for rediscount. In the House, where inflationary sentiment was rampant, a policy statement had been written in redefining the functions of the Federal Reserve System, broadening them to the point of giving it overall economic planning authority. The statement, offered as a new subsection (O) of Section 11, read as follows:

It shall be the duty of the Federal Reserve Board to exercise such powers as it possesses in such manner as to promote conditions conducive to business stability and to mitigate by its influence unstabilizing fluctuations in the general level of production, trade, prices, and employment, so far as may be possible within the scope of monetary action and credit administration.

Representative Goldsborough offered a further amendment, that lost only by a vote of 128 to 122, extending the Committee’s language to charge the Federal Reserve System with the duty of manipulating the money system so as to restore the purchasing power of the dollar to the 1921–1929 level.

In the Senate the policy declaration was deleted. The Senate also rejected the proposal, accepted by the House, repealing the requirement for collateral against Federal Reserve notes other than the 40 per cent gold cover, and making the notes secured by all the assets of the Reserve banks.

The bill that went to the President for signature provided the following:

(1) Reorganization of the Federal Reserve Board. The name of the Board was changed to the Board of Governors of the Federal Reserve System and the membership was reduced from eight to seven, to be appointed by the President. The ex officio memberships of the Secretary of the Treasury and the Comptroller General were abolished. Eccles is authority for the statement that it had originally been intended only to eliminate the ex officio membership of the Secretary of the Treasury and to leave the Comptroller General on the Board but both were excluded when Morgenthau’s sensitivity was offended that one of his subordinate officials should be on the Board while he was removed.

The Chairman of the Board was to be designated by the President for a four-year term.

(2) The executive authority of the Federal Reserve banks was transferred from the chairman to the governor and deputy governor and the title of these officers changed to president and first vice president. These officials were appointed by the board of directors for five years but the appointments were subject to the approval of the Board of Governors of the Federal Reserve System.

(3) The Open Market Committee, consisting of the twelve governors of the Federal Reserve banks, was replaced by a new committee composed of seven members of the Board of Governors of the Federal Reserve System and five representatives of the twelve Federal Reserve banks, who were to be selected annually by the boards of directors of the Federal Reserve banks: one by Boston and New York; one by Philadelphia and Cleveland; one by Richmond, Atlanta, and Dallas; one by Chicago and St. Louis; and one by Minneapolis, Kansas City, and San Francisco.

(4) The Board of Governors was now authorized to change the reserve requirements for both demand and time deposits of member banks without the declaration of an emergency. Such changes, however, were to be within the minimum then required by law, and a maximum of not more than twice the amount.

(5) The law made no change in regard to setting discount rates except that Federal Reserve banks should establish these rates with the approval of the Board of Governors every fourteen days, or more often if deemed necessary by the Board.

(6) The law did not go so far as Eccles had desired in permitting any sound asset to be eligible for rediscount, but it did grant permanent authority to any Federal Reserve bank, under regulations of the Board of Governors of the Federal Reserve System, to make advances on any “satisfactory” as well as eligible paper to a member bank.

(7) The act liberalized the restrictions on real estate loans.

(8) The law further eased the requirements for admission to the Federal Reserve System.

(9) Technical changes relieved the Board of Governors of certain administrative details.

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3Ibid. p. 166. Currie, a Canadian by birth, subsequently came under suspicion as a member of a Soviet spy ring that included Harry Dexter White, Morgenthau’s assistant in monetary matters. He was investigated by the Federal Bureau of Investigation and by the House Committee on Un-American Activities and apparently satisfied the Committee that his associations with known Communists were innocent. Subsequently, he moved to Colombia and renounced his American citizenship.

4Eccles had promised to discuss the draft with Glass, he states, but was unable to do so by reason of the fact that he himself did not receive the draft until it was sent to Congress. (Op. cit. pp. 194 ff.) Nevertheless, the bill was completely an Eccles bill.

• 2Nevertheless, not all railroads were prosperous, and much of Harriman’s success lay in his careful husbandry of his properties and his superb railroading management. He was like a good householder. If he milked his cow, he also fed it well. No sooner had he acquired control of the Union Pacific than he began a large scale rebuilding of tracks and stations, and modernizing equipment. He continually travelled inspecting his properties. He paid particular attention to public relations. He cultivated new customers by offering inducements to industries to establish themselves on his routes. In the only magazine article he is known to have written, he gave his creed of railway management: “The railroad that does not seek to build up the territory through which it passes by offering good service, pursues a policy that will only bring it grief in the long run.” When the Colorado River left its banks and flooded the Imperial Valley of California in 1907, Harriman sent Southern Pacific engineers to the area and he personally directed the work of relief and rehabilitation. Before the control of the river was achieved, the Southern Pacific had invested $3 million in the effort.
• 3Theodore Roosevelt returned from a year of big game hunting in Africa and a triumphal tour in Europe to find again an opprtunity and a demand for his political talents. Drawn by an appeal to public service, and perhaps to a considerable degree by ambition,* he began to angle for the leadership of the insurgent wing. In a speech at Osawatomie, Kansas, on August 31, 1910, on “The New Nationalism” he backed the Supreme Court’s attitude toward social legislation and announced the political doctrine “that every man holds his property subject to the general right of the community to regulate its use to whatever degree the public welfare may require it.”
• 4Wilson came into office under considerable popular momentum toward centralization of government. Ten days before his inauguration the Sixteenth Amendment to the Constitution, which had been proposed only three years before, was finally ratified and declared in effect. This revolutionary fiscal measure, authorizing a tax on incomes, vested in the Federal government almost unlimited taxing power and gave it the financial means by which it could dominate and eventually overwhelm the state governments. On February 28, 1913, the Pujo Committee investigation into the “money trust,” which had been authorized the February before,* reported an unwholesome concentration of money and credit through bank consolidations, company mergers, interlocking directorates, security syndicates, and increased banker representation on the boards of insurance companies, railroads, public utilities and industrial corporations.