A History of Money and Banking in the United States: The Colonial Era to World War II

by Murray N. Rothbard

  Douglas cunningly used the Whitney crisis, coming on top of widespread denunciations of short-sellers allegedly causing a stock collapse during the 1938 recession, to complete the anti-Morgan and cartelizing coup at the New York Stock Exchange. William McChesney Martin was named head of the exchange in a new, full-time salaried post as president, and Douglas and Martin proceeded to conduct what Professor McCraw correctly terms a “carefully orchestrated” series of negotiations to hammer out a new cooperative SEC–Stock Exchange structure. Both men used time-honored tactics: Douglas employing severe pressure to force his desired changes; Martin pretending to oppose the changes, but “rais[ing] the specter of direct SEC intervention to persuade his recalcitrant colleagues to accept the new system.” In the end, both men effected a cartelizing revolution, achieving their common goals. As McCraw concludes: “Again, the SEC had used the circumstances of an evanescent crisis to work permanent change, insisting all the while that the exchange itself propose and adopt the new rules as its own.”84, 85

  The New Dealers completed their financial revolution as well as their successful multipronged assault against the Morgans, with their most implacably radical piece of legislation: the Public Utility Holding Act of August 1935. Urged on by Roosevelt himself, the administration insisted on driving through the drastic “death sentence” clause, abolishing all holding company systems in the public utility industry. By 1932, the public utility industry, formerly mired in separate locations, had been producing almost 50 percent of its output in three efficient nationwide holding companies. One was Samuel Insull’s independent Chicago-based utility empire, which collapsed with Insull fleeing to Europe in mid-1932; the other two were Morgan-oriented combines: J.P. Morgan’s directly controlled United Corporation, and General Electric’s Bond and Share Company, General Electric being from its inception in the Morgan ambit. For seven years until 1935, the Federal Trade Commission engaged in massive assaults on the utility holding companies, and Pecora did his snarling best with a retrospective series of blasts against Insull. Finally, Roosevelt set up a National Power Policy Committee in the summer of 1934 to draft legislation abolishing utility holding companies. Arch New Dealer, Interior Secretary Harold Ickes, was chairman of this committee, and general counsel was Benjamin V. Cohen, who drafted the fateful Public Utility Holding Act (PUHA), a measure so radical that Joseph Kennedy felt he had to resign as chairman of the SEC.

  The public utility holding companies, led by the Morgans, waged a long ferocious political and constitutional battle against the PUHA. It was led by the Edison Electric Institute, the lobbying organization for the public utilities, and by its general counsel, longtime Morgan attorney and personal friend of Morgan’s, John W. Davis. Also assisting the opposition effort was Wendell L. Willkie, head of the Commonwealth and Southern Corporation, a subsidiary of Morgan’s United Corporation. Davis thundered that the act was “vicious... the last word in federal tyranny... the gravest threat to the liberties of the American citizen that has emanated from the halls of Congress in my lifetime.” But all to no avail, as in 1938 the Supreme Court, tamed and denatured by the New Deal, upheld the constitutionality of the Public Utilities Holding Company.86

  MARRINER S. ECCLES AND THE BANKING ACT OF 1935

  The saga of Marriner Stoddard Eccles has been told many times, not only by his adoring biographer,87 but also by numerous historians of the New Deal. How Marriner Eccles, young multimillionaire head of a Western banking and construction empire, had been led by the depression and by his reading of Foster and Catchings, to rethink his previous laissez-faire views, and to arrive, virtually on his own and therefore almost miraculously, at proto-Keynesian conclusions. How he came to impress the New Dealers, and was called first to the Treasury and then soon became the radical New Deal head of the Federal Reserve Board and of the entire Federal Reserve System, to remain chairman of the board until after World War II.

  In truth, rediscovering ancient economic fallacies hardly qualifies as a notable achievement. Eccles read Foster and Catchings in early 1931, and adopted wholesale their view of underconsumption as cause of depression, and government deficit spending and stimulation of consumption as the way to recovery. Any intellectual acumen on Eccles’s part would, on the contrary, have led him to realize that Foster and Catchings were writing during the boom of the 1920s, and would have led him to wonder what accounted for the sudden change from boom to depression—a change that can scarcely be explained by an alleged state of permanent underconsumption. Under the influence and assistance of proto-monetarist and radical New Dealer Lauchlin Currie, Eccles soon added governmental monetary inflation to his armamentarium, to make him a comprehensive inflationist and macro–New Dealer. Given such influences, it was easy to become a “Keynesian” slightly before Keynes’s time.

  Moreover, it is doubtful that Marriner Eccles’s conversion to statism was purely intellectual. Marriner was the son of David Eccles, who, as a penniless lad and Morman convert, had emigrated from Glasgow to Utah, there to build up one of the largest fortunes in the West. Most of David’s fortune was in banking and sugar manufacturing. When David died in 1912, Marriner, at age 22, managed to elbow aside competing Mormon families of David’s, and assume control of his father’s empire. By the early 1930s, Marriner had expanded the business empire greatly, a business empire centered in a network of bank holding companies throughout the West, and also including milk production and construction as well as sugar. Marriner Eccles’s empire was centered in his bank holding company, the First Security Corporation, and indeed Marriner had pioneered in forming such holding companies in banking.88 Eccles’s conversion away from free markets was, indeed, micro as well as macro: as head of the important Amalgamated Sugar Company, Eccles led a vigorous effort to cartelize the sugar industry, and to unite all sugar producers, foreign and domestic, in an allotment plan to form rigorous maximum production quotas for each firm. Furthermore, as a large banker in a shaky banking environment, Eccles was understandably eager to push for federal guarantees of bank deposits, legislation that redounded to his direct benefit.

  From the failure of the voluntary sugar cartel, it was an easy step for Eccles to advocate a compulsory cartel plan for all of agriculture: essentially the Agricultural Adjustment Administration’s domestic allotment plan for the federal government to compel restriction of agricultural production in order to raise farm prices. It was also an easy step for Eccles to weave together his banking and sugar interests, to advocate the federal government’s subsidy of farm mortgages, mortgages which of course had been and would continue to be purchased by Eccles’s savings banks.89

  There was another personal economic reason for Eccles to suddenly look benignly on massive federal public works spending. In 1930, President Hoover decided to build the mammoth Boulder Dam, which became one of the major public works projects of the early depression years. One of the major construction companies in the consortium that built the dam was Utah Construction, with Eccles putting up much of the capital and personally present at the San Francisco meeting where the consortium was formed.90

  By the time of his appearance at the Senate Finance Committee hearings at the end of February 1933, in testimony that would win him great notoriety, Eccles had worked out a complete collectivist program: not only for macro deficits, public works, and unemployment relief, not only for guaranteed bank deposits, and not only for taxing the rich and subsidizing the poor, but also a plea for agricultural cartels, for federal agencies which would have to approve all new capital issues, and all “means of transportation and all means of communication to ensure their operation in the public interest”; and, as a topper, “a national planning board to coordinate public and private economic activities.”91

  What was unusual about Eccles was not that he was a big businessman who had opted for collectivism—he was only one of many in this era—but that he was willing and eager to move to Washington to carry out these programs personally. Eccles had another personal economic and intelle
ctual interest in serving in Washington in money and banking. Like the Bank of America’s A.P. Giannini, Eccles was a Western outsider to the Morgan-dominated Federal Reserve System of the 1920s, and he had conceived a bitter hatred of the Morgan empire, as well as a crusading desire to transform American banking by shifting power in the Fed, once and for all, from the Morgan- and Wall Street–dominated New York Federal Reserve Board to a non-Morgan politically appointed Federal Reserve Board in Washington.

  Two channels have been charted for the way that Eccles’s views became known to the New Dealers. Robert Hinckley, an old friend of Eccles’s and nephew of Senator William King (D-Utah), and another young man, Dean Brimhall, a brother-in-law of Eccles’s, had formed a bimonthly discussion club in Utah called the Freidenkers. On hearing of Eccles’s new views, the Freidenkers became Eccles’s disciples, and Hinckley used Senator King’s influence to get Eccles a hearing at the Senate Finance Committee. Also Marriner was a regent of the University of Utah, and when radical New Dealer Stuart Chase spoke at the Chautauqua lecture series at the university, he was impressed with Eccles’s views. Another, overlooked influence on the New Dealers is the fact that George Dern, Roosevelt’s secretary of war and former governor of Utah, was a financial subaltern of Eccles’s, being a director of two Salt Lake City banks, both part of Eccles’s First Security Corporation holding company.

  After a year, in February 1934, Eccles came to Washington as special assistant on monetary and credit matters to Secretary of the Treasury Henry Morgenthau. Eccles found himself frustrated at Treasury, however, since Morgenthau had old-fashioned pro-balanced-budget views. Morgenthau was heavily under the influence of Lewis W. Douglas, still in the administration as head of the Bureau of Budget (then in the Treasury Department), and of Undersecretary of the Treasury T. Jefferson Coolidge, of the Morgan-allied financial family in Boston, who had been placed in his spot on the urging of George Harrison. But Eccles did not waste his months at the Treasury, finding support and enthusiastic agreement in two young aides, former Fed economist Winfield W. Riefler and Lauchlin Currie, a young Ph.D. from Harvard. Currie, whose important monetarist work was in the process of being published by Harvard University Press, converted Eccles to the goal of total political control over the money supply, and of the alleged necessity for recovery to concentrate on open market operations for rapid inflation of the money supply.92

  In early September 1934, Eccles was asked by administration aides to accept an appointment as governor of the Federal Reserve Board in Washington, Eugene Black having resigned to return to Georgia and later to move to the Chase National Bank. Eccles boldly replied that he would only accept the post if at the same time there was a fundamental structural change at the Fed, and power was shifted from the New York Fed to the Federal Reserve Board in Washington. Following up on this determined stance, Eccles submitted a memorandum to the White House on November 4, written in collaboration with Eccles’s aide and theoretician, Lauchlin Currie. The memo stressed that the Federal Reserve Board must take full power from the New York Fed: that it must obtain “complete control over the timing, character and volume of open market purchases and sales of bills and securities by the Reserve banks.” Until this point, wrote Eccles/Currie, private banker “interest, as represented by individual Reserve bank governors, has prevailed over the public interest, as represented at the [Federal Reserve] Board.” From now on, the “public interest” must prevail. In particular, the Federal Reserve Board must gain complete control over the Open Market Committee, now composed of the 12 governors of the private Federal Reserve banks. Such changes were necessary, the memo concluded, in order for the Fed to become a genuine “central bank”; although, secure in such new powers, there would be no need to arouse intense political opposition by calling such a setup a “central bank.”93

  On November 10, FDR, impressed by the memo and emboldened by his smashing victory over the Republicans in the November 1934 congressional elections, announced the appointment of Marriner Eccles as governor of the Federal Reserve Board, and he was sworn in a week later. At the same time as his appointment was announced and submitted for confirmation to the Senate, the radical Banking Act of 1935, embodying the Eccles/Currie program, was scheduled to be submitted to Congress. Lined up against Eccles and the new banking act were powerful Senator Carter Glass, chairman of the Senate Finance Committee and of the crucial subcommittee of the Senate Banking and Currency Committee, as well as Glass’s theoretician Professor H. Parker Willis, who denounced the banking act as the “worst and most dangerous measure that has made its appearance for a long time.” In this particular battle, the opposition was a coalition of former enemies, the Willis-Glass hard-money qualitativists; and the Morgan empire, spearheaded by George L. Harrison, whose New York Fed stood to lose its dominating power over the banking system. In contrast, founding monetarist and veteran inflationist Irving Fisher of Yale, spiritual mentor to Milton Friedman, claimed that the banking bill “will represent a great step forward, probably the greatest in the president’s administration.”

  With the fight now under way, Eccles moved quickly to establish his own total control over dissident institutions within the Federal Reserve. He met with the Federal Advisory Council (FAC), a powerful voice of private bankers within the Federal Reserve. The FAC consisted of one private banker from each of the 12 Federal Reserve districts; almost always, they were representatives from large metropolitan banks in each district. The occasional publications of the FAC were often presented to the public as if they were the official views of the Federal Reserve Board. Thus, in September, strategically timed for the election, the FAC had publicly called for a balanced federal budget, incensing Eccles and the New Dealers. Eccles now cracked down, ordering the FAC to confine itself to an advisory role, and to issue no public statements without first submitting the recommendations to the Federal Reserve Board and notifying it in advance of any public pronouncement. The Federal Advisory Council promptly knuckled under.

  Eccles then moved to completely control any legislative recommendations to emerge from the Federal Reserve System. He abolished the Fed’s Committee on Legislative Programs, which had been headed by Harrison, and had consisted only of private or regional Fed bankers with the exception of one representative from the Federal Reserve Board. Eccles then created a new legislative committee, consisting solely of his own appointed professional staff. In addition to Eccles himself, members were Chester Morrill, Federal Reserve Board secretary; Walter Wyatt, the board’s general counsel; Emanuel Gold-enweiser, director of the Fed’s Division of Research and Statistics; and Lauchlin Currie, the division’s new assistant director. The committee was charged with drafting a new banking act. The committee draft would then go to a subcommittee on banking legislation of the administration’s Interdepartmental Loan Committee, chaired by Secretary Morgenthau, and consisting of the heads Federal Advisory Council and Federal Deposit Insurance Corporation (FDIC), and the comptroller of the currency, as well as several representatives of the Treasury.

  To gain support from the Treasury and other administration figures as well as from Congress and the nation’s bankers, FDR devised a cunning strategy: he would present Eccles’s radical reform as Title II of the new banking act, sandwiched in between two reforms the bankers desperately wanted: Title I, liberalizing assessment on banks for deposit insurance, a pet reform of FDIC head Leo T. Crowley; and Title III, which granted bankers a grace period beyond the statutory July 1, 1935, imposed by the Banking Act of 1933, before they had to repay loans granted to them by their own banks. Title III was a favorite project of Comptroller of the Currency J.R.T. O’Conner. It was no accident that both Crowley and O’Connor were members of the decisive Interdepartmental Loan subcommittee. While both Crowley and O’Connor fought to present their own bills separately from Eccles’s, Morgenthau went along with Roosevelt’s strategy and with Eccles’s reforms, the banking act being hammered through the committee quickly and submitted to Congress on February 5.94

/>   In Congress, Eccles’s nomination sailed through, with struggles concentrated on the banking act. In the hearings, particularly interesting in opposition was James P. Warburg of Kuhn, Loeb, and chairman of the board of the Kuhn, Loeb–run Bank of Manhattan. Warburg, who as an old-line banker had been allied with the Morgans at the London Economic Conference, denounced the banking bill as “Curried Keynes.”95 In the course of the controversy, the highly influential New York Times and the Washington Post (owned and directed by Eugene Meyer) changed their initial opposition to support for the bill. Essentially, Eccles won almost all of his points: the shift of banking control from Morgan’s New York Fed to the non-Morgan Washington politicians had been completed. In the Senate, Eccles only had to make one important concession to Glass: instead of the Federal Open Market Committee consisting solely of the governors of the Federal Reserve Board, it would be instead comprised of the seven members of the Federal Reserve Board plus five rotating representatives of the Federal Reserve banks (in practice, their presidents) and hence of private bankers.

  But despite this compromise, the decisive act had taken place: open market policy would be initiated in, dominated by, and enforced by the Federal Reserve Board in Washington. Actual open market operations would be carried out, most conveniently, in New York, but strictly under the orders of the Federal Reserve Board–dominated FOMC. Individual Federal Reserve banks (in practice, the New York Fed) were prohibited from buying or selling government securities for their own account, except under the direction, or with the explicit permission, of the FOMC. To further reduce the power of the Federal Reserve banks, it was explicitly provided that the bank-elected members of the FOMC were not to serve in any way as agents of the banks that elected them; indeed, the banks were not to know what was going to happen but only to have a chance to be heard through an advisory committee. Indeed, the bank presidents serving on the FOMC were not even allowed to divulge actions taken at FOMC meetings to their own board of directors! Harrison fought unsuccessfully against this provision; and in a last-ditch and finally failing battle in 1937, Harrison tried to get the FOMC to allow Reserve banks to conduct open market operations on their own in case of individual bank emergencies.