A History of Money and Banking in the United States: The Colonial Era to World War II (48 page)

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

Chicago-based utility empire, which collapsed with Insull flee-ing 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

86Seligman,
Transformation of Wall Street
, pp. 127–38. Wendell Willkie’s sudden surprise Republican nomination for president in 1940

was a cleverly engineered Morgan coup in the Republican Party. During that period, Willkie sat on the board of the Morgan-dominated First National Bank of New York. Willkie’s close friends included the inevitable Thomas W. Lamont; Perry Hall, vice president of Morgan, Stanley and Company; George Howard, president of the United
From Hoover to Roosevelt:

331

The Federal Reserve and the Financial Elites
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 Corporation; and S. Sloan Colt, president of the Morgan-established and Morgan-dominated Bankers Trust Company. Moreover, the two young New York Republican leaders who actually engineered the nomination were Oren Root, Jr., of the top “Morgan” law firm of Davis (John W.), Polk, Wardwell, Gardiner and Reed; and Charlton MacVeagh. Not only was MacVeagh a former officer of J.P. Morgan and Company, but his father had been a longtime partner of the Davis Polk law firm, and his brother was still an officer there. Burch,
Elites
, 3, pp. 44–45, 66.

It is intriguing that one of Willkie’s two main rivals for the nomination, New York’s Thomas E. Dewey, was all his life virtually in the hip pocket of Winthrop W. Aldrich, the Rockefellers, and the Chase National Bank. Thus, see Harr and Johnson,
Rockefeller Century
, pp. 208–09, 405–06.

87Hyman,
Marriner Eccles
, passim. Hyman goes so far as to say that

“Marriner Eccles
is
American economic history.” For a good summary of Eccles’s “remarkable intellectual accomplishment” from the hagiographical point of view, see L. Dwight Israelson, “Marriner S. Eccles, Chairman of the Federal Reserve Board,”
American Economic Review
75 (May 1985): 357–62.

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

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 Mor-mon 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 88By the time of the depression, Marriner Eccles was president of: the First Security Corporation, the Eccles Investment Company, the First National Bank of Ogden (Utah), the First Savings Bank of Ogden, the Eccles Hotel Company, the Sego Milk Company, the Utah Construction Company, and the Amalgamated Sugar Company.

From Hoover to Roosevelt:

333

The Federal Reserve and the Financial Elites
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

89Hyman,
Marriner Eccles
, p. 107. Israelson is therefore wrong to imply that Eccles confined his statism to the macro sphere. Israelson, “Marriner S.

Eccles,” pp. 358–59. Actually, this implication is belied by evidence on the same page of Israelson’s article.

90Another major firm in this construction consortium was W.A.

Bechtel Company. Eccles and Utah Construction had a close association with the Bechtels for many years, often subcontracting construction work to Bechtel in northern California. This association continues to the present day: Eccles’s successor as chairman of Utah Construction, Edmund
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A History of Money and Banking in the United States:
The Colonial Era to World War II

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 intellectual 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 Littlefield, became a senior director of Bechtel Corporation in the early 1980s.

The construction of the Boulder Dam was also the occasion for Bechtel to save Stephen Bechtel’s old college chum John A. McCone’s Consolidated Steel from bankruptcy by awarding Consolidated a huge fabricated steel contract in constructing the dam. Bechtel and McCone soon began to collaborate closely with Standard Oil of California in worldwide construction contracts for refineries and oil complexes.

McCone went on to become a high public official, including head of the Atomic Energy Commission and of the CIA. Laton McCartney,
Friends
in High Places: The Bechtel Story
(New York: Simon and Schuster, 1988), pp. 34 and passim.

91Israelson, “Marriner S. Eccles,” p. 358.

From Hoover to Roosevelt:

335

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

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 92See Lauchlin Currie,
The Supply and Control of Money in the United
States
, 2nd rev. ed. (Cambridge, Mass.: Harvard University Press, [1934]