A History of Money and Banking in the United States: The Colonial Era to World War II (49 page)

1935). Currie’s doctoral thesis proved to be perhaps the most important monetarist work of the pre–World War II period. Currie’s thesis was simple: An ideal monetary system
from the standpoint of control
would be one in which expansions and contractions of the supply of money could be brought about easily and quickly to any required extent. . . . It appears to the writer that the most perfect control could be achieved by direct government issue of all money, both notes and deposits subject to check. (Ibid., p. 151)

A history of monetary theory by a leading early monetarist partially acknowledged the importance of Currie’s influence on economic theory.

Lloyd W. Mints,
A History of Banking Theory
(Chicago: University of Chicago Press, 1945). Currie’s vital influence on Eccles and hence on banking legislation in the United States is shown in Hyman,
Marriner
Eccles
, pp. 155 ff., and in Israelson, “Marriner S. Eccles,” p. 358. It is therefore all the more astonishing that there is not a single mention of Currie in Friedman and Schwartz,
Monetary History
.

From Hoover to Roosevelt:

337

The Federal Reserve and the Financial Elites
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, spear-headed 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 93Hyman,
Marriner Eccles
, pp. 157–58.

338

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

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 Goldenweiser, 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

From Hoover to Roosevelt:

339

The Federal Reserve and the Financial Elites
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.

94Ibid., pp. 167–71.

95Lauchlin Currie, continuing as economist at the Fed, rose to the post of administrative assistant to President Roosevelt during World War II.

There he was recruited as a valuable member of the Silvermaster group of Soviet espionage agents. The group was organized by Board of Economic Warfare official Nathan Gregory Silvermaster, and it included Treasury economist and later director of the International Monetary Fund, Harry Dexter White. After the defection of Soviet agent Elizabeth Bentley after World War II and his naming by Bentley, Lauchlin Currie found it expedient to emigrate to Colombia, spending the rest of his days as economic adviser to the Colombian government. Elizabeth Bentley,
340

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

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
Out of Bondage
(New York: Ballantine Books, 1988), particularly the

“Afterword” by Hayden Peake; and Christopher Andrew and Oleg Gordievsky,
KGB: The Inside Story of Its Foreign Operations from Lenin to
Gorbachev
(New York: Harper Collins, 1990), pp. 281–84, 369–70.

From Hoover to Roosevelt:

341

The Federal Reserve and the Financial Elites
Reserve banks to conduct open market operations on their own in case of individual bank emergencies.

In addition, the Federal Reserve Board was given veto power over the election of the president and first vice president of each district Federal Reserve bank. And, in a symbolic gesture, all district Fed “governors,” the hoary name for heads of the central banks, were demoted to “presidents,” whereas the old ”members” of the Federal Reserve Board in Washington were upgraded to “governors,” while the previous “governor” of the Federal Reserve Board now became the board’s august “chairman of the board of governors.” Furthermore, cementing Chairman Eccles’s power within Washington, the Treasury secretary and the comptroller of the currency were both removed as ex officio members of the Federal Reserve Board.

Finally, the last shred of qualitativist restraint upon the Fed’s expansion of credit was removed, as bank assets deemed eligible for Fed rediscounting were broadened totally to include any paper whatever deemed “satisfactory” by the Fed—that is, any assets the Fed wished to declare eligible.96

The Banking Act of 1935 was important for being the final settled piece of New Deal banking legislation that consolidated all the revolutionary changes from the beginning of the Roosevelt administration. The Morgans tried desperately, for example, to alter the 1933 Glass-Steagall provision, compelling the separation of commercial and investment banking, but this reversion was successfully blocked by Winthrop Aldrich.

Specifically, Senator Glass’s amendment to the Banking Act of 1935, restoring limited securities power to deposit banks, was able to reach the congressional conference committee; for a while, it looked like this Morgan maneuver would succeed, but presumably at the behest of Aldrich, however, FDR

96Friedman and Schwartz,
Monetary History
, pp. 445–49.

342

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

personally interceded with the committee to kill the Glass amendment.97

For his part, Aldrich, as a Wall Street banker himself, was not very happy about the permanent shift of power from Wall Street to Washington, but he was content to go along with the overall result, as part of the anti-Morgan coalition with Western banking.

The centralization of power over the banking system in Washington was now complete. It is no wonder that the irre-pressible H. Parker Willis, writing the following year, lamented the centralized monetary and banking tyranny that the Federal Reserve had become. Willis wisely perceived that the course of inflationary centralization to have begun in the 1920s as Morgan control in the hands of the New York Fed, and now, with the New Deal, was immeasurably accelerated and shifted to Washington:

The Eccles group which advocated the Act of 1935 sought to obtain for themselves those powers which the more ambitious of the banking clique in New York and elsewhere had already arrogated to the Federal Reserve Bank of New York and to the small group by which the institution was practically directed [the House of Morgan]. There was no change in the conception or notion of centralization, but only in the agency or personnel through which such centralization should be put into effect.98

The New Deal, Willis went on, had passed various allegedly temporary and emergency measures in its first three years, which were now permanently consolidated into the Banking Act of 1935, and thus “was built up perhaps the most highly 97Chernow,
House of Morgan
, p. 384; Ferguson, “Coming of the New Deal,” pp. 29–30.

98Henry Parker Willis,
The Theory and Practice of Central Banking: With
Special Reference to American Experience 1913–1935
(New York: Harper and Brothers, 1936), p. 107.

From Hoover to Roosevelt:

343

The Federal Reserve and the Financial Elites
centralized and irresponsible financial and banking machine of which the modern world holds record.”

The result, Willis pointed out, was that the years of

“tremendous deficit” from 1931 on were marked by a process of “gradually diverting the funds and savings of the community to the support of governmentally directed enterprises.” It was “an extraordinary development—an extreme application of central banking which brought the system of the United States to a condition of even higher concentration” than in other countries. Willis ominously and prophetically concluded, Today, the United States thus stands out as a nation of despotically controlled central banking; one in which, as all now admit, moreover, business paper of every kind is gradually taking the form of government paper which is then financed through a governmentally controlled central banking organization.99