• U.S.

Business: Banks & Brakes

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(See front cover)

Without debate, without dissent the Senate last week confirmed six appointments to the new Federal Reserve Board submitted by President Roosevelt. The seventh appointee is yet to be chosen. Three days later the old Board, set up by Woodrow Wilson 22 years ago, passed out of legal existence. Though their terms had not expired, four members of the old Board were retired without pensions. At 67 John Jacob Thomas, a Roosevelt appointee, returns to his farm and his law practice in Nebraska. George Roosa James, 69, wise and crotchety, goes back to Memphis to train his son in the wholesale drygoods trade. The two members who have sat on the Board since its first meeting in 1914 will stay on in Washington: Charles Summer Hamlin, 74, as a technical adviser to the new Board; Adolph Caspar Miller, 70, as an adviser on its new $3,400,000 marble building, contracts for which were let last week. The new Board is new in far more than personnel. Now called the Board of Governors of the Federal Reserve System, it is headed by a chairman instead of a governor. Annual salaries have been upped from $12,000 to $15,000. The Board’s powers were so vastly augmented by the Banking Act of 1935 that it now sits virtually as the directorate of a central bank of issue. Along with the Board’s enlarged authority over the country’s currency and credit goes a greater responsibility for U. S. economic life than any single body has ever had before in U. S. history. Today the U. S. has a managed currency. With the advice and consent of the Administration, the Reserve Board is the manager. And in the management process a tremendous potential momentum toward Inflation has been built up. If this force is not properly braked, most disinterested observers agree that the U. S. may go on a reckless ride which would make the boom of the 1920’s seem like a harmless trolley trip. Indeed, there is some doubt whether the Board can keep this momentum Bunder control, because many of the inflationary threats lie not upon the records in its rented quarters across from the Treasury but in the cloak rooms of the Capitol. Last week inflationary sentiment in Congress burned brighter than at any time since 1933. Congressmen hate the thought of voting taxes in an election year. Led by Oklahoma’s Thomas in the Senate and Texas’ Patman in the House, inflationists and silverites loudly demanded new currency by the billion to pay the Government’s bills. Schemes ranged from use of the $3,000,000,000 of “greenbacks” authorized in the so-called Thomas Amendment to the 1933 Emergency Farm Relief Bill, to the issuance of silver certificates against the mountain of silver acquired by the Treasury since 1934. And there was a fresh cry for spending the so-called “gold profit,” now safely locked up in the $2,000,000,000 Stabilization Fund. Meantime the 59¢ dollar sank for three weeks straight in international exchange. Last week both the French franc and Dutch guilder were near the gold export point. Metal shipments to Europe were expected to start shortly, reversing a flow which, with one minor interruption, has gone on since the dollar was devalued just two years ago last week.

Debtor Board. In personnel the Reserve Board that took office last week differs from all former boards. For the first time in history it is predominantly a debtor board, representing people who borrow money rather than lend it. Though the influence of big Eastern bankers upon Reserve Board policy has been largely exaggerated, previous boards have tended to think of U. S. economic life in terms of the banking system. The new Board will think of the banking system in terms of U. S. economic life.

Every member is a Roosevelt appointee. Besides Chairman Marriner Stoddard Eccles, only one member is a carryover from the old Board—Mene Stephen Szymczak, whom President Roosevelt added to the old Board in 1933. Born in Chicago 42 years ago. Governor Szymczak has often thought of changing his name, used to preface political speeches with an explanation that it was pronounced Sim-chak. His father, a Pole, was a day laborer. Tall, robust, good-natured, Governor Szymczak went to St. Mary’s College in Kansas, continued his studies at De Paul University in Chicago, eventually joined the faculty there, teaching business logic, psychology, ethics. For two years he was superintendent of Cook County’s Forest Preserve District. A political protege of Chicago’s late Mayor Anton Cermak, and a Roosevelt campaigner in Polish districts, Mr. Szymczak was Comptroller of the City of Chicago when the President named him to the Board. To bankers he is that rare creature—a political appointee who turns out better than expected. Since the full term for a Board Governor is 14 years the first appointments were staggered to allow for one retirement every two years. Governor Szymczak got the twelve-year appointment. Only full ( 14-year) term went to Joseph A. Broderick, onetime (1929-34) New York State Banking Superintendent. His appointment was something of a homecoming, since he had served on the organization committee which worked out the technical details of the Federal Reserve Banks in 1914, was the Board’s first chief examiner. After a nine-year turn as vice president in a big Manhattan bank, Mr. Broderick was picked to head New York’s Banking Department by Governor Franklin D. Roosevelt. While Mr. Broderick was in office, Manhattan’s Bank of United States blew up. In the horrid aftermath the Banking Superintendent was indicted for neglect of duty and conspiracy, along with the bank’s officers and directors. One of the trial’s high points was the parade of Broderick witnesses, including Governor Roosevelt, Alfred E. Smith, Charles Edwin Mitchell. He was acquitted. Now 54, brisk, hardworking, humorous, he is popular with bankers, is the only member with anything like an Eastern banking background. The ten-year term went to John Keown McKee, a Pittsburgher who has lived in Washington for the past four years, lately as RFC’s chief examiner. Husky, energetic, 43, he made a name for himself as a receiver of closed banks in Ohio and Pennsylvania, acting for the U. S. Comptroller of the Currency. Much of RFC’s rosy record is attributed to Mr. McKee’s examining department. Having no political qualifications, appointments to the Board must be made with “due regard” to geographical and economic interests. No two members may be named from the same Reserve district. The South’s representative is Ronald Ransom, 54, executive vice president of Atlanta’s Fulton National Bank. A suave, studious, blue-eyed six-footer, he is the one member who looks the banker’s part and dresses accordingly. He got into banking by way of the Law, founded Fulton National’s trust department, married the daughter of Georgia’s late great Hoke Smith. His is the six-year term.

Shortest term (two years) went to Ralph Waldo Morrison, Texan utilitarian, whom President Roosevelt sent to the London Economic Conference in 1933. He is a close friend of Vice President Garner, a generous contributor to the National Democratic Committee’s campaign funds. A Missourian by birth, he spent his youth in South America, selling railroad equipment and adding machines. Later he was promoted and operated a tramp steamship line, finally became interested in Texas power companies. The system he built up was shrewdly sold to Samuel Insull before 1929. Today he owns hotels, ice companies, Mexican power companies, does large-scale entertainment on his Anacacho Ranch at Spofford, Tex. Jowled, powerfully-built, 53, he is suspicious of the Press, which he thinks mistreated him in London three years ago (TIME, June 26, 1933). To newshawks last week he drawled: “A Federal Reserve Board membership is not a talkin’ job.” He is rated a strictly political appointee.

Capitalist. The one remarkable man on the new Board is the governor appointed to the four-year term and designated by the President as chairman. At 45 Marriner Stoddard Eccles is lean, smallish, nervous, intense. In manner he is pleasant, impersonal. Like many another New Dealer he is convinced that in money management lies the salvation of Capitalism.

His father was a Scotsman who was taken to Utah by his immigrant family after their conversion to the faith of the Church of Jesus Christ of Latter-Day Saints. They covered the last thousand miles westward on foot. David Eccles prospered, founding one of the Northwest’s great lumber companies, later branching into beet-sugar, banks, insurance, rapid transit. Before he died in 1912 he persuaded Son Marriner to accept his church’s “call.” Two early years of Reserve Board Chairman Marriner Stoddard Eccles’ life were spent in Scotland in the frock coat and silk hat of a Mormon missionary.

When he went to Washington in 1934 as an Assistant to the Secretary of the Treasury, Mr. Eccles’ business interests included the presidencies of a $2,000,000 milk product company, a big Oregon lumber concern, a huge construction company, and the $50,000,000 Eccles group of banks. In addition he was vice president of Amalgamated Sugar Co., a director of a railroad, a hotel company, a farm implement company, a retail lumber organization. All this was achieved in less than 20 years from the time he set up Eccles Investment Co. to manage the $2,000,000 estate bequeathed to his mother and her children. His share of the property was some $200,000. The chairman of the Board of Governors of the Federal Reserve System says he is a capitalist and a conservative. Some time before the 1929 collapse Mr. Eccles perceived that all was not well with the U. S. economic system. Starting with the farm debt problem in Utah, this Republican banker-industrialist groped outward toward the larger questions of unemployment and insecurity as it developed in the early years of Depression, arriving independently at the same conclusions reached by the Brain Trust during the Roosevelt campaign. Few days before March 4, 1933, Mr. Eccles laid before a Senate committee a plan, which turned out to be nothing less than a detailed blue print of the New Deal. Only one Eccles’ suggestion has not materialized—official cancellation of War Debts. Money Managers. Supposedly underlying the whole New Deal is the belief that by proper management of money the U. S. can be boosted out of Depression. New Deal money management demands close co-operation between the Reserve Board and the Government. One of Chairman Eccles’ unspecified jobs is to make interest rates as low as possible to facilitate Treasury borrowing. Cheap money cuts the cost of doing business in general but is also an invitation to speculation. And, politics being what they are, the thing that bothers serious economists is whether Chairman Eccles and his fellow money managers will be able to pull the lever before reflation turns into inflation. Chairman Eccles defines inflation as a “condition brought about when the means of payment in the hands of those who will spend increases faster than goods can be produced.” On this definition he bases a rhetorical question: “How is it possible to have inflation when men are idle and plants are idle?” _ However, nearly every economist has his own pet idea of what constitutes inflation, largely because of the astonishing lack of agreement on just where good times become a boom and a boom becomes inflation. On only one point is there any unanimity: the possibilities of inflation in the U. S. lie almost wholly within the banking system. And the core of that problem is bank reserves and their manipulation. Excess Reserves. The principal medium of exchange in the U. S. is not currency, which accounts for only 10% of the total money supply, but credit money, which means checks. By law a bank must maintain with a Federal Reserve Bank a certain ratio of reserves to customers’ deposits. Reserve requirements vary with locality and type of deposit but a rough average is 10%—i. e., for every $10 of customers’ deposits a bank must itself have at least $1 on deposit in a Reserve Bank. If a bank has $2 in the Reserve for every $10 of customer money, $1 counts as “excess reserves.” A banker can create deposits with the aid of a willing borrower and a good pen. When a bank lends, say, $25,000 to a businessman, it credits his account with that amount—an addition to the deposits, hence a liability. To balance the books’ the bank takes the businessman’s note for $25,000, which is an asset. Thus $25,000 worth of new credit money is turned loose in the country, passing from bank to bank in the form of checks. Not until the borrower pays off his loan does that money disappear from circulation. Provided he has enough capital, the only limit on a banker’s power to create credit is the amount of his reserves. At present U. S. banks have excess reserves of more than $3,000,000,000, and if they could find enough borrowers they could conceivably create some $30,000,000,000 of credit. That would swell the total supply of bank money by two-thirds, cause a violent rise in prices. A number of bankers, led by Chairman Winthrop Aldrich of Chase National Bank, think that excess reserves should be reduced before inflation gets going. This No. 1 U. S. banker declared last December that the U. S. was “running with the throttle chained wide open and the airbrake system removed from the train.” On the other hand, the House of Morgan believes that excess reserves are by no means excessive, since a heavy outflow of gold would quickly pare them to more normal proportions. To Chairman Eccles the track looks clear as far as he can see. Moreover, he disagrees with Banker Aldrich about the air-brakes. As soon as he spies a red-signal around the Recovery bend, he can: 1) Double reserve requirements, a move which would wipe out some 90% of the present excess. 2) Order the Reserve Banks to sell some of their $2,400,000,000 load of Government securities. To pay for all these bonds the member banks would have to draw down their balances with the Reserve System to an extent that would reduce their excess revenues about 80%.

Having cut reserves by one or both of these means, Chairman Eccles could then apply the final brake—upping of the rediscount rate. At present this action would be ineffectual, for banks do not need to borrow from the Reserve. The weakest link in this brake chain is the fact that selling of the Reserve’s Government bonds would be flatly contrary to Treasury policy so long as there are huge budget deficits to be financed.

Meantime Chairman Eccles is trying out another set of brakes, which are designed to control a specific kind of credit —stockmarket credit. Under the Securities Exchange Act the Reserve Board was given the power to regulate margin requirements. Fortnight ago, sensing the growing speculative fever, Chairman Eccles upped maximum margin requirements from 45% to 55% (TIME, Feb. 3). Some bankers believe that even if the Board shut down, as it can. on all market credit, a fancy boom could occur on a cash basis. Their point is that while credit may be shut off at one spigot it might still flow at another, spill into the market since as soon as it is disbursed by check one man’s credit becomes another man’s cash.

Deficit Inflation. The Federal Reserve Board cannot increase the supply of credit money of its own volition. All it can do is to make it easy to borrow. Under the New Deal the Government, not business, has done the borrowing. And when the Treasury sells bonds to commercial banks, the banks manufacture new credit money with a pen just as they do for private borrowers. Of course, many Government bonds are sold for cash to corporations, individuals, insurance companies, etc. But in the past few years some $6,000,000,000 has been added to the U. S. money supply by selling Government securities to commercial banks. Thus $6,000,000,000 of new credit money has been turned loose upon the country to date, and there is likelihood that another $4,000,000,000 may be added by a year from next June.

Last week in one of its periodic manifestoes about the Budget, the U. S. Chamber of Commerce trumpeted”‘ While this method of inflation differs from the issuing of paper currency the ultimate results of its continuance may not differ. At the conclusion of the next fiscal year there will have been . seven consecutive years of heavy budgetary deficits. It must not be overlooked that every nation which has permitted deficits in any way comparable for such periods of time has found the greatest difficulty if not the impossibility, of escaping the devastating consequences of uncontrolled inflation.” Bushel Basket Inflation, in post-War German manner, is almost inconceivable in the U. S., not because of the enormous gold base, but because it is impossible to keep any considerable amount of currency in circulation. Issues of greenbacks, silver certificates or other paper money contemplated by inflationist Congressmen would merely displace present currency or promptly return to the banks. There it would increase deposits by a like amount. And to inflate deposits materially would require enormous issues of paper money Deficit financing has increased deposits by $6,000,000,000 with no alarming results. Aside from the precedent created the real danger of fresh currency lies in its effect on that key factor—bank reserves In the natural course of banking events the new money taken in at member banks’ windows would be deposited in the Federal Reserve Bank, creating an equal amount of reserves. Thus a $3,000,000,000 issue of greenbacks would loft excess reserves to more than $6,000,000,000 Used to the limit, Chairman Eccles’ brake system can at present control excess reserve only up to $5,200,000,000. Without additional powers he could then do practically nothing to stop the inflation train. As it is, a good many people believe that Marriner Stoddard Eccles is he only thing standing between the U. S. and disaster.

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