FISCAL: New System

“I belong to the school which believes the Government should own the stock of the Reserve Banks. . . . Instruments of credit, I believe, should be centred in a Government authority.”

So saying the U. S. Secretary of the

Treasury looked around at a ring of smiling faces including those of two former Secretaries of the Treasury, Carter Glass and William G. McAdoo.

That same afternoon at the White House newshawks popped a question at Franklin Roosevelt. Did he agree with Mr. Morgenthau that the Government should own the Federal Reserve? Nodding sagely the President of the U. S. remarked that Government ownership of the Reserve banks would solve a great many problems.

Then, if U. S. citizens had not known it before, they had notice that the U. S. banking system was going to be made over, that the U. S. was to have a Government-operated central bank.

Father Coughlin and the financial Left have demanded it. Franklin Roosevelt and his New Dealers had hitherto smilingly shaken their heads and denied that they intended going so far. But steadily the New Deal has marched in that direction: centralized some Federal Reserve powers under the Emergency Banking Act; put at the head of the Reserve System a banker specially selected because of his approval of New Deal monetary theories; by a straight party vote got the House to pass a bill centralizing full control of the Reserve System in the Administration’s hands.

When Mr. Morgenthau admitted that he favored the ultimate step, Government ownership, the New Deal’s aim was well on the way to achievement: Carter Glass, still resolutely holding Senate subcommittee hearings on the Banking Act of 1935, appeared to be only postponing the accomplishment of the New Deal’s will. Said he ironically: “If the President and the Secretary of the Treasury and the Governor of the Federal Reserve Board want a Government-owned central bank, notwithstanding the consistent opposition of the Democratic Party since the time of

Mr. Jefferson up to the present to such a thing, I’m puzzled to know why they did not incorporate such a provision in the pending banking Bills. It is not too late. The President usually gets what he wants.

. . . The subcommittee will give it suitable attention.”

Central Bank. Never in its history has the U. S. had a central bank in the modern sense.* Prior to 1913 the U. S. did not even have a formal banking system; it merely had banks (some of which were called national banks because they had the privilege of issuing bank notes and were Federally inspected, but which remained independent banks).

In 1913 the U. S. finally decided to have a banking system. After much miaowing and alternate complaints from different schools of bankers, politicians and economists, a system was worked out. Instead of following European models and establishing one big bank-for-banks, a decentralized system was set up: twelve central banks in twelve regions of the U. S., each bank owned by its customers—the member banks of that region. Over all was set the correlating Federal Reserve Board, appointed by the President.

Last week all that was visibly fading into history. When the Banking Act of 1935 is passed there will still be twelve Reserve banks, but instead of being members of a league they will be subjects of the Reserve Board. The Board will fix their rediscount rate, determine whether they shall buy or sell Government securities, fix how much credit they may extend to their member banks. In short, the Reserve banks will exist to obey. In practice the U. S. will have the same thing as a central bank, a centralized banking system. This was a virtual certainty not only because the New Deal wished it so but because even the American Bankers Association had acquiesced in so much of the plan.

The Issues. But two questions were still hotly debated. First was how much power the new central bank shall have. When the Reserve System was founded the law definitely prescribed the amount of reserves which each member bank must have on deposit with one of the twelve Reserve banks, the kinds of assets the Reserve banks may rediscount, the kinds of securities against which the Reserve banks may issue Reserve notes. Under the banking bill now before Congress the law will fix none of these things, will leave them to the discretion of the Reserve Board. The argument for granting the Reserve Board these powers is that it needs them to control inflation when it occurs.

Second and most important debate was who should exercise these powers. When Secretary Morgenthau let the hot biscuit out of his mouth by declaring flatly that he favored Government ownership of the Reserve banks, a significant dialog followed.

Mr. Morgenthau: “Control of credit should be lodged with a Government agency, but that doesn’t mean the Treasury.”

Senator Bulkley: “Independent of the President?”

Mr. Morgenthau: “The President would have only the power of appointment.”

Senator Glass: “Like the Supreme Court?”

Mr. Morgenthau: “Right.”

Senator Glass: “That would mean removal only by impeachment?”

Mr. Morgenthau: “Yes, sir.”

He made no effort to square this pronouncement with his remark that “in crises it shouldn’t be so that the engineer [the Administration] wanted to have full steam ahead and the fireman [Federal Reserve] didn’t want to put coal in the boiler.” Certainly his idea of an independent Supreme Court-of-Finance was hard to square with the bill before Congress, a bill which his former assistant Marriner Eccles, now Governor of the Federal Reserve Board, had defended only a week before. That bill would not only make all members of the Board appointees of the President, but three of them would be direct representatives of the Administration in power: the Secretary of the Treasury, the Comptroller of the Currency (both serving ex-officails) and the Governor of the Board who could be dismissed at any time by the President.

To such an Administration-serving Reserve Board the American Bankers Association is directly opposed, and last week Winthrop W. Aldrich, chairman of the Chase National Bank, went before the Senate Committee and roundly damned the combination of huge new powers for a politically controlled Reserve Board. Particular danger that he spotlighted was giving the Reserve Board power to make the Reserve banks buy Government bonds and issue Federal Reserve notes against them. This was the means of both the German and French inflations—the Governments, running huge deficits, selling bonds without limit to their central banks in exchange for bank notes. Governor Eccles had insisted that the powers the Administration would have over the Reserve System would be no greater than those of all other Governments over their central banks. Mr. Aldrich pointed out that today both the Reichsbank and the Bank of France were forbidden that kind of dangerous financing. Said he:

“I find nowhere among the central banking organizations abroad so complete political control as the present bill provides for. . . . This is not liberalizing the Federal Reserve System. It is making it over into an instrument of despotic authority.”

But neither Banker Aldrich nor Senator Glass was ignorant that the political odds were that the U. S. banking system would soon have a “despot,” Governor Marriner Stoddard Eccles. For Father Coughlin may denounce the banking bill because it does not go so far as he would like but the financial radicals of the Senate will join with New Dealers to put the bill through. If and when they do, Marriner Stoddard Eccles, erstwhile Mormon banker, capitalist by profession, but supporter of the New Deal’s pump-priming theories of finance, will become the first “financial despot” of the U. S.

*Within four days Secretary Morgenthau 1) broadcast to the world a definition of New Deal policy on dollar-exchange, 2) told Senators the New Deal’s domestic plans for dollar control through a central bank. The above pictures show the scene at his broadcast with his wife (a niece of Gov. Lehman) and his secretary, Mrs. Henrietta S. Klotz, in attendance. Before he went on the air. Mrs. Morgenthau whispered to him a final admonition. The late William Woodin, looking down from his portrait, heard his successor tell the world that ”the monetary policy of this Administration rescued us from chaos . . . is now the spearhead as we advance. *From 1791 to 1811 there was a Federally chartered Bank of the United States and from 1816 to 1833 (when Andrew Jackson snuffed it out) there was another bank of the same name. But each of these banks was virtually a private institution in which the Government owned only a small minority interest. Except that they were the largest banks in the country, and had corresponding influence, they functioned practically as ordinary banks—in which any ordinary Sam Citizen could make a deposit or get a loan. They did not even have the sole privilege of issuing banknotes. Since rediscounting was relatively unimportant, since open market operations and reserve requirements were unknown, they did not have such power as the Bank of England, the Bank of France, the German Reichsbank, or even the Federal Reserve have today—the power to make borrowing easy or hard, to squeeze or expand the credit reservoir of the nation as if it were a sponge.