Mariner S. Eccles and the Banking Act of 1935
The saga of Mariner Stoddard Eccles has been told many times, not only by his adoring biographer, but also by numerous historians of the New Deal.
How Mariner Eccles, young multi-millionaire 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
of 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 under
are Consumption as Cause of the Depression and Government Deficit Spending and Stimulation
of Consumption as the Way to Recovery.
Any intellectual acumen on Eccles' 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
can scarcely be explained by an alleged state of permanent underconsumption.
Under the influence and assistance of proto-monitorist and radical New Dealer Lachlan Curry, 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 quote Keynesian slightly before Keynes's
time.
Moreover, it was doubtful that Mariner Eccles' conversion to statism was purely intellectual.
Mariner was the son of David Eccles, who, as a penniless lad and Mormon 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, Mariner, at age 22, managed to elbow aside competing Morgan families
of David's and assume control of his father's empire.
By the early 1930s, Mariner 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.
Mariner Eccles' empire was centered in his bank holding company, the first security corporation,
and indeed Mariner had pioneered in forming such holding companies and banking.
Eccles' 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
and 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' savings banks.
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
at the San Francisco meeting where the consortium was formed.
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
War, but also a plea for agricultural cartels, for federal agencies which would have to approve
all new capital issues and all, quote, means of transportation and all means of communication
to ensure their operation in the public interest, end quote, and as a topper, quote, a national
planning board to coordinate public and private economic activities, end quote.
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. Janini, 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, Democrat
from Utah, and another young man, Dean Brimmel, a brother-in-law of Eccles's, had formed
a bi-monthly discussion club in Utah called the Frydenkers.
On hearing of Eccles's new views, the Frydenkers became Eccles's disciples, and Hinckley
used Senator King's influence to get Eccles a hearing at the Senate Finance Committee.
Also, Mariner 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
and 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-balance budget views.
Morgenthau was heavily under the influence of Louis W. Douglas, still in the administration
Eccles did not waste his months at the Treasury, finding support and enthusiastic agreement
in two young aides, former Fed economist Winfield W. Reifler and Laughlin Currie, a young Ph.D.
from Harvard.
Curry, 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.
In early September 1934, Eccles was asked by administration aides to accept an appointment
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
on November 4th, written in collaboration with Eccles's aide and theoretician, Lachlan
Curry.
The memo stressed that the Federal Reserve Board must take full power from the New York
Fed, that it must obtain, quote, complete control over the timing, character, and volume
of open market purchases and sales of bills and securities by the Reserve Banks, end
quote.
Till this point, wrote Eccles and Currie, private banker, quote, interest, as represented
by individual reserve bank governors, has prevailed over the public interest, as represented
at the Federal Reserve Board, end quote.
From now on, the, quote, 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 quote
Central Bank.
Although secure in such new powers, there would be no need to arouse intense political
opposition by calling such a step a quote Central Bank.
On November 10th, FDR, impressed by the memo and emboldened by his smashing victory over
were the Republicans in the November 1934 Congressional elections, announced the appointment
of Mariner 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-Curry 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 quote, worst and most dangerous measure that has made its
appearance for a long time, end quote.
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 Fischer of Yale, spiritual
mentor to Milton Friedman, claimed that the banking bill, quote, will represent a great
Step Forward, Probably the Greatest in the President's Administration."
With the fight now underway, Eccles moved quickly to establish his own total control
over dissident institutions within the Federal Reserve.
He met with the Federal Advisory Council, or 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.
Eccles abolished the Fed's Committee on Legislative Programs, which had been headed by Harrison,
and had consisted of only 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, Emmanuel Goldenweiser, Director of the Fed's
Division of Research and Statistics, and Lachlan 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
of the heads of Federal Advisory Council and Federal Deposit Insurance Corporation, or 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
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, JRT O'Connor.
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 5th.
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 Coon
Leb, and chairman of the board of Coon Leb-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, quote, curried Keynes.
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
For 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
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
Harrison's 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.
In addition, the Federal Reserve Board was given veto power over the election of the
The President and First Vice President of each district Federal Reserve Bank
And, in a symbolic gesture, all district-fed, quote, governors, the hoary name for heads
of central banks, were demoted to, quote, presidents, whereas the old, quote, 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, quote, 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 re-discounting were broadened totally to include any paper
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,
I'm telling the separation of commercial and investment banking, but this reversion
was successfully blocked by Winthrop Aldrich.
Specifically, Senator Glass' 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
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 irrepressible 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
irrigated 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
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, quote, was built up perhaps the most highly centralized and irresponsible
Financial and Banking Machine of which the modern world holds record.
The result, Willis pointed out, was that the years of, quote, tremendous deficit from 1931
on were marked by a process of, quote, gradually diverting the funds and savings of the community
to the support of governmentally directed enterprises, end quote.
It was quote, an extraordinary development, an extreme application of central banking
which brought the system of the United States to a condition of even higher concentration
end quote than in other countries.
Willis ominously and prophetically concluded quote, Today, the United States thus stands
out as a nation of despotically controlled central banking, one in which, as all now
I will 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.