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NOTE 48. Marriner S. Eccles and the Banking Act of 1935

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Mariner S. Eccles and the Banking Act of 1935

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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.

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How Mariner Eccles, young multi-millionaire head of a Western banking and construction empire,

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had been led by the Depression and by his reading of Foster and Catchings to rethink his previous

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laissez-faire views and to arrive, virtually on his own and therefore almost miraculously,

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at proto-Keynesian conclusions. How he came to impress the New Dealers and was called first to

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of the Treasury and then soon became the radical New Deal head of the Federal Reserve Board

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and of the entire Federal Reserve System to remain Chairman of the Board until after World

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War II.

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In truth, rediscovering ancient economic fallacies hardly qualifies as a notable achievement.

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Eccles read Foster and Catchings in early 1931 and adopted wholesale their view of under

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are Consumption as Cause of the Depression and Government Deficit Spending and Stimulation

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of Consumption as the Way to Recovery.

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Any intellectual acumen on Eccles' part would, on the contrary, have led him to realize

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that Foster and Catchings were writing during the boom of the 1920s and would have led him

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to wonder what accounted for the sudden change from boom to depression, a change that can

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can scarcely be explained by an alleged state of permanent underconsumption.

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Under the influence and assistance of proto-monitorist and radical New Dealer Lachlan Curry, Eccles

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soon added governmental monetary inflation to his armamentarium to make him a comprehensive

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inflationist and macro New Dealer.

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Given such influences, it was easy to become a quote Keynesian slightly before Keynes's

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time.

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Moreover, it was doubtful that Mariner Eccles' conversion to statism was purely intellectual.

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Mariner was the son of David Eccles, who, as a penniless lad and Mormon convert, had

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emigrated from Glasgow to Utah, there to build up one of the largest fortunes in the West.

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Most of David's fortune was in banking and sugar manufacturing.

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When David died in 1912, Mariner, at age 22, managed to elbow aside competing Morgan families

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of David's and assume control of his father's empire.

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By the early 1930s, Mariner had expanded the business empire greatly, a business empire

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centered in a network of bank holding companies throughout the West and also including milk

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production and construction as well as sugar.

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Mariner Eccles' empire was centered in his bank holding company, the first security corporation,

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and indeed Mariner had pioneered in forming such holding companies and banking.

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Eccles' conversion away from free markets was, indeed, micro as well as macro.

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As head of the important, amalgamated sugar company, Eccles led a vigorous effort to cartelize

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the sugar industry and to unite all sugar producers, foreign and domestic, in an allotment

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and plan to form rigorous maximum production quotas for each firm.

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Furthermore, as a large banker in a shaky banking environment, Eccles was understandably

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eager to push for federal guarantees of bank deposits, legislation that redounded to his

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direct benefit.

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From the failure of the voluntary sugar cartel, it was an easy step for Eccles to advocate

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a compulsory cartel plan for all of agriculture.

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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.

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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,

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mortgages which, of course, had been and would continue to be purchased by Eccles' savings banks.

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There was another personal economic reason for Eccles to suddenly look benignly on massive

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federal public works spending.

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In 1930, President Hoover decided to build the Mammoth Boulder Dam, which became one

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of the major public works projects of the early depression years.

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One of the major construction companies in the consortium that built the dam was Utah

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Construction, with Eccles putting up much of the capital and personally present at the

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at the San Francisco meeting where the consortium was formed.

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By the time of his appearance at the Senate Finance Committee hearings at the end of February

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1933, in testimony that would win him great notoriety, Eccles had worked out a complete

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collectivist program, not only for macro-deficits, public works and unemployment relief, not

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only for guaranteed bank deposits and not only for taxing the rich and subsidizing the

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War, but also a plea for agricultural cartels, for federal agencies which would have to approve

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all new capital issues and all, quote, means of transportation and all means of communication

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to ensure their operation in the public interest, end quote, and as a topper, quote, a national

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planning board to coordinate public and private economic activities, end quote.

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What was unusual about Eccles was not that he was a big businessman who had opted for

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collectivism, he was only one of many in this era, but that he was willing and eager to

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move to Washington to carry out these programs personally.

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Eccles had another personal economic and intellectual interest in serving in Washington in money

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and banking.

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Like the Bank of America's A.P. Janini, Eccles was a western outsider to the Morgan-dominated

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Federal Reserve System of the 1920s, and he had conceived a bitter hatred of the Morgan

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Empire, as well as a crusading desire to transform American banking by shifting power in the

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Fed once and for all from the Morgan and Wall Street dominated New York Federal Reserve

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Board to a non-Morgan, politically appointed Federal Reserve Board in Washington.

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Two channels have been charted for the way that Eccles's views became known to the

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New Dealers.

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Robert Hinckley, an old friend of Eccles's and nephew of Senator William King, Democrat

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from Utah, and another young man, Dean Brimmel, a brother-in-law of Eccles's, had formed

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a bi-monthly discussion club in Utah called the Frydenkers.

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On hearing of Eccles's new views, the Frydenkers became Eccles's disciples, and Hinckley

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used Senator King's influence to get Eccles a hearing at the Senate Finance Committee.

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Also, Mariner was a regent of the University of Utah, and when radical New Dealer Stuart

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Chase spoke at the Chautauqua Lecture Series at the University, he was impressed with Eccles's

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views.

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Another overlooked influence on the New Dealers is the fact that George Dern, Roosevelt's

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Secretary of War and former governor of Utah, was a financial subaltern of Eccles's.

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Being a director of two Salt Lake City banks, both part of Eccles's first security corporation

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and Holding Company.

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After a year, in February 1934, Eccles came to Washington as Special Assistant on Monetary

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and Credit Matters to Secretary of the Treasury, Henry Morgenthau.

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Eccles found himself frustrated at Treasury, however, since Morgenthau had old-fashioned,

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pro-balance budget views.

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Morgenthau was heavily under the influence of Louis W. Douglas, still in the administration

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Eccles did not waste his months at the Treasury, finding support and enthusiastic agreement

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in two young aides, former Fed economist Winfield W. Reifler and Laughlin Currie, a young Ph.D.

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from Harvard.

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Curry, whose important monetarist work was in the process of being published by Harvard

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University Press, converted Eccles to the goal of total political control over the money

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supply and of the alleged necessity for recovery to concentrate on open market operations for

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rapid inflation of the money supply.

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In early September 1934, Eccles was asked by administration aides to accept an appointment

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Eccles boldly replied that he would only accept the post if at the same time there was a fundamental

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structural change at the Fed and power was shifted from the New York Fed to the Federal

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Reserve Board in Washington.

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Following up on this determined stance, Eccles submitted a memorandum to the White House on

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on November 4th, written in collaboration with Eccles's aide and theoretician, Lachlan

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Curry.

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The memo stressed that the Federal Reserve Board must take full power from the New York

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Fed, that it must obtain, quote, complete control over the timing, character, and volume

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of open market purchases and sales of bills and securities by the Reserve Banks, end

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quote.

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Till this point, wrote Eccles and Currie, private banker, quote, interest, as represented

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by individual reserve bank governors, has prevailed over the public interest, as represented

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at the Federal Reserve Board, end quote.

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From now on, the, quote, public interest must prevail.

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In particular, the Federal Reserve Board must gain complete control over the Open Market

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Committee, now composed of the 12 Governors of the private Federal Reserve Banks.

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Such changes were necessary, the memo concluded, in order for the Fed to become a genuine quote

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Central Bank.

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Although secure in such new powers, there would be no need to arouse intense political

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opposition by calling such a step a quote Central Bank.

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On November 10th, FDR, impressed by the memo and emboldened by his smashing victory over

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were the Republicans in the November 1934 Congressional elections, announced the appointment

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of Mariner Eccles as governor of the Federal Reserve Board, and he was sworn in a week

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later.

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At the same time as his appointment was announced and submitted for confirmation to the Senate,

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the Radical Banking Act of 1935, embodying the Eccles-Curry program, was scheduled to

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be submitted to Congress.

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Lined up against Eccles and the New Banking Act were powerful Senator Carter Glass, chairman

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of the Senate Finance Committee and of the crucial subcommittee of the Senate Banking

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and Currency Committee, as well as Glass's theoretician, Professor H. Parker Willis, who

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denounced the Banking Act as the quote, worst and most dangerous measure that has made its

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appearance for a long time, end quote.

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In this particular battle, the opposition was a coalition of former enemies.

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The Willis Glass Hard Money Qualitativists and The Morgan Empire, spearheaded by George

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L. Harrison, whose New York Fed stood to lose its dominating power over the banking system.

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In contrast, founding monetarist and veteran inflationist Irving Fischer of Yale, spiritual

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mentor to Milton Friedman, claimed that the banking bill, quote, will represent a great

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Step Forward, Probably the Greatest in the President's Administration."

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With the fight now underway, Eccles moved quickly to establish his own total control

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over dissident institutions within the Federal Reserve.

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He met with the Federal Advisory Council, or FAC, a powerful voice of private bankers

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within the Federal Reserve.

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The FAC consisted of one private banker from each of the 12 Federal Reserve districts.

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Almost always, they were representatives from large metropolitan banks in each district.

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The occasional publications of the FAC were often presented to the public as if they were

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the official views of the Federal Reserve Board.

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Thus, in September, strategically timed for the election, the FAC had publicly called

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for a balanced federal budget, incensing Eccles and the New Dealers.

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Eccles now cracked down, ordering the FAC to confine itself to an advisory role and to

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issue no public statements without first submitting the recommendations to the Federal Reserve

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Board and notifying it in advance of any public pronouncement.

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The Federal Advisory Council promptly knuckled under.

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Eccles then moved to completely control any legislative recommendations to emerge from

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the Federal Reserve system.

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Eccles abolished the Fed's Committee on Legislative Programs, which had been headed by Harrison,

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and had consisted of only private or regional Fed bankers, with the exception of one representative

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from the Federal Reserve Board.

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Eccles then created a new legislative committee, consisting solely of his own appointed professional

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staff.

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In addition to Eccles himself, members were Chester Morrill, Federal Reserve Board Secretary,

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Walter Wyatt, the Board's General Counsel, Emmanuel Goldenweiser, Director of the Fed's

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Division of Research and Statistics, and Lachlan Currie, the Division's new Assistant Director.

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The committee was charged with drafting a new banking act.

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The committee draft would then go to a subcommittee on banking legislation of the administration's

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Interdepartmental Loan Committee, chaired by Secretary Morgenthau and consisting of

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of the heads of Federal Advisory Council and Federal Deposit Insurance Corporation, or FDIC,

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and the Comptroller of the Currency, as well as several representatives of the Treasury.

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To gain support from the Treasury and other administration figures, as well as from Congress

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and the nation's bankers, FDR devised a cunning strategy.

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He would present Eccles's radical reform as Title II of the New Banking Act, sandwiched

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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.

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Title III was a favorite project of Comptroller of the Currency, JRT O'Connor.

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It was no accident that both Crowley and O'Connor were members of the decisive Interdepartmental

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Loan Subcommittee.

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While both Crowley and O'Connor fought to present their own bills separately from Eccles's,

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Morgenthau went along with Roosevelt's strategy and with Eccles's reforms, the banking act

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being hammered through the committee quickly and submitted to Congress on February 5th.

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In Congress, Eccles's nomination sailed through, with struggles concentrated on the Banking

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Act.

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In the hearings, particularly interesting in opposition was James P. Warburg of Coon

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Leb, and chairman of the board of Coon Leb-run Bank of Manhattan.

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Warburg, who as an old-line banker had been allied with the Morgans at the London Economic

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Conference, denounced the banking bill as, quote, curried Keynes.

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In the course of the controversy, the highly influential New York Times and the Washington

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Post, owned and directed by Eugene Meyer, changed their initial opposition to support

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for the bill.

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Essentially, Eccles won almost all of his points.

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The shift of banking control from Morgan's New York Fed to the non-Morgan Washington

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politicians had been completed.

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In the Senate, Eccles only had to make one important concession to Glass, instead of

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For the Federal Open Market Committee, consisting solely of the governors of the Federal Reserve

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Board, it would be instead comprised of the seven members of the Federal Reserve Board

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plus five rotating representatives of the Federal Reserve Banks, in practice their

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presidents and hence of private bankers.

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But despite this compromise, the Decisive Act had taken place.

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Open Market Policy would be initiated in, dominated by, and enforced by the Federal

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Federal Reserve Board in Washington.

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Actual open market operations would be carried out, most conveniently, in New York, but strictly

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under the orders of the Federal Reserve Board-dominated FOMC.

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Individual Federal Reserve Banks, in practice the New York Fed, were prohibited from buying

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or selling government securities for their own account, except under the direction or

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with the explicit permission of the FOMC.

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To further reduce the power of the Federal Reserve Banks, it was explicitly provided

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that the bank-elected members of the FOMC were not to serve in any way as agents of

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the banks that elected them.

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Indeed, the banks were not to know what was going to happen but only to have a chance

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to be heard through an advisory committee.

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Indeed, the bank presidents serving on the FOMC were not even allowed to divulge actions

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Harrison's taken at FOMC meetings to their own board of directors.

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Harrison fought unsuccessfully against this provision and in a last-ditch and finally

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failing battle in 1937, Harrison tried to get the FOMC to allow reserve banks to conduct

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open market operations on their own in case of individual bank emergencies.

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In addition, the Federal Reserve Board was given veto power over the election of the

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The President and First Vice President of each district Federal Reserve Bank

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And, in a symbolic gesture, all district-fed, quote, governors, the hoary name for heads

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of central banks, were demoted to, quote, presidents, whereas the old, quote, members

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of the Federal Reserve Board in Washington were upgraded to governors, while the previous

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governor of the Federal Reserve Board now became the board's august, quote, chairman

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of the Board of Governors.

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Furthermore, cementing Chairman Eccles's power within Washington, the Treasury Secretary

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and the Comptroller of the Currency were both removed as ex officio members of the Federal

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Reserve Board.

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Finally, the last shred of qualitativist restraint upon the Fed's expansion of credit was removed,

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as bank assets deemed eligible for Fed re-discounting were broadened totally to include any paper

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The banking act of 1935 was important for being the final settled piece of New Deal

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banking legislation that consolidated all the revolutionary changes from the beginning

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of the Roosevelt administration.

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The Morgans tried desperately, for example, to alter the 1933 Glass-Steagall provision,

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I'm telling the separation of commercial and investment banking, but this reversion

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was successfully blocked by Winthrop Aldrich.

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Specifically, Senator Glass' amendment to the Banking Act of 1935, restoring limited

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securities power to deposit banks, was able to reach the Congressional Conference Committee.

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For a while, it looked like this Morgan maneuver would succeed, but presumably at the behest

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For his part, Aldrich, as a Wall Street banker himself, was not very happy about the permanent

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shift of power from Wall Street to Washington, but he was content to go along with the overall

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result as part of the anti-Morgan coalition with Western banking.

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The centralization of power over the banking system in Washington was now complete.

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It is no wonder that the irrepressible H. Parker Willis, writing the following year,

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lamented the centralized monetary and banking tyranny that the Federal Reserve had become.

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Willis wisely perceived that the course of inflationary centralization, to have begun

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in the 1920s as Morgan control in the hands of the New York Fed, and now with the New

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Deal, was immeasurably accelerated and shifted to Washington.

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The Eccles Group, which advocated the Act of 1935, sought to obtain for themselves those

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powers which the more ambitious of the banking clique in New York and elsewhere had already

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irrigated to the Federal Reserve Bank of New York and to the small group by which the institution

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was practically directed, the House of Morgan.

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There was no change in the conception or notion of centralization, but only in the agency

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The New Deal, Willis went on, had passed various allegedly temporary and emergency measures

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in its first three years, which were now permanently consolidated into the Banking Act of 1935,

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and thus, quote, was built up perhaps the most highly centralized and irresponsible

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Financial and Banking Machine of which the modern world holds record.

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The result, Willis pointed out, was that the years of, quote, tremendous deficit from 1931

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on were marked by a process of, quote, gradually diverting the funds and savings of the community

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to the support of governmentally directed enterprises, end quote.

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It was quote, an extraordinary development, an extreme application of central banking

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which brought the system of the United States to a condition of even higher concentration

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end quote than in other countries.

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Willis ominously and prophetically concluded quote, Today, the United States thus stands

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out as a nation of despotically controlled central banking, one in which, as all now

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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.