Reserve Review

Widespread among financiers is the conviction that U. S. banking is undergoing the most important and fundamental change in its history. Certain it is that historians will look back upon the 1920-1940 era as one of sensational disturbances, major tragedies and new developments in U. S. and world finance.

During the past month an attempt has been made in Congress to get above the immediate crosscurrents of U. S. finance and take a long view backward and forward. Planting itself at the halfway point of the Era of Change, a subcommittee of the Senate Banking & Currency Committee has been seriously taking stock of the Federal Reserve system and its implications. No spectacular hit-&-run investigation flashing large in press headlines and proving nothing, the committee's survey will require a year to complete.

In 1913 no man had a larger hand in creating the Federal Reserve Board with its twelve district banks than little, sharp-beaked Congressman Carter Glass of Virginia. Today Senator Carter Glass heads the sub-committee conducting this broad inquiry. Rarely is it thus given to a member of Congress to review his legislative handiwork after 17 years.

The ten-year trial of the Federal Reserve system since post-War disturbances cleared away closely parallels the decade of experiment with Federal Prohibition. Just as Prohibition is now undergoing scrutiny and overhauling, so also is the Federal banking system.

To test the strength and flexibility of the Federal Reserve system there were three major inflations during the decade: 1) the boom in western farm land values followed by the long collapse of Agriculture; 2) the rise and fall in Florida land; 3) the boom of "Coolidge prosperity" followed by the stock crash and Depression. It was the last that brought the Glass committee into action.

Some of the questions to which Chairman Glass sought answers: 1) Why did 6,000 banks out of 30,000 fail in the U. S. in ten years? 2) What did the Federal Reserve do to check 1929 stock speculation? 3) What effect has branch banking on U. S. finance? 4) What new laws might stop excessive stock speculation? 5) What new powers does the Federal Reserve system need? 6) How can banks' security subsidiaries be controlled and regulated? 7) How can competition for bank charters between States and the Federal Government be reduced?

Most of the subcommittee's hearings so far have been a post-mortem of the stock crash and the part the Federal Reserve played--or failed to play--to avert catastrophe. From the financiers who passed before his committee Senator Glass, arch enemy of stock speculation, got little support for his bills to penalize speculators with a new tax and to restrict the Federal Reserve's loan policy.

General was the agreement of witnesses that the Federal Reserve Board in Washington had followed a mistaken course of public warnings in trying to check the 1929 stock inflation instead of adopting the recommendation of the New York Federal Reserve Bank for tipping the rediscount rate. When this rate was belatedly advanced from 5% to 6% it was admittedly insufficient to turn the tide. Though witnesses were not rude enough to say so, they implied that the fault lay largely with the foggy-headed uncertainties of Roy A. Young, the Governor of the Board.

Adolph Caspar Miller, senior Reserve Board member and good Hoover friend, told the committee that the Board was in a measure responsible for speculative excesses. George Leslie Harrison, governor of the New York bank, openly complained that the Board had raised the rate too late and then raised it too little. He flayed "bootleg loans" by commercial corporations into the stockmarket, admitted that the Federal Reserve Bank was powerless to trace borrowings for speculation purposes. Albert Henry Wiggin, board chairman of the Chase National Bank in Manhattan, biggest in the U. S., declared the Federal Reserve Board should have adopted a stiffer rate policy. He criticized bank loans on unlisted securities and real estate as a general factor in the 1929 crash. Said he: "The debauch of speculation reached a climax and just flopped." He foresaw a further shrinkage in values before the turn.

Investment affiliates by banks were generally flayed by Federal witnesses who urged stricter examination and regulation whereas bankers defended these fiscal appendages as a necessity to meet competition.

Most impressive, most lucid, most constructive witness before the Committee was Owen D. Young, a director of the New York Federal Reserve Bank. Said he of the stock crash: "The low [rediscount] rates were continued too long. An active, firm and decisive policy of advancing rates should have been carried out in 1928. The Federal Reserve Bank of New York did not make its recommendations for rate increases early enough or advance the rates rapidly enough. I was quite as much to blame for that as anyone."

Mr. Young diagnosed present banking ailment as due to charter competition between the U. S. and States. He recommended that all commercial banks be forced into the Federal Reserve system, even if it required a constitutional amendment as a means of "fixing responsibility."* He declared that "Member of the Federal Reserve System" painted on a bank's window today meant, despite popular impression to the contrary, little or nothing because the Federal Reserve exercised no real control over the institution, was in fact afraid to, lest it drive the bank out of the System.

"We have seen thousands of banks fail here," testified Mr. Young. "It is certainly a great reflection on the American people that they cannot get a banking system in hand that will prevent such awful tragedies." He favored a limited form of branch banking, recommended prohibiting corporations from putting their surplus cash into the call market, frowned on security affiliates of banks which go unexamined.

Meyer Matter. While the Glass Committee was surveying the broader aspects of the Federal Reserve system, another Senate committee was engaged with a more immediate problem of the Board, namely, the appointment of Eugene Meyer as its Governor. Mr. Meyer's nomination was on the point of being confirmed by the Senate last month when Senator Smith Wildman Brookhart of Iowa, archfoe of Mr. Meyer and the Reserve Board, got it thrown back into committee for further study. Before the committee he heckled Mr. Meyer so unmercifully on all manner of remote and extraneous matters -- inter national finance, Interstate Commerce Commission rulings, farm conditions -- that that usually calm gentleman cried out angrily against his "unfairness." The Senator tried to force Mr. Meyer to outline his policies if he became head of the Federal Reserve. Mr. Meyer exploded: "I cannot and will not answer questions as to how I will conduct myself. I'd rather forfeit the position than to prostitute my principle."

Congressman Rainey of Illinois and McFadden of Pennsylvania -- representatives of the "lunatic fringe" among Congressional economists -- crossed the Capitol to say their say against Mr. Meyer before the Senate Committee. Mr. Rainey ac cused him of "wrecking" the Federal Land Banks when head of the Federal Farm Loan Board and knocking $100,000,000 off the value of these banks' bonds. Mr. McFadden flayed him as a "stock broker" allied with "international bank ers," an "office hunter" who had been juggled into the Governor's job by "Wall Street." Mr. Meyer made immediate and sweeping denials of all such accusations.

Last week in Manhattan was progressing an investigation of a bank failure which was frequently cited in the Senate inquiry as a "horrible example" of bad banking, if nothing worse. Last December the Bank of United States went under owing some 400,000 depositors some $160,000,000 (TIME, Dec. 22). Investigation showed that the bank had 50 affiliates and subsidiaries which had drained away its assets for stock manipulation and real estate deals. About $75,000,000 was tied up in "frozen" loans to these affiliates, many of them dummy concerns without resources. The City of New York stood to lose $1,500,000 in municipal funds deposited with Bank of United States.

Chief investigator of what threatened to be New York's biggest banking scandal was able, witness-baiting Lawyer Max D. Steuer, who was appointed as an Assistant Attorney General and an Assistant District Attorney to get the facts and prosecute wrongdoers. He filled the Press with a hodge-podge of evidence to show that the bank's directors had made wild and unauthorized loans, with no collateral, to themselves and to their subsidiaries; had speculated in the bank's stock and left their losses unpaid. Lawyer Steuer charged that this "crookedness" by directors constituted a "serious crime." He detailed a system of "hokus-pokus" whereby the bank would pay itself with its own money debts owed it by its affiliates.

Chief defender of the closed bank was its Director-Counsel Isidor Jacob Kresel. With venomous politeness Lawyer Steuer and Lawyer Kresel sparred to fix responsibility for the bank crash, with Mr. Kresel exhibiting an ignorance of the bank's doings equalled only by the sudden forgetfulness of witnesses before him in Manhattan's magistracy investigation.

*Of the 24,000 banks of deposit in the U. S., 7,000 are national, 17,000 State. Five out of six failures occur among State banks not members of the Federal Reserve system.

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