The Banker's Banker
(See Cover)
"You shall not press down upon the brow of labor this crown of thorns," thundered William Jennings Bryan at the end of the peroration that won him the Democratic presidential nomination in 1896. "You shall not crucify mankind upon a cross of gold." In the most famed speech ever made in the U.S. on money, silver-tongued Bryan pounded home a 24-carat political fantasy: the bigger the money supply, the more for everyone. Bryan's particular panacea, a switch from gold to silver as the basis for an expanded currency, was discredited after his defeat by Republican William McKinley. But the easy-v. tight-money controversy, bitterly disputed ever since the founding of the American Colonies, is far from dead. Last week it was livelier than ever. The question: Is money so scarce that it is pinching off the boom and threatening to plunge the U.S. into recession?
Not since the Depression has money been so tight or so costly. In the midst of industry's greatest expansion, businessmen are finding that interest rates for loans are more than half again as high (up to 6%) as they were two years ago. Home-buyers are hard pressed by a dearth of mortgage money; housing starts are down 17% from the 1955 level-For the first time since the '30s, bankers are reluctantly turning away borrowers--as many as three out of five in some areas.
Squarely in the center of the argument over the nation's money supply is 49-year-old William McChesney Martin Jr., $20,-500-a-year chairman of the Federal Reserve Board of Governors, known to bankers and other moneymen simply as the "Fed." It is Chairman Martin who, with his six-man board and twelve Federal Reserve Bank presidents, has the overall responsibility for regulating the nation's flow of money and credit, the lifeblood of an expanding modern economy.
Like a Schoolteacher. For the Fed's part in tightening credit, Martin has been bitterly assailed. Says Economist Arthur Smith, vice president of Dallas' First National Bank: "I think they're tightening the screws far too close. In some areas of the consumer-credit picture there are undoubtedly abuses. But the Fed is behaving like a schoolteacher who punishes the whole class because two to three children are bad." Says Trust Co. of Georgia Board Chairman John A. Sibley: "When money is scarce, it's the little man who suffers."
On the other hand, S. (for Seth) Clark Beise (rhymes with high C), president of the Bank of America, biggest U.S. bank (1955 installment loans: more than $1 billion), feels that there is "insufficient evidence that there are not enough funds to finance necessary capital outlay. There are enough long-term loans available and enough equity loans." Bill Martin himself summed up the controversy last week: "Thoughtful people, who take the long view, approve. People who are pinched naturally say it will only bring on a depression."
Martin is dead sure that if the Fed had not tightened credit now, there might be a recession or worse. On all sides there is evidence that rising prices, kept in check for four years, are once more threatening the stability of the economy. The cost of living has moved up 1.4% in two months -- the biggest two-month increase in four years -- and still on the rise. Industrial prices, e.g., for electrical equipment, all types of machinery, are jumping, and the demand for manpower and materials is showing signs of outstripping supply.
Warns Bill Martin: "Inflation leads to deflation and costs people their jobs. Our biggest bugaboo is unemployment." Eleusinian Mysteries. To lay this bogey, Martin is vigorously wielding the potent weapons at his command. Although every man, woman and child in the U.S.
is affected by what he does, few under stand how he does it. To most credit users the operations of the Fed are as incomprehensible as the Eleusinian mysteries. Basically, the Fed operates on three main fronts: P: One of the quickest and easiest ways of tightening credit is to hike the discount rate, the interest that the Federal Reserve charges member banks for short-term loans. This tends to raise commercial interest rates and discourage marginal borrowing. In the past 17 months the FRB has raised the discount rate six times, boosted it to the highest level (3%) since 1933 only last fortnight. (Conversely, by lowering the discount rate, as Martin did in the 1954 recession, the FRB makes it less expensive to borrow money.) P: An even faster-acting weapon is the FRB's $23 billion portfolio of marketable Treasury securities. To nip expanding credit, the FRB sells securities through its Open Market Committee at competitive prices, thus sucks in funds from bank reserves. Since banks can lend up to $6 for every $1 in reserve, every dollar paid for these Treasury securities actually can mop up as much as $6 in potential loans. Since the first of the year, the Open Market Committee has allowed the banking system to thin out their portfolios without replenishing the money supply. (The FRB expands the money supply by buying securities, thus increasing a bank's lending capacity by $6 for every $1 the FRB pays out.)
P: As a last resort, not used since 1951, the Fed can make the 6,502 banks in the Federal Reserve system raise their minimum reserves, which now average 16% of loans, thus drastically cutting their lending ability overnight. (The FRB can also reverse this process when recession threatens; e.g., it opened the door for a $9.6 billion credit expansion by lowering reserves in 1953.)
Hat in Hand. In its manipulation of these controls, has the Fed clamped down too hard on credit? Most bankers say that companies with solid earnings records and established lines of credit will have no difficulty raising money (though at a higher price) for productive uses, e.g., to expand plants, construct office buildings, etc. Ford Motor Co., for example, raised $250 million for plant expansion last month, but had to pay 4% for the 20-year loan. However, some banks are so short of money that they turn over many of their loans to insurance companies, the last great reservoir of private U.S. capital. But even some of the biggest insurance companies, e.g., Prudential, are so heavily committed that they are turning down loans they would have snapped up a year ago. The big squeeze is on businessmen who have not previously borrowed, have uncertain profit prospects or want money for speculation, e.g., inventory-buying to beat price increases.
Though economists are chiefly concerned by pyramiding personal debt and such installment loan abuses as no-down-payment deals and overlong terms, the installment buyer is not yet being pinched, will be the last to feel it. Bankers welcome installment loans not only because they are quickly repaid (average loan duration: two years) but also because few customers resist high interest rates (top effective rate* at New York banks: 11.7%). The installment buyer is usually not concerned with interest rates; all he wants to know is the size of his monthly payment and whether he can carry it. Household Finance Corp., whose 757 offices shoveled out $771 million in installment loans last year, borrows funds at 3.7% to 5%, lends them at an effective rate of 24%. But few balk. Explains H.F.C. President H. E. MacDonald: "When a man comes to us for a loan, he comes not as a customer or a client but as an applicant, with hat in hand."
Fueling the Boom. Customers, clients and hat-in-hand applicants have all contributed to the money shortage, putting massive pressure on the nation's credit resources in the race to translate higher-than-ever paychecks and profits into higher-than-ever living standards and productive capacity. To fuel the boom, the nation has run $770 billion in debt, a 65% increase since 1946 (see chart). While public debt has dwindled from 65% of the total to 45% in ten years, loans to individuals (including small businesses and farmers) have rocketed from $60 billion to $191 billion, up 215%.
Corporate debt, including bonds and loans of all types, now totals $232 billion, up 40% in five years. Mortgage debt, which had been climbing steadily by $10 billion a year since 1949, spurted ahead $16.2 billion in 1955; despite the decline in homebuilding, mortgages on nonfarm, one-to-four-family housing reached a $94.2 billion peak in June, are still mounting at an estimated annual rate of $12 billion.
Raising the Standards. The sharpest increase has been in short-term consumer credit. As disposable income quadrupled since 1939, consumers raised their debt accordingly (from $7.2 billion to $37.1 billion), now owe an average 13% of take-home pay. With the addition of housing debt, the consumers' total unpaid balance in mid-1956 represented $800 for every man. woman and child in the U.S., v. $180 in 1939. From go-now, pay-later trips abroad to fill-your-teeth-on-time plans, installment buying now covers almost every contingency from womb to tomb.
The increase reflects a basic shift in the American outlook. Even churches, traditionally shy of debt, have taken advantage of easy credit and heavy collection plates. Shucking off the social stigma that once was associated with debt, most U.S. consumers have also shed their economic qualms about pledging future earnings to enrich the present.
Inflation, or the threat of it, is at least partly responsible. Louis Ogens, a 46-year-old Chicago mail clerk who, with his wife, Frances, is paying off $152.90 in installment loans plus $97.50 in rent a month on total monthly take-home pay of $658, says he learned his lesson as a G.I. in inflation-crippled China. Ogens' slogan: "Get in debt on the high dollar, pay off in the low dollar." Says he: "Then there's the $200-or 300-a-year income-tax deduction you can take for interest payments. If we don't need anything after we get out of debt, we'll go out and invent something to buy."
A bigger reason is the nation's apparently unshakable faith in a future of total employment, total production and total consumption. In Seattle, Gordon L. MacDonald, 30, a $6,000-a-year draftsman, has bought a car and all his appliances and furniture on credit, in addition to paying $59 a month on a three-bedroom home, says that he has no idea how much interest he is paying or when he will be out of debt. Shrugs MacDonald: "I'm not too worried about it. I expect my income to increase steadily through the years, and I don't have any worry about a depression."
A New Generation. Such overoptimism worries many observers even more than rising credit. While the rate of repayment on installment loans continues at a peak, they point out, a sharp dip in employment might bring on a wave of defaults that could wash in a recession--or worse.
Says K. K. DuVall, president of Chicago's Merchandise National Bank: "In the tiny space of 20 years, we have bred a whole generation of working Americans who take it for granted that they will never be out of a job or go a single year without a salary increase."
On the other hand, there is evidence that the U.S. consumer is an amazingly reliable credit risk, with repossessions running at the scanty rate of 1.18% of loans. Furthermore, credit statistics are misleading, since they conceal the fact that many new consumer debts are new obligations in name only. The vast postwar increase in home ownership, for example, means that millions of families pay the banker instead of the landlord; when a family buys a car or a TV set, its cash outlay for public transportation or entertainment decreases. Moreover, while the U.S. citizen in 1956 owes more, he also owns more. Per-capita savings have risen to $1,300 from $330 in 1939. Consumers' assets (including $200 billion worth of stocks, equities in life insurance and pension funds, etc.) are worth $600 billion, more than four times the 1939 level. Unlike 1929, the U.S. investor owes proportionately little ($2 billion) on stocks.
Viewing the statistics, some businessmen contend cheerfully that a constantly increasing population, the vast new opportunities unlocked by the atom, and the whole new field of electronics all help to assure continued high employment and demand for goods. But Martin contends that the risk of boom and bust is too dangerous, since the FRB is powerless to reverse full-scale depression. It takes more than easy credit to persuade a businessman to turn out goods for which there is no market. Argues Martin: "The Federal Reserve cannot turn the economy off and on like a faucet. But we can minimize fluctuations, and we have the responsibility to do that--to lean against the prevailing wind in order to achieve economic balance." To a great extent, the Federal Reserve's effectiveness in maintaining the balance of the U.S. economy today is a tactical victory for its ninth chairman.
The Boy Next Door. Bill Martin is a boyish, ruddy-cheeked, rangy (5 ft. 11 in.) man, with greying brown hair and good-humored eyes behind gold-rimmed glasses. Looking, as one longtime friend remarked recently, like "the boy next door--35 years later," he has turned the Fed, after a ten-year interlude (1941-51) as a puppet of the Treasury, back into an independent and effective custodian of the nation's money. Republican officials sometimes question Democrat Martin's judgment, notably after he boosted the discount rate last spring, at a time when many experts thought that a slump in business was ahead. But no one ever questions his integrity. He is famed in Washington as a man of low pressure and high principle, the boy wonder who has continued to make good ever since he was elected president of the New York Stock Exchange at 31. Martin regards central banking almost as a religion whose chief temple is Washington's white marble Federal Reserve Building, has repeatedly hailed the Federal Reserve system as America's greatest contribution to the science of government. Says he: "Money is at the heart and center of a flexible society. Too few of us realize how deeply the roots of the Federal Reserve are embedded in the soil of democracy, in the understanding that power over money, if abused, can be a tyranny which can destroy all liberty and freedom."
Though Martin is an economist by education (Yale '28) and long experience, he is no doctrinaire. He seldom bases his judgments solely on the exhaustive economic analyses that flow into his marble-walled Washington office from member banks, from stores throughout the U.S. and from the system's crack 250-man staff of economists. Explains Martin: "Economics is not an exact science, and never can be. It is part sociology, part psychology. It has to do with the reactions of a multitude of individuals."
New Vigor. To sound out the multitude, Martin each month visits at least two of the twelve Federal Reserve Banks or their 24 branches for conferences with regional banking officials, keeps his brown eyes peeled for economic pointers en route. He questions cab drivers and businessmen assiduously on money problems. In Chicago last month, striding the five blocks from Union Station to La Salle Street Station on his return from a Mon tana vacation, Martin spotted seven help-wanted signs in five blocks, one good sign to him that the economy was straining at the leash. "I'm not an extravert," ad mits Martin. "But I do like people."
The FRB, often riven by factionalism in the past, has gained new vigor as a result of Bill Martin's patent faith in people--and his patient, persuasive way of expounding his viewpoint. Unlike crusty Marriner Eccles, who ran the FRB like a one-man streetcar until his resignation as chairman in 1948. Martin scrupulously refers all major issues to his board of governors. In the garden-flanked Federal Reserve Building, Washington's handsomest office structure, Martin meets at 10 a.m. each day with the governors (who used to confer only once or twice a week before Martin took office), calls frequent meetings of the twelve-man Federal Advisory Council, which Eccles dismissed as a "statutory nuisance." He has beefed up the economic staff and put new life into two other grass-roots advisory groups, the conference of Reserve Bank presidents and the conference of Reserve Bank chair men. Martin has also abolished the exec utive committee of New York bankers who used to direct open-market operations in the buying and selling of government securities, effectively answering critics' charges that the Fed was dominated by a tight little coterie.
"In," Not "Of." Although careful not to compromise the Fed's freedom of action--he emphasizes that the system is "independent within the Administration, not independent of the Administration"--Martin confers on the business outlook over lunch each Monday with Treasury Secretary George Humphrey, with whom he works closely; each Wednesday Martin has a business lunch with Treasury Under Secretary Randolph Burgess. Martin, who neither smokes nor drinks, keeps himself in top shape (170 Ibs.) by playing squash or tennis each day. After the morning board meetings, he hustles back into his office, changes into shorts and sneakers, and pads through the marble halls with FRB Governor James L. Robertson. In summer, they take on all comers on the Fed's own tennis courts. Says one staffer: "Before they started playing tennis, most of us had never even met a member of the board of governors."
In the red brick Georgian mansion in northwest Washington, where he lives with his wife Cynthia (a daughter of Davis Cup Donor Dwight Davis) and three children (Cynthia, 12; William McC. Ill, 9; Diana, 7), Martin spends his evenings poring over the financial reports that sprout in 2-ft. stacks on his mahogany desk and bookshelves at the Fed. Punctually at n o'clock, Martin goes to bed.
Martin is as unruffled under public criticism as he is in the quiet of his own home. He can hardly make a move without provoking tantrums in some political sector, where worry springs eternal that something he does will cost votes. Nevertheless, he has earned a reputation for disarming his most vehement critics with quiet logic, unfailing good humor. His formula: "When I get involved in a controversy, I don't care whether the people on the other side are s.o.b.s. What mat ters is what they stand for."
Young Turk. To the money market born, Bill Martin is a son of the late William McChesney Martin Sr., longtime president of St. Louis' Federal Reserve Bank. After a sheltered upbringing in upper-crust West St. Louis. Martin entered Yale at 17, and after graduation got a $67.50-a-month clerk's job in his father's bank. When President Martin found out where Junior was working, he eased him out and young Martin went to work for a small St. Louis brokerage house. After two years he became a partner and went to Manhattan in 1931 as a floor partner on the New York Stock Exchange.
Bill Martin not only made a tidy fortune (which is now invested in real estate and Series E Government bonds); he soon made a name for himself as a leading spokesman for the Young Turks who were urging sweeping reforms on the old, bold exchange in a last-ditch fight to stave off SEC regulation. The insurgents triumphed, transforming the exchange from a private club run for the benefit of its members into the public utility that serves as the major source of U.S. venture capital. After Old Guard President Richard Whitney was convicted of embezzling exchange members' and customers' funds in 1938, Reformer Martin was elected to the $48,000-a-year job.
In 1941 Bill Martin again became a national symbol--this time at $21 a month. In one of the first New York groups to be drafted, Martin, then a bachelor, went good-humoredly off to Fort Dix, helping, as Selective Service Boss General Lewis B. Hershey said, "to convince people that we were dealing off the top of the deck it helped to have some aces and kings come off as well as deuces." Martin was a full colonel when discharged in 1945.
A month after his return to St. Louis, Martin was asked by War MobiMzation and Reconversion Chief John Snyder to join the Export-Import Bank as a director. Within a year Martin was appointed Ex-Im chairman (at $15,000), presided over the bank's expansion of capital to $3.5 billion. Determined not to allow the bank to become a handout window, Martin once refused to make a loan to China that had been requested by General George C. Marshall, then Secretary of State, insisted that he would never approve a loan unless it were economically sound. In 1948 Martin took a $5,000 pay cut to go to the Treasury as assistant secretary for international affairs.
Shotgun Marriage. In 1951, while he was still at the Treasury, Bill Martin was handed the job of dissolving a shotgun marriage of the Treasury and the Federal Reserve. The Fed had been stripped of most money-regulating powers in 1941, when the U.S. entered World War II. Anxious to finance the war at low interest, the Government froze the discount rate at i%, suspended the FRB's right to alter reserve requirements, and harnessed it to an agreement to support, at par, Treasury securities, which supplied 60% of the cost of fighting the war. By 1950 the Fed, which had been created as an independent agency to guard the nation's money, was clamoring to be unshackled from the Treasury, whose primary and distinct concern has always been to manage Government finances. By thus supporting the "easy money" policy of Harry Truman's Treasury Secretary, John Snyder, the Fed had, in fact, become an "engine of inflation."
To Bill Martin, a lifelong advocate of free markets, the famed "accord" that divorced the Fed and the Treasury in 1951 was a labor of love. It stipulated, in essence, that marketable Treasury securities would again have to find their own level in free trading. The FRB thus was able once more to exercise effective control over the money supply by buying and selling Government securities as it saw fit on the open market.
No Stooge. Nevertheless, in 1951, when he was first appointed FRB chairman by Harry Truman, succeeding Thomas (Scot-tissue) McCabe, who resigned in midterm, Martin had a hard time convincing fellow Democrats at Senate confirmation hearings that he would not allow the FRB to be dominated by his longtime friend John Snyder. Martin's clincher: "I'm not going to be a stooge for Snyder. I have too much respect for him."
Democrat Martin ran the FRB so efficiently that he was the highest-level holdover in the Administration when President Eisenhower called him to the White House to announce his reappointment as chairman in March 1955. At the same time, Ike confided, he intended to announce that Martin would also be named to a full 14-year term as a member of the FR Board of Governors when his predecessor's term expired in another nine months. But Martin persuaded Eisenhower to postpone the advance nomination. "Mr. President," he smiled, "by next January we might have a big depression. You would be very embarrassed to have a commitment to name me to a 14-year term." Said Ike: "I don't think that will happen. But have it your way." On Jan. 9, 1956, Martin was appointed to the 14-year term.
Tobacco Money. A realist who knows his history, Martin is well aware that he could overnight become the scapegoat of slump. In the crisis-stained chronicles of U.S. finance, bankers have been crucified on crosses of gold, silver, paper and every other substance used to back currency. From early colonial days, when they had to ship scarce gold and silver abroad to pay for imports, Americans chronically lacked sufficient backing for stable money. Virginia in the 17th century used tobacco for money (top-grade weed was worth 3$. a lb.), but was plunged into inflation by citizens' cash crops.
As Secretary of the Treasury in 1790, Alexander Hamilton (whose portrait faces Bill Martin at his Washington desk) persuaded Congress that a national bank "would be of the greatest utility" in helping the Government collect taxes, raise loans and stimulate private investment. Though it was eminently successful, the first Bank of the U.S. was dissolved in 1811 on grounds that it was unconstitutional. The second national bank, chartered in 1816, was allowed to die with its 20-year charter by Andrew Jackson, who had won the 1828 and 1832 presidential elections on a hard-money platform. Gould's Gold.The federal government was finally brought back into banking by the vast cost ($3.2 billion) of financing the Civil War. But the Government was unable to prevent the chronic breakdowns in credit and currency that caused a parade of panics from 1873 to 1907. The fault lay largely in the inability of the banking system either to provide an elastic money supply or to shift its reserves to meet demand in different sec tions of the country. Moreover, the Government had no means of restraining predatory financiers such as Robber Baron Jay Gould, who in 1869, set out to corner all the privately owned gold in the U.S.
The price of gold certificates rose from $125 to $165--and banks up and down the U.S. closed their doors--before the Treasury finally started selling. Forewarned, Gould was able to unload his gold at peak prices. Though Congress tried to investigate Gould, it was not until after the 1907 panic that the House finally launched an exhaustive study of the banking system itself. The outcome: the Federal Reserve Act of 1913.
As drawn up by Carter Glass's House
Banking and Currency Subcommittee, the act created a decentralized central bank that would "correct and cure periodical financial debauches, give vision and scope and security to commerce, amplify the opportunities of our industrial life at home and abroad." The Federal Reserve became the Government's banker, paying its bills, depositing its income, handling its financial dealings with foreign governments. For the first time, Treasury reserves were systematically distributed and coordinated with the banking system by Federal Reserve Banks in twelve regions. Federal Reserve banks, supported by the gold in Fort Knox through gold certificates in their vaults, issue all paper currency except dollar bills, which are still issued by the Treasury. In response to business expansion, the Reserve Banks can issue currency up to four times the value of their gold certificates. But to keep the money supply in balance with the level of economic activity, commercial bankers must deposit short-term notes as collateral with the Reserve Banks.
To protect the money supply from political debauch, the act made the system responsible only to Congress. Its seven-man board of governors, appointed by the President and confirmed by the Senate, represents both parties. To guard against control by the banking community, each of the twelve Federal Reserve Banks is run by a nine-man board of directors, no more than three of whom may be bankers. Member banks (nearly half the nation's banks, with 85% of total deposits, are members) are closely supervised by the Fed, must turn in weekly accounts of all transactions.
A total of 84 amendments in the original act have since given the Fed greater central authority and more power to regulate the money supply. For example, when the 1929 crash showed that the FRB had inadequate controls to restrain credit abuses, it was empowered to set margin rates for brokerage loans.
The Fed's tools have been jealously guarded and sharpened since Bill Martin succeeded Thomas McCabe as head of the Fed. A banker's banker, Martin has educated a whole new generation of Federal Reserve officials in the classic function of U.S. central banking: keeping money in balance with production with as little direct Government interference as possible. Says FRB Governor (and Truman crony) J. K. Vardaman: "Martin has a better mastery than any man I know of the intermingling of private enterprise and federal supervision in this mixing bowl of the system. He has done more than any man to ensure continuation of the system by Congress."
Built-in Inflation. It remains to be seen how Bill Martin's current formula will affect the mixing bowl over the next critical months. A report by the Commerce Department and the Securities & Exchange Commission this week predicted that the money shortage--as intended --will force business to push some expansion plans over into 1957. But far from canceling major expansion plans, many businessmen argued that any possible savings in loan costs in the future would be more than offset by higher-priced labor and materials if they postponed construction. Said Arthur Longini, chief economist for the Chicago & Eastern Illinois Railroad: "We're going right ahead borrowing for capital improvement. We feel that this economy has a built-in inflation. There's too much opportunity for profit right now; the cost of waiting is prohibitive."
The Federal Reserve noted at week's end that retail sales (excluding autos) for first-half 1956 averaged 6% above the same period in 1955, more than offsetting the slump in car sales. Wholesale prices and the cost of living seem certain to edge even higher when 1,250,000 union workers collect automatic raises as a result of June-July advances in the consumer index. After raising price tags a record $8.50 a ton in June, steelmen are already talking up another boost. The -auto industry, setting its sights on a near-record 7,000,000-car year in 1957, may drive consumer credit to new peaks. An increase in defense production, which generates spending power with no corresponding increase in consumer goods, promises to put new steam under prices. But Bill Martin is confident that the boom can be controlled, that the rise in the cost of living can be checked without bringing on a recession. Says he: "I have faith in the future of this country. We are growing as we go along the road."
* Although the maximum legal interest rate on bank loans in New York State is 6%, a consumer who borrows $100 for one year at the maximum rate has $6 interest deducted in advance. Thus the borrower not only does not receive the full amount of money on which he pays interest, but keeps paying interest on the full amount of his note as he repays the loan. The borrower winds up paying the bank an effective rate of some $12 interest.
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