Abstract
The main purpose of this study is to survey the processes of governance reform during the Great Depression and their effects on the economic and social backgrounds of the Federal Reserve System’s top executives. When confronted by the financial crisis, Congress restructured the Federal Reserve Banks by imposing greater uniformity in structure and control by the Federal Reserve Board in Washington, and Chairman Eccles accomplished a partial purge of the Federal Reserve’s management without revision of the Federal Reserve Act by asking Federal Reserve Banks to adhere to the policy regime as set by the Federal Reserve Board. First, we trace the evolution of the governance and membership of the directors and governors/presidents of the Federal Reserve Banks. Second, we observe annual trends in the economic and social backgrounds of the top executive groups of the Federal Reserve from 1915 to 1955 and examine how the Banking Act of 1935 and the partial purge of old-line executives in the mid-1930s affected their backgrounds. We conclude that Eccles’ governance reforms had some impact on the executives’ ages, levels of education, industrial origins, and lengths of service, and some economic and social networks, including political and religious affiliations, were operating in the Federal Reserve’s top executive groups.
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Notes
- 1.
See Dodd–Frank Wall Street Reform and Consumer Protection Act of 2010, Title XI, Sect. 1107, which states as following: “The president shall be the chief executive officer of the bank and shall be appointed by the Class B and Class C directors of the bank, with the approval of the Board of Governors of the Federal Reserve System, for a term of 5 years; and all other executive officers and all employees of the bank shall be directly responsible to the president.”
- 2.
Bopp (1935, p. 531). He was a faculty at University of Missouri from 1931 to 1941.
- 3.
Ervin Miller discussed the occupational backgrounds of the Class C directors, Andrew F. Brimmer, the FRB member, focused on the backgrounds of three classes of directors in 1957, 1967, and 1972. Thomas Havrilesky surveyed the directors’ industrial origins during 1950–1970 and 1972–1983.
- 4.
The Committee started as a program supported by the Rockefeller Foundation on January 21, 1954, but stopped substantially because Allan Sproul, chair of the committee, retired as president of New York Bank, and W. Randolph Burgess, who committed to write a history, was appointed as an Undersecretary of the Treasury. In 1956, the project was moved to Brooking Institution, and most documents of the Committee except some, including personal files, were opened to the public on the FRASER website of the St. Louis Bank.
- 5.
Young to Strong, March 31, 1927, p. 3, Young Papers, Box 263, 463H.
- 6.
However, the Act of February 25, 1927 provided for indeterminate charters. The original Act is in Federal Reserve Board, Annual Report for 1914, pp. 25–44.
- 7.
The full text of this Amendment Act is in Federal Reserve Bulletin, October 1918, pp. 947–948.
- 8.
It seems that the Federal Reserve Board believed that the original grouping brought about the dominance of larger banks within all classes of director, for instance James B. Forgan as a Class A director elected by Group 2, and consequently a lower voter turnout. In the election held in 1917, the voting rate was 37.5% in the New York Bank, 41.9% in Richmond, 47.1% in Atlanta, 23.9% in Chicago, 21.6%, in St. Louis, 15.9% in Minneapolis, 7.5% in Dallas, and 39.9% in San Francisco (Federal Reserve Board, Annual Report for 1917, pp. 31–32).
- 9.
According to James (1938, p. 874), nomination of James B. Forgan as a Class A director for Group 2 was subject to the condition that “the third Class A director [who was appointed by the group 3] and all the Class B directors should come from parts of the district outside Chicago.”.
- 10.
Federal Reserve Bulletin, October 1918, pp. 947–948.
- 11.
In the list of National City Bank of New York (1914, p. 8), James B. Forgan was listed in every category, Groups 1 to 3 for Class A and Class B, in the Chicago Bank.
- 12.
Of the six directors elected by bankers, four were those recommended by the committee of clearing house, while two Class B directors were the “insurgents” group. Clark (1935, pp. 69–71).
- 13.
Committee on Nominations for Directors of the Federal Reserve Bank of New York to Young, October 20, 1922, O.D. Young Papers, Box 262, 463B. When O.D. Young switched from Class B director to Class C, George L. Harrison, Deputy Governor, recommended for Young to write each of the presidents of the Bankers Associations of New York, New Jersey and Connecticut. See Harrison to Young, January 8 and 11, 1927, O.D. Young Papers, Box 263, 463D.
- 14.
Clark (1935, p. 85) insists that “real power in determining who shall sit on the board as Class A and B directors of the Reserve Bank resides in this committee of the bankers’ associations of the states in the district.”.
- 15.
We confirmed that there are copies of proceedings of stockholder meetings of the Boston Bank during 1929–1930. At these meetings, governors of the Boston Bank, William P.G. Harding and Roy A. Young, “as is the custom,” reported reviews of the operation of the Boston Bank. According to the meeting in 1929, “The Federal Reserve Bank of Boston inaugurated stock-holders’ meetings in 1923.” The Boston Bank paid “the expenses of one representative from each member bank in the District to the stock-holders meetings,” and “attendance at the meeting has been consistently large, averaging over 85% of all members annually.” Federal Reserve Bank of Boston (1931, pp. 9, 99–100).
- 16.
A letter that appeared on the front page of the Chicago Daily Tribune (January 4, 1915) alleged that “the reserve bank has been ‘stuffed’ with Reynolds-Forgan appointees.”.
- 17.
Also see testimony of Governor Miller at U. S. Senate, Committee on Banking and Currency (1935, pp. 766–768).
- 18.
Pierre Jay served as vice president of [Bank of] Manhattan Company until 1914.
- 19.
After serving as a deputy governor until 1938, Burgess moved to the National City Bank, where he was executive chair from 1948.
- 20.
Young to Strong, January 8, 1927, O.D. Young Papers, Box 263, 463D.
- 21.
A 1975 study on the directors concluded “the so-called public directors appointed by the Board hold views similar to those of directors elected exclusively by bankers.” See Harrison (1977, p. 55).
- 22.
Young to Strong, March 31, 1927, O.D. Young Papers, Box 263, 463H.
- 23.
- 24.
Hamlin to Glass, October 30, 1935, p. 1, C. Glass Papers, Box 64.
- 25.
U.S. Reserve Bank Organization Committee (1914, p. 21).
- 26.
One well-known case was that Governor Harrison of the New York Bank suggested continuing open-market purchases of about $25 million a week during the Depression, but the executive committee rejected his “recommendation by a vote of 4 to 1.” Friedman and Schwartz (1963, p. 369).
- 27.
See Federal Reserve Act, Sect. 4; Federal Reserve Bank of New York, Bylaws, Article I, in Federal Reserve Board, Annual Report, 1916, pp. 201–202.
- 28.
Federal Reserve Act, Sect. 12. The Council was a compromise for no direct banker’s representation on the Board. Lindley (1985, p. 6).
- 29.
U.S. Reserve Bank Organization Committee (1914, pp. 22–26).
- 30.
The San Francisco Bank did not call upon the executive committee in practice, even though they set up the committee. “With the exception of Mr. Alden Anderson, Class A director, who lives in Sacramento, three hours distant, all directors live in San Francisco, and their great regularity of attendance at meetings, hold on the first and third Tuesdays of each month, assures invariably larger meetings than a mere quorum of five. Matters both of general policy and to a considerable extent of detail are considered by the entire board. The members of the executive committee of five individually investigate and sign the executive committee report of investments submitted at each directors’ meeting, but because of the close touch of the whole board of directors with the bank’s affairs formal meetings of the executive committee are rarely called.” Federal Reserve Board, Annual Report for 1916, pp. 455–456.
- 31.
In general, power of the executive committee was as follows: (1) pass upon all commercial paper submitted for discount, (2) initiate and conduct open-market transactions, (3) recommend to the board of directors changes in the discount rates, (4) buy and sell securities, (5) apply for and provide for the security to be pledged against the issuing of Federal Reserve notes, (6) employ or delegate to officers and fix their compensation, (7) approve bonds furnished by the officers, and (8) conduct the business of the bank.
- 32.
Class A directors were Reynolds and Forgan, and Class C director was James Simpson, vice president of Marshall Field & Co. An article in the Chicago Daily Tribune, January 4, 1915, p. 2, reported that Class B directors “have taken little interest in the conduct of the institution.”
- 33.
There were 53 board of directors meetings and 246 executive committee meetings in 1918. Federal Reserve Board, Annual Report, 1916–1918. Despite the Federal Reserve Act permitted [Sect. 15], the Secretary of Treasury designated as fiscal agent of the United States on June 1, 1916, and the sub-treasury, which held a large portion of government deposits until 1920. After the United States entered the Great War, the Reserve Banks started fully the fiscal agency functions and sold huge amounts of the Liberty Bonds and Treasury Certificates, short-term obligations of the government. Taggart (1938, pp. 86–90). In the Chicago Fed, “An Executive Committee was organized with the Governor and Federal Reserve Agent as Chairman and Vice-Chairman”. Griswold (1936, pp. 72–74).
- 34.
Federal Reserve Board, Annual Report for 1917, p. 594. See also Willis (1937, p. 120).
- 35.
Federal Reserve Board, Annual Report for (1914, p. 8). In the original Act, the name of governor was given to a member of the Federal Reserve Board as “the active executive officer” [Sect. 10].
- 36.
Parthemos (1990, p. 8). See also Committee on the History of the Federal Reserve System, Persons and Federal Reserve Banks files, Federal Reserve Bank of St. Louis, FRASER website.
- 37.
By Sect. 21 of Federal Reserve Act, the Comptroller of the Currency “shall appoint examiners who shall examine every member bank.” However, “every Federal Reserve Bank may, with the approval of Federal Reserve agent or the Federal Reserve Board, provide for special examination for member banks within its district.” Furthermore, the FRB “shall at least once each year, order an examination of each Federal Reserve Bank,” and order “special examination” of the Reserve Bank “upon joint application of ten member banks.” Even though the Reserve Banks organized their own examination department in 1917, they had only 18 examiners in that year while the Office of Comptroller of the Currency had 204 examiners. For more details, see White (2013, pp. 31–33).
- 38.
Also see Temporary Internal Memorandum, Atlanta Bank Visit—February 1955, Comments of Mr. Levis Clark, Vice President of Atlanta Bank, Committee on the History of the Federal Reserve System file on the FRASER website.
- 39.
Federal Reserve Board, Minutes of the Meeting, Nov. 9, 1917, pp. 616–617; Gamble (1989, p. 27).
- 40.
“Interview with Mr. John P. Phillips Jr., recently retired as vice president of the Kansas City Bank,” June 13, 1955, p. 5, in Committee on the History of the Federal Reserve System file.
- 41.
Other directors received “in addition to any compensation otherwise provided, a reasonable allowance for necessary expenses in attending meetings of their respective boards.” Federal Reserve Act, Sect. 4.
- 42.
Federal Reserve Act provided in Sect. 4 as follows: “Any compensation that may be provided by boards of directors of Federal Reserve banks for directors, officers, or employees shall be subject to the approval of the Federal Reserve Board.” However, most salaries were decided by informal discussions at Board meetings.
- 43.
All expenses and salaries of the FRB are also levied upon the Reserve Banks [Sect. 3 and 4].
- 44.
Maximilian B. Wellborn, whose salary was $18,000 as president of the First National Bank of Birmingham, accepted a position of chair of the Atlanta Bank in 1914. Gamble (1989, p. 15).
- 45.
Griswold (1936), pp. 53–54. Both chair and president received equal salaries in 1916 in the Atlanta Bank, in 1920–1924 in the Dallas Bank, in 1919 in the Minneapolis Bank, in 1920–1921 in the San Francisco Bank, in 1927–1935 in the New York Bank, and in 1931–1935 in the Chicago Bank.
- 46.
By the amendment of the Reserve Bank bylaws, the chair of the board of directors became chair of the executive committee. See J.H. Philbin to Young, February 4, 1927, O.D. Young Papers, Box 263, 463I. Leslie Rounds also held that “the position of the chairman is somewhat ambiguous,” and “the reason for that change in the by-laws was simply that McGarrah foresaw the possible occasions when that might be a necessary power to have.” Brookings Institution, “Confidential Interview with Leslie Rounds,” May 2, 1955.
- 47.
“Comparison of Governor Eccles' Recommendations with Title II as Reported to the Senate,” July 3, 1935, p. 3, Box 13, Marriner S. Eccles Papers, University of Utah. In March 1933, O.D. Young, Deputy Chair of the New York Bank received $20 dollars for attendance of each meeting. Receipt issued by Allan Sproul, March 31, 1933, O.D. Young Papers, Box 266, 463V.
- 48.
Brookings Institution, “Confidential Interview with Leslie Rounds,” January 29, 1954.
- 49.
Federal Reserve Bulletin, March 1936, p. 145.
- 50.
Commercial and Financial Chronicle, March 7, 1936, Vol. 142, Pt. 1, p. 1558. The FRB also introduced a new rule for the Reserve Bank chair, who must be younger than 65 when entering office. “This controversial move brought the immediate resignations of six of the Reserve Bank chairmen.” Board of Governors to Young, December 4, 1935, O.D. Young Papers, Box 268, 463EE, Box 267, 463AA; Gamble (1989, p. 73).
- 51.
Simpson to Young, January 28, 1935; Simpson to Eccles, January 28, 1935, O.D. Young Papers, Box 267, 463AA.
- 52.
Federal Reserve Bulletin, 1936, March, p. 145; Gamble (1989, p. 73). “The Board agree not to approve for the five year term beginning March 1, 1936, the appointment of any one as President or First Vice President of a Federal reserve bank who is seventy years or more of age or who, before the end of the five years, will have reached that age.” Federal Reserve Board, Minutes of the Board of Governors of the Federal Reserve System, February 29, 1936, p. 8.
- 53.
“Business: Reservists Out,” The Time (1936, March 16).
- 54.
At the end of May 1935, the board of directors of the New York Bank decided that “the regular meetings of the executive committee during the months of June, July, and August, 1935, be omitted.” Allan Sproul to Young, May 31, 1935, O.D., O.D. Young Papers, Box 267, 463AA.
- 55.
“Proposed Amendment to By-laws of Federal Reserve Bank of New York, Effective March 1, 1936, To Be Presented to Board of Directors for Action at Meeting of Board on January 2, 1936,” December 27, 1935, O.D. Young Papers, Box 268, 463CC. See also Bylaws of Federal Reserve Bank of New York website.
- 56.
Committee on the History, “Profile of Federal Reserve System Top Command,” Entry 164, Box 11, Folder 11, Committee on the History of the Federal Reserve System, Brookings Institution, p. 2.
- 57.
Andrew F. Brimmer, a member of the FRB in 1966–1974, surveyed age, tenure, industry origins, and educations of the board of directors, including the branch offices in 1957, 1967, and 1972. He pointed out that the “composite director in 1972 is younger than his predecessors, has served less time on his board, is more diverse in his occupant pursuits, and has more formal education than the typical directors of 15 years ago.” Furthermore, he insisted there were few directors of minority groups and women then (Brimmer 1972). Miller (1961) and Havrilesky et al. (1973) also noticed a lack of diversity in the boards of directors, especially Class C directors.
- 58.
FRB, Minutes of the Board of Governor of the Federal Reserve System, December 28, 1934, p. 1.
- 59.
See Note 53.
- 60.
For example, Rudolph M. Evans (1940–1954) was formerly an Administrator of Agricultural Adjustment Administration, Ernest G. Draper (1938–1950) was formerly an Assistant Secretary of Commerce, and William M. Martin Jr. (1951–1970) was formerly an Assistant Secretary of the Treasury.
- 61.
Section 10 of the original Act provided that “the President shall have due regard to a fair representation of the different commercial, industrial, and geographical divisions of the country.”
- 62.
Pak (2013, p. 139) suggests, “a university education from an elite university became an informal requirement” for new partners who were not born of high social status.
- 63.
Class C director (1916–1917) at the Philadelphia Bank and Class C director (1936–1942) at the Chicago Reserve Bank were Catholic, and Class C director (1919–1922) at the Minneapolis Reserve Bank was Jewish.
- 64.
With regard to the FRB members, Jews Paul M. Warburg served 1914–1918, Eugene Meyer served 1930–1933, and Henry Morgenthau, Jr. served 1934–1936, and Catholic James F.T. O’Connor served 1933–1936.
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Suto, I. (2018). Economic and Social Backgrounds of Top Executives of the Federal Reserve Before and After the Great Depression. In: Rockoff, H., Suto, I. (eds) Coping with Financial Crises. Studies in Economic History. Springer, Singapore. https://doi.org/10.1007/978-981-10-6196-7_7
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