Eccles #4 - Becoming Fed Chairman
As the announcement of the next Chair of the Federal Reserve System is scheduled to be announced by President Trump before the release of the next episode, I wanted to share the story behind Marriner Eccles’s appointment back in 1934.
This is Alexander Bagehot, and you’re listening to The Bankster Podcast, the only podcast dedicated to the fascinating and ever more consequential world of central banking.
This is the fourth part of The Bankster Podcast’s ongoing research into the life and work of Marriner Stoddard Eccles. The timing of the release of this episode could not be more perfect. The current President of the United States is in the final days of deliberation before he announces the next Chairperson of the Federal Reserve System. It’s looking like Janet Yellen, Jay Powell, and John Taylor are the current front runners. The President has promised that he will announce his decision before he leaves for Asia on November 3rd (next Friday). It seemed appropriate to share with you today Eccles’s nomination experience. It’s a dramatic story with some aspects that are unimaginable today and others that could have been headline news articles of the last few weeks. So with that, let’s jump right in.
Eugene Black had a short tenure as leader of the Board of Governors. He had served just 15 months from May of 1933 to August of 1934, when he decided that he would rather go back to his old position as head of the Federal Reserve Bank of Atlanta. Under today’s system, this move would be a major step down in power and authority. However, things were different back then. And the changes from an environment where a Fed Chair would leave his position in favor of a local Reserve Bank President position came in large part to one man, obviously, Marriner Eccles. Eccles himself tells the story really well, so I’m going to be taking a lot of quotes from his Autobiography, Beckoning Frontiers. Eccles picks up the story right from there.
“In the months following Black’s resignation several names were bandied about Washington as those of likely successors to the post he had vacated. But it was not until a blistering day in August that I heard my own name included among the list of prospects. On this day, when I was seated next to Henry Morgenthau at a White House conference, he suddenly leaned over and whispered: “Marriner, I’ve been talking to the President about your filling Eugene Black’s place.”
Here is Eccles’s response,
“[Morgenthau] waited for a reply. For once in my life I was mum. Nothing more was said, nor were any questions asked when the meeting ended. I’d never thought of myself as a candidate for the vacant post or for any other public post. June 1935 had been set as the limit of my stay in Washington, the date coinciding with the end of the school term. I meant to return to Utah with my family at that time.”
A month went by before the President himself brought up the subject with Eccles directly. Remember that at the time Eccles was serving in the Roosevelt administration as Assistant Treasury Secretary. Eccles continues.
“Sometime in September, when Morgenthau took me to another White House meeting, Roosevelt informed me directly that I was being considered for the post of Governor of the Federal Reserve Board and asked how I felt about that prospect. I replied that the post would be an appealing one only if fundamental changes were made in the Federal Reserve System.”
In his autobiography Eccles detailed a few of the problems with the way the Federal Reserve had evolved from the 1913 vision of the nation’s central bank to the present 1934 situation.
“Over the years, practices had grown up inside the System which had reduced the Reserve Board in Washington to impotence. The System had originally been designed to represent a blend of private and public interests and of decentralized and centralized authorities, but this arrangement had become unbalanced. Private interests, acting through the Reserve banks, had made the System an effective instrument by which private interests alone could be served. The Board in Washington, on the other hand, which was supposed to represent and safeguard the public interest, was powerless to do so under the existing law and in the face of the opposition offered by the men who ran the Reserve banks throughout the country.”
The President gave Eccles a few months to go to the drawing board and write up his critiques of the Federal Reserve System as he saw them and to offer specific recommended changes. Now listen to what Eccles says about the document, the memorandum he calls it, that he prepares in response to the President’s request for specific changes. There’s a line in this next quote that I could have pulled from any number of shade throwing comments of the 2017 political atmosphere.
“This memorandum, which led to the Banking Act of 1935, is now deposited among the Roosevelt papers. It should have more than passing interest to the historians of the epoch. While Roosevelt beforehand had engaged in the very agreeable political game of attacking “Wall Street control” of the American economy, the attack was largely theatrical in character. It had never been followed by off-stage action of the sort that could make the nation’s financial centers useful servants of the national welfare. The memorandum I presented to Roosevelt on November 4 proposed in explicit terms that this sort of action should be taken, and indicated, furthermore, how it should be taken.”
I’m proud to say that after some diligent research I was able to find the very Memo, with an inscription at the top of the page, “Memo Given to President 11/3/34” [November 3, 1934]. The title of the Memo is, “Desirable Changes in the Administration of the Federal Reserve”. I’ll send a link to the PDF of a scan of the original Memo in the show notes to today’s episode. To those of you who haven’t yet signed up for the show notes, it’s super simple. Go to www.thebanksterpodcast.com, scroll to the bottom of the page and type in your email, it’s as simple as that. I send one short email with bonus content at the same time the episode is released.
Considering the sweeping nature and impact of this Memo, its layout is quite simple and concise. It consists of eight bullet points and doesn’t reach the two and a half page mark. Here is a quick summary of the eight recommendations that, as Eccles said, “should be taken” by which he implied, “should be taken if you want me to be the next Fed Chair.”
The first three touch on the Fed’s power to control the supply of money
The fourth recommends the monetary policy decision making authority be shifted from the Reserve Banks, especially the FRBNY, to the Board of Governors. The fourth also asks that the head of the Reserve Banks be appointed annually - subject to Board of Governors approval.
The fifth is mostly a complaint about the status of the Board. It’s worth quoting, “Although the Board is nominally the supreme monetary authority in this country it is generally conceded that in the past it has not played an effective role, and that the system has been generally dominated by the Governors of the Federal Reserve Banks; As a consequence, the Board has not commanded the respect and prestige to which its position would apparently entitle it, nor has membership on the Board been as highly desired as it should be to attract the necessary talent. The great disparity in salaries has also contributed to this condition”
The sixth is also too juicy not to quote. In this one he really lays into what he sees as the ludicrous current amount of power held by the Reserve Banks. “There is no reason to suppose that this administrative organisation which functioned so badly in the past, will function any better in the future. The diffusion of power and responsibility, the root cause of the trouble, remains. Over one hundred individuals are responsible, in various degrees, for the formulation of policy. Obviously the more people there are who share the responsibility, the less keenly any one of them will feel any personal responsibility for the policies adopted. It is therefore almost inevitable that such a loosely knit and cumbersome body as the Federal Reserve Administration should be characterized by inertia and indecisive action generally. Moreover, a complete stalemate resulting from a disagreement of the reserve banks and the Board is always possible. To correct this condition reform must be in the direction of concentrating authority and responsibility for control into the hands of a small policy formulating body [namely the Board of Governors]”.
The seventh takes the idea from number four about the Board of Governors involvement in approving the appointment of the leaders of the Reserve Banks one step further, “Governors were conferred on the Board, the possibility of lack of cooperation and friction would be obviated in the future, while the prestige of the Board would be enhanced.”
Finally, his eighth and final statement is one of self confidence and almost pride at his own recommended changes. “The adoption of these suggestions would introduce certain attributes of a real central bank capable of energetic and positive action without calling for a drastic revision of the whole Federal Reserve Act. Private ownership and local autonomy are preserved, but on really important questions of policy authority and responsibility are concentrated in the Board. Thus, effective control is obtained, while the intense opposition and criticism that greets every central bank proposal is largely avoided.”
What a Memo! Eccles delivers the written Memo and then spends over 2 hours answering the President’s questions and expanding on his ideas. Then, “At last [Roosevelt’s] powerful hands slapped down on the table in his characteristic gesture of decision as he said: ‘Marriner, that’s quite an action program you want. It will be a knock-down and drag-out fight to get it through. But we might as well undertake it now as at any other time. It seems to be necessary. Then he added: “Gossip has gotten around about my considering appointing you the new Governor. It is only fair that you should know that formidable opposition has developed as a result. However, I don’t give a damn. That opposition is coming from the boys whom I am not following.”
To this I replied: “Well, Mr. President, if you don’t give a damn, I don’t see why I should.”
“Six days later, on November 10, [Roosevelt] announced [Eccles’s] appointment as [Chairman] of the Federal Reserve.”
The recess appointment and the following brutal nomination process is a story for another episode, but it too has a lot of parallels to today’s political climate. The process of turning the Memo into actual legislation was also incredibly challenging. And the pushback Eccles received from the leaders of the Reserve Banks was naturally fierce and taxing. Those stories will be shared in future episodes of The Bankster Podcast. But for now, I hope you enjoyed learning about the incredible story of Eccles’s nomination to the head of the Federal Reserve.
You can bet that although the Federal Reserve always changes when a new person takes the lead, 2018’s almost certainly will not be as dramatic a transition as the one in 1935.
Today’s episode was written, edited, and produced by me, Alexander Bagehot. Reach out with your feedback, comments, and questions on twitter or via my website www.thebanksterpodcast.com. Thanks to all of you for listening, and I’ll see you next time on The Bankster Podcast!