Episode 1 - Show No Signs of Panic (Rebroadcast)
Welcome to the Bankster podcast, my name is Alexander Bagehot and I’ll be your host today. This is Episode 1 - Show No Signs of Panic. Every week we dive into the intricate world of central banking! I summarize the latest news and events catching you up on all things Federal Reserve and monetary policy from around the world. Then I take a more in depth look into a historical event or person that helped shape what central banking is today.
On this episode we’ll talk about an experience that Marriner Eccles had as a banker in Utah before he became the 7th Chairman of the Federal Reserve. But first let’s catch you up on what happened this week in the Central-verse. And as an aside, because this is the first episode, Centralverse is not a real word yet, but it’s one that I have made up to describe the deep, fascinating, ever changing, and incredibly consequential world of central bankers and the economies they attempt to support. I’ll start the podcast with pretty simple terms and definitions and build upon that foundation as time goes on.
And first we are going to start with a very important number in the central-verse. This past friday, at about 8:31am Eastern time my phone began to light up. Over the next 10 minutes or so I got notifications from CNN, WSJ, NYT, and The Economist - an unnecessarily high quantity of push feeds I have set up that on this occasion were sharing one simple piece of information. See, at 8:30am on the first friday of every month the Bureau of Labor Statistics releases their monthly “Employment Situation” report.
This is a 39 page report filled with interesting charts, graphs, and tables. However, it is almost universally summarized by one number - the national unemployment rate (which congress tells the Fed they need to maximize, or in other words keep as many people working as is sustainable). All of those notifications on my phone this time were informing me that the number was 5.0%. This number means of the 1000 people in the labor force there are 50 that are looking for a job and haven’t found one. In later episodes we will dive into the significance and intricacies of this number, but for today we’ll leave it at that.
Most market players and central bankers received the number relatively positively even though it was a slight uptick from last month’s 4.9%. Think of it this way. In our 1000 people labor force example, last month 49 people were looking for a job. This month there were 50. But instead of thinking of this extra person as someone who lost their job, central bankers and market players read more of that 39 page report and found that this person is someone who was depressed, sitting on their couch, and not looking for a job in February, but in March they saw the economy strengthen got off the couch and started looking. They still haven’t found a job yet, but they believe they can find one, so they are now in the labor force again.
Onto the second piece of news we’ll cover this week. Central bankers wield an incredible amount of power over the economy. However, they are limited in the number of tools that they have. The foundational and textbook tool is the ability to signal to the market what interest rates should be, or at least which direction they should be moving. In the United States every six weeks a council convenes in the Eccles building (yes, named after the very Marriner Eccles that will learn about later in this episode).
At this meeting the 12 bank presidents and the 7 board of governors of the Federal Reserve System gather to discuss the condition of the national economy. Then a select number of them (more on that later) cast a very simple vote - what to do with interest rates (up/down/unchanged). So given that limited function what are some other options that central bankers have to progress their ideas or influence the economy? Well, one way is by giving public speeches. The 12 presidents and 7 governors frequently speak about their views and opinions about the economy.
This is a way for them to let the markets and policy makers know where they stand, what their next council vote might look like, and what they think the Fed should do in the future to foster a healthy economy. This week we heard from a number of officials. In just the seven days I’m covering in this episode (March 30 - April 6) we heard from the presidents of the Fed’s in Boston, New York, Cleveland, Chicago, and St Louis. With the high quantity of speeches being given I won’t go through each of them or even mention the speeches every week. I will however, keep you up to date if the spirit or direction of the content of these speeches changes in a significant way.
This week there was a slight shift towards accommodative monetary policy, which for now we will crudely define as keeping interest rates lower for longer. For example, Loretta Mester, the president of the Federal Reserve Bank of Cleveland said she viewed the pace at which they will raise interest rates as, “slightly more gradual than the path [she] foresaw in December”. Similarly, Charlie Evans, President of the Chicago Fed said, “Currently, I believe it will be appropriate to make two more rate hikes this year and then follow a very gradual path of rate increases thereafter.” These were two of the biggest voices of the week suggesting that the council that sets interest rates make gradual increases this year, a subtle, but important shift.
As the podcast continues you’ll quickly learn that the Fed talks a lot about interest rates. Simply put, interest rates have a large impact on the two goals that congress told the Fed they are to shoot for (1) maximizing employment and (2) keeping prices stable. Lots more on those goals to come.
And now that we’ve covered the new unemployment numbers and the slight shift in the monetary policy outlook of a few leaders of the Centralverse. We are going to dial the clocks back to 1931 - the setting, Utah; to a classic scene of the Great Depression - the eve of a bank run. After this short break.
Show No Signs of Panic
All of the information from this story came from Marriner Eccles autobiography, Beckoning Frontiers. Marriner Eccles, the oldest son of an immigrant family, was born in 1890. He was raised on the awe inspiring, western foothills of the Rocky Mountains, in the small town of Logan, Utah six years before Utah was made a state. Although his father had come from an impoverished family in Scotland he had achieved the American dream and was quite wealthy and owned a number of businesses. However, not wanting his children to quote, “grow up in idleness or acquire a taste for easy living” Eccles father sent him to work in one of his lumber yards at eight years of age, “carrying his weight in boxes” where he would be paid, “The rate of...five cents an hour for ten hours’ work.”
His father not only wanted him to learn the lessons of a hard day’s work, but he wanted Eccles to learn a business mind. In his autobiography, Beckoning Frontiers, Eccles says, “When I held in my hands the first fifty cents for a day’s labor, my father offered a plan whereby I could be taught to follow in his footsteps and become a capitalist by curtailing the consumption of my current income. At the outset of that first summer he said that if I saved my money until I had one hundred dollars, he would sell me one share of Oregon Lumber Company stock.” (pg 27).
Now, I don’t know about you, but I can’t imagine being too inspired at the age of eight by the prospect of lifting boxes for ten hours a day so that I could buy stock in a lumber company. But Eccles stuck it through, and after three summer’s worth of work, he had earned enough to buy that stock and become, in the words of his father, “A capitalist”.
Eccles’ business aptitude would be put to the test sooner than he expected. Shortly after returning from serving a two year, two month mission for the Church of Jesus Christ of Latter Day Saints his father passed away suddenly. Eccles took substantial control of his father’s businesses and quickly expanded into a wide range of industries across the west. He was in everything from sugar mills, to railroads, to of course banking, and all this while still in his 20’s. Within the next decade his financial prowess had expanded into the creation of the first bank holding company (fed history bio of eccles), which owned and operated 15 banks in the intermountain west.
Now, if you’ve followed any of the dates of Eccles life so far you’ll see that he is unknowingly approaching, what is about to become a very dark chapter of American History, the Great Depression. The shock waves of the stock market’s collapse on the east coast reverberated across the country and fear was spreading across communities in Utah. And this is where Eccles finds himself on the eve of what he knows will be a terrible day for banks in the state. It was Sunday, and Eccles had watched as a number of banks in the state had closed due to bank runs by depositors the previous week, including the old and highly regarded Ogden State Bank.
If you’ve seen the movie, It’s a Wonderful Life, you can picture the scene where the townspeople crowd into Jimmy Stewart’s bank, fear in their eyes, and demand their money back. Eccles was informed that the Ogden State Bank would not be opening for business the following day and he could expect to see a crowd at his bank the following morning. Eccles’ banking knowhow would soon be put to the test, and you’ll see how important the central bank is in times of stress like these.
See, to be honest, I think the words depression and recession actually miss out on one of the fundamental characteristics of an economic downturn, and that’s why I prefer the term Panic. Because that is really what is happening. People that heard that Jimmy Stewart’s bank was going to close temporarily, panicked and wanted to pull out all of their money, which would have certainly caused the actual failure of his bank.
Similarly, in 2007 and 2008 it was fear in the short term innerbank lending market that led to a wider collapse in the economy. Now this isn’t to say that some of the fear isn’t justified, but what we do see, is that fear is very contagious and justified doubt about the health of bad institutions quickly spills over into unjustified doubt about healthy institutions and it becomes very difficult to know who’s healthy and who isn’t. But that, is one of the very jobs of a central bank. To lend to those that are healthy in the long run, but are in trouble in the moment because of the general panic of the day. So now let’s go back to 1931 and see what Eccles is going to do about the bank run he now knows is coming.
Early on Monday morning, he gathers the employees of the bank together and says, “If you want to keep this bank open, you must do your part. Go about your business as though nothing unusual was happening. Smile, be pleasant, talk about the weather, show no signs of panic.” Eccles understood that in order to save his bank, he was going to have to change the fear and panic that his customers felt, into feelings of calm and trust.
His first strategy at accomplishing this was to slow the bank’s activity way down. He admitted, “We can’t break this run today. The best we can do is slow it down...in the past you did not have to look up...signatures, but today when they come...you are going to look up every signature card...when you pay out, don’t use any big bills. Pay out in fives and tens, and count slowly” Shortly before three o’clock in the afternoon, the time at which the bank was supposed to close, Eccles gathered with the other leaders of the bank.
The implementation of his plan of earlier in the day had gone as hoped. Well, they had indeed paid out a minimum. However, looking around the bank, they all noted that the fear and the panic were strong as ever quote, “The crowd in the bank was as taut as it was dense. Some people had been waiting for hours to draw out their money.” (pg 59). They admitted that, “if we tr[y] to close at three, there [is] no telling what might happen.” They decided to switch tactics. They would not close the bank at the regular hour, in fact they would stay open as long as was needed to satisfy the demands of the customers.
Eccles’ hope was that people would see this as a sign of confidence that Eccles’ had in his own bank. But in order to hold true to this promise, he would need help, because truthfully, he didn’t have enough cash to honor everyone’s deposit withdrawals if they were to ask, and he couldn’t borrow any money from the other remaining banks in town because they were suffering from the same crisis panic.
Again, quoting from Eccles autobiography, I’ll let him describe what he did next, “A call [was] put through to the Federal Reserve Bank in Salt Lake City to send currency to our Ogden banks as well as to all others in the First Security Corporation (the bank holding company that Eccles owned). The armored car that brought funds to us in Ogden arrived on the scene as in the movies when the Union cavalry charges in to save all from the Indians.
“The guards strode through the crush inside the bank, and all made way before them...When [the deputy manager of the Federal Reserve Bank in Salt Lake City] entered our bank, I grabbed his arm and led him through the crowd to a black and gold marble counter in the officers’ section of the savings bank. Mounting the counter, I raised my hand and called for attention: “Just a minute!” There was instant silence. “Just a minute!” I repeated. “I want to make an announcement. It appears that we are having some difficulty handling our depositors with the speed to which you are accustomed.
“Many of you have been in line for a considerable time. I notice a lot of pushing and shoving and irritation. I just wanted to tell you that instead of closing at the usual hour of three o’clock, we have decided to stay open just as long as there is anyone who desires to withdraw his deposit or make one. Therefore, you people who have just come in can return later this afternoon or evening if you wish. There is no justification for the excitement or apparent panicky attitude on the part of some depositors.
“As all of you have seen, we have just had brought up from Salt Lake City a large amount of currency that will take care of all your requirements. There is plenty more where that came from. And if you don’t believe me,” I continued, “I have here...Morgan Craft, one of the officers of the Federal Reserve Bank, who has just come up in an armored car. Mr. Craft, say a few words to the folks.
“I pulled him up to the top of the counter, “I just want to verify what Mr. Eccles has told you,” he said. “I want to assure you that we have brought up a lot of currency and there is plenty more where that came from.” And listen closely to what Eccles says next, for it is the key, first takeaway I hope you gather about central banking’s role in the world. “The mood of the day was so unreasoning that men were heartened by words as meaningless as those which caused them fright.
“In a split instant the faces before me relaxed in relief. The edge in all voices seemed to vanish. Some people stepped out of line and left the bank. And a happy buzz replaced the waspish one heard earlier...On Tuesday customers came into the doorway of the bank, looked furtively around the lobby, and, seeing that things were peaceful and serene, walked away. And that was the end of that run.”
It would be a number of years before Eccles would join the Federal Reserve and eventually serve as the 7th Chairman of the board. But the lessons he would learn that fateful day would become vital to his term as leader of the Federal Reserve.
I am not explaining every intricacy or every detail about the news or about the workings of the Centralverse; however, I hope that if you stick with the podcast the world of Central Banking will open up and you’ll realize the incredible dance that the central bankers are performing with market men and women, with policy makers, and with anyone that plays a part in this economy...which, frankly, if you are listening to this podcast you are playing a part in the economy! I hope that today you picked up on the importance of the words of Central Bankers (whether prepared remarks by today’s Fed presidents or countertop impromptu speeches by Fed leaders of the 1930’s).
Central Bankers have made mistakes, and unfortunately Eccles experience during the depression with the Federal Reserve was somewhat uncommon. But whatever your thoughts about the power of the Central Bank I hope that you’ll gain a deeper understanding of how it works, what it’s doing, and most importantly, why it’s doing it.
Reach out with comments, recommendations, or questions about the The Bankster Podcast or the Centralverse in general. You can email me at email@example.com. Find me on twitter at the handle alexbagehot (that’s alexbagehot). At my website www.thebanksterpodcast.com you can find a transcript of today’s episode with links to all of the sources I used in creating the content. And check back in to the website over the next few weeks as it will be growing and expanding tremendously! You’ll find it an ever more useful source for all things Centralverse.
Today’s episode was written, edited, and produced by me, Alexander Bagehot. I dedicate this episode to Ira Glass, my first radio hero. And to all of you, my first week’s audience, thanks for listening. I’m Alexander Bagehot, and I’ll see you next time on The Bankster Podcast!