A History of the Federal Reserve, Volume 2 (44 page)

The crucial difference between the two policies is not what they would do to the global price level, but what they do to the relative price or exchange rate for the dollar. Raising the price of gold would have permitted the United States to adjust its exchange rate. In addition to providing liquidity, revaluation of gold could have provided much needed adjustment of relative prices or exchange rates.
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The reasoning at the time neglected relative price, or exchange rate, adjustment. Once again, as in the 1920s, policymakers failed to see the issue as a choice between adjustment of the U.S. price level or its exchange rate.

Triffin recognized correctly that confidence in the fixed but adjustable system had to be maintained. If countries or market participants believed that the Bretton Woods arrangements required long-run deflation, he thought they would not remain in the system.
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This did not prove to be a problem. Inflation, not deflation followed. Countries did not leave the system. After the system ended, countries continued to acquire dollar balances.

Evolution
of
the
IMF.
The Federal Reserve System divided sharply over the Bretton Woods Agreement before it was adopted. The Board supported the administration. New York did not. Allan Sproul, influenced by his adviser, Professor John H. Williams, his directors, and prominent New York bankers, favored a key currency system.
²⁹⁵

New York lost the battle but won the war. The international system de
veloped with many features proposed by Williams. The dollar became the standard, and the United States became the only country that could follow an independent monetary policy (McKinnon 1993, 602–4).
²⁹⁶

292. The French government argued for revaluation of gold without success. These issues return in chapter 5.

293. Between 1946, when the IMF started operation, and 1960, when Triffin wrote, the real value of gold (fixed at a nominal $35 value) declined 25 percent measured by the U.S. consumer price index (base 100, 1967). Using the GNP deflator, the decline was about 30 percent.

294. Canada floated its exchange rate, but not for this reason. Britain considered floating its currency to avoid adjustment problems and blocked sterling balances (James, 1996, 99). Instead, it received substantial IMF and U.S. bilateral assistance after the Suez crisis in 1956. Corden (1993) and others argue that if the U.S. had devalued, others would have followed, preventing (full) adjustment. I am skeptical of this argument because the facts are opposite. After 1971, the dollar floated down periodically. Major countries did not devalue. They purchased dollars to slow dollar devaluation.

295. See volume 1, chapter 7. Chairman Eccles wanted to fire John H. Williams and force the New York bank to support the System’s position in favor of the proposed arrangement.

At first, the IMF did very little. That changed. By the end of the 1950s, the IMF had two related achievements. By making a loan that was large at the time, it helped the British through the crisis that followed their aborted effort (with France and Israel) to retake the Suez Canal. Partly as a result, the number and size of IMF assistance programs increased. In 1959, the members agreed to a quota increase that almost doubled the IMF’s initial resources. In real terms, deflating by the U.S. consumer price index, the IMF’s combined quotas in 1961, when the increase became effective, were 50 percent greater than in 1947 when it began operations. Its membership had increased by 50 percent also. Prodded by the United States, the IMF had started to impose conditions on its loans that eventually became known as “the Washington consensus.”

The
Diminished
Role
of
Silver

Government silver purchases and pricing had been a major political issue in U.S. history for decades. By the 1950s, the issue had become less important. In 1955, Congress proposed to repeal legislation that fixed the price of silver above the market price, thereby requiring the Treasury to purchase all newly mined silver. Chairman Martin testified that the monetary effect was small and could be offset by open market sales (statement by Chairman Martin before the Subcommittee on the Federal Reserve System, Board Records, July 13, 1955). The Board favored legislation confining silver certificates to $1 and $2 bills, replacing $5 and $10 silver certificates with Federal Reserve notes (Board Minutes, November 5, 1959, 5–6). In the 1970s, inflation raised the market price of silver above the Treasury’s purchase price. Silver no longer had a monetary role.

LEGISLATION

In the 1950s, as in other periods, members of Congress introduced legislation to change the structure of the Federal Reserve. Perennial issues included centralization of authority in the Board, a reduced role for the reserve banks, and an outside audit. None of this legislation passed and, usually, it did not get out of committee. Nevertheless, it was a constant
concern for the System and made it wary of Congress, so it increased congressional influence.

296. McKinnon (1993, 602) claims that the critical change resulted from the Marshall Plan and the EPU. The latter solved the payments problem for inconvertible European countries by using dollars for settlement through a multilateral clearing arrangement. The EPU ended in December 1958, when currencies became convertible on current account.

The principal legislative change concerned bank holding companies. The Banking Act of 1933 provided for the regulation of bank holding companies, but it did not give the Board the power to approve or limit their expansion. It could limit branching, but a bank could avoid the restrictions by organizing a holding company that owned shares in each of its “independent” branches. The law did not restrict the number of banks a holding company could own or the number of states in which it could own them.

The Board considered the 1933 definition of a holding company inadequate, principally because it did not apply to companies controlling only non-member banks. The Board also wanted legislation to cover the twentyeight holding companies in business at the time the legislation passed and to give the Board power to approve or reject bank holding companies’ decisions to acquire non-bank enterprises.
²⁹⁷

The
1956
Act

Congress considered legislation for many years before reaching agreement. On May 9, 1956, it approved the Bank Holding Company Act of 1956, placing all bank holding companies (with more than one bank) under the Board’s regulatory authority and requiring all bank holding companies to divest interests in non-banking organizations (with certain enumerated exceptions.) A bank holding company could not acquire bank stock without prior approval of the Board. In July, the Board adopted regulation Y, containing the details of its holding company regulations.
²⁹⁸

Holding company legislation divided the Board. Governors Shephardson, Szymczak, and King interpreted the Board’s role as justifying mergers or acquisitions deemed to be in the public interest. Governors Mills
and Balderston wanted only to stop changes they considered undesirable (Board Minutes, February 11, 1960, 15–17). The legal staff sided with Mills and Balderston. On the issue of competition, the legal staff believed that anti-trust legislation did not apply to banking mergers and acquisitions because the effect on competition was not the dominant consideration. Other factors, peculiar to the banking industry, such as capital adequacy, earning prospects, and management, had to be considered.

297. A 1950 survey showed that the twenty-eight groups included 367 banks with 1,019 branches. These banks held 12 percent of all commercial bank deposits (Martin papers, letter to Brent Spence, Board Files, April 11, 1952).

298. In the first major case under the new act, the Board heard oral arguments of Transamerica Corporation, an old adversary. The hearing examiner had decided that Transamerica’s ownership of Occidental Life Insurance Co. violated the new statute, so Transamerica had to divest its holdings. The Board upheld the hearing examiner. Governor Vardaman voted with the majority but noted that the act treated different types of holding companies inconsistently. In 1948, the Board had issued a complaint against Transamerica Corporation under the Clayton Act to force it to divest ownership in forty-seven banks in five states. Marriner Eccles believed that this action was responsible for his dismissal as Board chairman. The federal appeals court in 1953 agreed that the Board had jurisdiction but rejected the Board’s finding of monopoly. The court suggested legislation (Annual Report, 1953,47–48).

Congressional consideration of a bank merger bill brought these issues to the fore. After much discussion, the Board voted to treat holding company and merger applications and decisions under separate procedures.
²⁹⁹
The Board opposed legislation bringing bank mergers under the Clayton Act, since that would have made competition the principal basis for permitting or rejecting bank mergers. This issue arose in Congress several times, but it did not pass. The Board retained responsibility for mergers and did not have to get the approval of the Attorney General, a step that some in Congress often proposed.

The new legislation greatly expanded the Board’s regulatory reach. With that additional power, it could influence bank policy much more than in earlier years. And it gained a powerful group of potential supporters.

Other
Legislation

The Federal Reserve had to defend itself in the 1930s against proposals to restructure the System. These efforts continued in the 1950s and beyond, in part because one of the leading proponents, Congressman Wright Patman (Texas), continued to serve in Congress, and in part because member banks’ nominal ownership of the reserve bank shares and service by private citizens as directors attracted populist attention. It is not clear whether Congressman Patman made these proposals with the intention of passing them or saw them as a way of monitoring the Federal Reserve and requiring it to explain its procedures and actions in public. In the 1960s, Patman became chairman of the House Committee on Banking and Currency.

By the mid 1950s, Congressman Patman offered proposals in every session. Some took the form of non-binding resolutions. One such provided that the “Board and the FOMC should support the price of United States Government securities at par, but not exceeding par” (memo, Cherry to Martin, Board Records, January 11, 1955). Another called for an audit of the
Board and the FOMC.
³⁰⁰
The audit proposal alarmed the Board. It saw the audit as a threat to its independence that would expand from an accounting report to an audit of policy actions and decisions.
³⁰¹
Without waiting for a vote on the resolution, the chairman of the House Committee on Government Operations sent a letter to the GAO requesting them to audit the Board and the reserve banks for the years 1953 and 1954. In response, the Board recognized that it was the “creature of Congress” and subject to any procedures that the Congress adopted. But, the Board said, the proposed audit was “an important departure from long-established practice . . . with far-reaching implications” (Board Minutes, April 20, 1955, 5, letter, Martin to Chairman Dawson, Committee on Government Operations).
³⁰²

299. A critical issue was whether the Board should disclose publicly that a holding company had filed an application to acquire a bank. The Board voted five to two to make the disclosure. Governors Mills and King objected that disclosure would permit competitors to oppose an acquisition. They noted that the Board did not publish notices of applications for bank mergers (Board Minutes, March 2, 1960).

Patman’s legislative proposals included abolition of the FOMC, transfer of its functions to the Board, and expansion of the Board to twelve members, each with a six-year term. He proposed also that FOMC operations move to Washington from New York. The FOMC considered the last suggestion but did not act on it (Board Records, October 4, 1955).

The use of credit guarantees, subsidies, and other forms of preference appealed to many in Congress as a means of assisting favored groups such as home owners without showing the cost in the government’s budget. An example from 1958 called on the System to give financial assistance to small business. The Board offered to give advice and technical assistance
to an agency that Congress chose for the task. The Board reminded Congress that lending to small business was not a central banking function. It was careful not to state a position on the need for assistance (Board Minutes, May 7, 1958, 5–8).
³⁰³

300. The House voted on the audit resolution in 1955. It lost 214 to 178, a result that was close enough to concern the Board (telegram [Walter] Young to [George B.] Vest, Board Records, June 15, 1955). Defending the resolution, Congressman Patman charged that the FOMC “operated in New York City by employees of the Federal Reserve bank who are paid by the reserve banks, [and] that the Board . . . has no control, whatsoever, over the operations” (memo, Cherry to Martin, Board Records, January 13, 1955). This increased the pressure on Martin to change the way the manager was appointed.

301. The 1955 resolution called for an audit of all accounts back to 1913, apparently unaware of the audits done in the early years. The Board had responded to earlier proposals for an audit by appointing a public accounting firm to audit its accounts. Members of the Board did not all agree on the danger. Governor Vardaman objected to an audit by the General Accounting Office (GAO) because it would weaken congressional influence. “[T]here would be a tendency on the part of the Board to pay more attention to the General Accounting Office and less to the Congress” (Board Minutes, February 15, 1955, 23–24). Vardaman mentioned his objection to Congressman Patman and suggested that a subcommittee of Congress do the audit. The rest of the Board wanted to avoid congressional interference as a serious threat to independence. Vardaman’s proposal did not attract any support at the Board, but it suggests the degree of his disaffection.

302. The Board’s opposition to an audit received support from the Hoover Commission set up to study the operation of the federal government. That commission recommended no changes in the Federal Reserve System. Its report concluded that “[d]uring the 42 years since its foundation in 1913 it has functioned efficiently without a taint of mismanagement or corruption.” The Board included that sentence in a subsequent letter to Chairman Dawson (Board Minutes, April 20, 1955, 8).