Poignant Parting

Four times a year, says the law, representatives of the twelve Federal Reserve Banks shall meet as an open market committee to give their advice on credit management to the Federal Reserve Board. Last week, for the fourth time in 1935, the members of those august bodies met in Washington, looked at one another with sad eyes. They had met to part but even their parting was not allowed to be sweet sorrow. A grave problem and bitter issue was on hand to discomfit even their valedictory.

Hardly a man present knew whether he should again look on the old familiar faces of his colleagues or, if so, under what circumstances. By Feb. 1, the Federal Reserve System is to be reconstituted under the Banking Act of 1935. The Governors of the twelve Reserve Banks may hold their posts under the new title of "President" if re-elected by their respective directors. The Open Market Committee will cease to be an advisory body, will acquire genuine authority over the Federal Reserve System's buying & selling of government and other paper. But on the committee, representation of the Reserve Banks will be cut from twelve to five members.

Yet as a group, the heads of the Reserve Banks were less concerned over their own future than over the future of their hosts, the Federal Reserve Board. Of the Board two members, the Secretary of the Treasury and the Comptroller of the Currency will automatically lose their ex-officio jobs. The other six members will lose their jobs unless reappointed by President Roosevelt. Only one member of the present Board, Governor Marriner Stoddard Eccles, has been publicly assured by the President of reappointment. Under the new setup he will change his title to "chairman." Two members of the Board, besides Mr. Eccles, have been added to it by President Roosevelt: John Jacob Thomas, 66, Nebraska farmer-lawyer and Democratic politician; Menc S. Szymczak (pronounced Sim-chak), 41, who was Comptroller of Chicago under the late Mayor Anton Cermak. If either of them has White House assurances of reappointment, he is keeping the fact strictly to himself.

The other Board members are no youngsters either in service or years. George Roosa James, Memphis drygoods man and banker, was appointed by President Harding in 1923. Next year he will be 70 and though he has the crotchets that go with age, he is crammed full of useful technical information. Adolph Caspar Miller, who will have his 70th birthday in a week, was one of the original members of the first Federal Reserve Board appointed by President Wilson in 1914. For 24 years before that he was an economist. His chances of reappointment are considered good, because he was a great & good friend of Franklin Roosevelt in the days when that young man was Assistant Secretary of the Navy. Oldest member is Charles Summer Hamlin, 74, who also has kept a Board seat continuously warm since there were any Board seats to keep warm. A Boston lawyer, Mr. Hamlin ardently advocates world peace, keeps large scrapbooks pasted up with peace clippings.

The poignancy of last week's meeting was that for the last time the destiny of U. S. banking policy was in the hands of these men, and yet they either cared not or dared not use their power.

The problem before them was the existence of $3,300,000,000 excess reserves in the Federal Reserve System. Since one dollar of bank reserves can become the basis of about $10 of credit, the existence of such surplus reserves would make possible, in theory at least, a credit inflation of $33,000,000,000. One school of bankers views this situation with vast alarm, recalling that the stock market boom of 1929 flared on an expansion in total reserves of only $600,000,000. They would have these huge excess reserves pared down: 1) by having the Reserve Board increase reserve requirements the full 100% now permitted by law; or 2) by having the Reserve Banks get rid of their huge ($2,400,000,000) holdings of government securities. Arch-apostle of this doctrine is Winthrop W. Aldrich, chairman of Manhattan's huge Chase National Bank. Fortnight ago in a speech at Houston he declared that the U. S. is running "with the throttle chained wide open and the airbrake system removed from the train. . . . Even those who believe that bank credit has the magical power of controlling commodity prices and the volume of business still should wish to keep their hand on the throttle."

This is not the view of Governor Eccles, nor presumably will it be the view of the new Reserve Board soon to be named by President Roosevelt. But it was in general the view of some of the gentlemen who sat around the Washington table last week. Only month ago the Federal Advisory Council, consisting of representatives elected by the twelve Reserve Banks, urged the Reserve Banks to allow their holdings of government securities to run off--i. e. not to buy new ones as the old matured. Chief banker interest in last week's meeting was whether the Open Market Committee as a parting shot would defy Governor Eccles by making a similar recommendation.

On the morning of the second and last day of the Washington meeting as the Reservemen sat down to breakfast, those who had copies of the New York Times popped their eyes and read with interest an open letter from S. Parker Gilbert, partner of the House of Morgan. Seldom does the House of Morgan see eye to eye with the Chase National Bank. Last week their divergence in views was made quite explicit by Mr. Gilbert who wrote:

"The excess reserves are abnormal, but so are the times in which we live. . . . Most of the great increase in reserves comes from net gold imports, which thus far this year have amounted to over 1,500 million dollars, and in 1934 to over 1,100 millions, following the devaluation of the dollar. During the same period, foreign balances in this market have increased considerably, and there have been substantial foreign investments in American securities. These foreign holdings have a potential call on our reserves, and if and when political conditions in Europe become more settled, and the foreign exchanges return to some kind of stability, there may be a substantial return flow of gold to Europe. . . . The volume of excess reserves, in other words, may shrink from natural causes, and the present high figure is in a very real sense a protection against unnecessary deflation if, for example, there should be a large outflow of gold."

In 1933 J. P. Morgan went to the aid of the New Deal by declaring that an embargo on gold exports was necessary for the country. Now in 1935 the House of Morgan was again going to its aid. Whether or not Governor Eccles needed the aid of the Gilbert letter was not disclosed, but that evening when the last meeting of the old regime of the Federal Reserve broke up an official statement was issued:

"There is at the present time no evidence of overexpansion of business activity or of the use of business credit. . . . The present volume of member bank reserves, which have been greatly increased by imports of gold from abroad, continues to be excessive, far beyond the present or prospective requirements of credit for sound business expansion. Therefore, the special problem created by the continuing excess of reserves has had and will continue to have the unremitting study and attention of those charged with the responsibility for credit policy, in order that appropriate action may be taken as soon as it appears to be in the public interest."

In other words, the future of the Boom was left to the future Federal Reserve Board.

*Fortnight ago Winthrop Williams Aldrich rode the locomotive cab from Minden, La. to Hope, Ark. where Harvey Couch gave him a party (TIME, Dec. 23).

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