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October 27, 2013
David Warsh, Proprietor


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Beckoning Frontiers

The Federal Reserve System remains in the news. Sen. Rand Paul (R-Ky) has promised to oppose the nomination of Janet Yellen to chair the Fed, perhaps with a “hold,” which could be overcome by sixty votes. Former chair Alan Greenspan is promoting his new book, The Map and the Territory: Risk, Human Nature and the Future of Forecasting, in which he “recalibrates” his economic views in light of “what the 2008 crisis was telling us about ourselves).

Myself, I spent my free time reading a book published in 1951, Beckoning Frontiers: Public and Personal Recollections, by Marriner Eccles.

Eccles is the man whose name is on the Fed headquarters, on Constitution Ave.  As principal author of Banking Act of 1935, he was the creator of the modern Fed.  He was its chair from 1934 to 1951.  Returning to Utah and his business interests, he lived until 1977.

I suppose that, among New Dealers, Secretary of Labor Frances Perkins is probably better remembered today than any other, by more people, thanks to her bit part in President Franklin Roosevelt’s cabinet meeting scene in the musical comedy Annie.

Eccles, on the other hand, is one of the most remarkable public servants of the twentieth century, on a par with George Catlett Marshall and Paul Volcker. Yet he would be all but unknown, except to students of banking history, but for the 50-page chapter on him in The Vital Few: The Entrepreneur and American Economic Progress, by the economic historian Jonathan Hughes, a vastly underappreciated book (from which most of this account is taken).

Eccles was born in 1890, in Logan, Utah. His grandfather had been lured in1863 from Paisley, Scotland, by the Mormon’s Perpetual Emigration Fund. Whatever doubts they may have had about the Prophet Joseph and the golden plates were beside the point, Eccles later wrote.  His father made a fortune in the lumber and sugar-refining industries, and, according to custom, took two wives.  As the firstborn child of the second, or cadet wife, Eccles assumed control of two-sevenths of his father’s business empire when “the richest man in Utah” died, in 1912.

Over the next twenty years, Eccles built his family’s share into a substantially bigger fortune, at one point joining a syndicate with Henry Kaiser, the Bechtels and Morrison Knudsen, to build Boulder Dam; at another, inventing the multibank holding company, seventeen banks and a savings and loan association scattered over Utah, Idaho and Wyoming, an innovation that was quickly imitated. Banking came easily to Eccles; so did a sense of the industry’s innate fragility.

When the Crash came, in 1929, Eccles began a search for remedies that led, among other places, to the underconsumptionist views of William Foster and Waddill Catchings, a middlebrow anticipation of Keynesian economics described in Road to Plenty in 1928, which Eccles supplemented with “naked eye” observations of  his own.  In 1932 the tycoon startled the Utah Banker’s Association by proclaiming the gospel of compensatory finance:

The theory of hard work and thrift as a means of pulling us out of the depression is unsound economically.  True hard work means more production but thrift and economy mean less consumption Now reconcile those two forces, will you?… There is only one agency… that can turn the cycle upward and that is the government. The government… must so regulate… the economic structure as to give men who are able, willing, and worthy to work the opportunity to work, and to guarantee to them sustenance for their families and protection against want and destitution.

In Ogden, Eccles met economist Paul Douglas, of the University of Chicago (where compensatory finance was also something of a vogue); he met journalist Stuart Chase; and on a trip east, he met Columbia University economist Rexford Tugwell, then in charge of Roosevelt’s “brain trust.”  In January 1934 he was summoned back to Washington, and this time Treasury Secretary Henry Morganthau asked him to write a report on money and banking.  Ten months later President Roosevelt appointed him chairman of the Fed.

The Fed that Eccles inherited had been established by Congress in 1913 in response to the Panic of 1907, on a plan largely drawn up by financier J. P. Morgan, whose personal authority had been sufficient to restore confidence after 1907.  A dozen regional Federal Reserve banks, each with its own chairman and board of directors, the most important of which by far was New York, contended with seven presidentially-appointed governors of the Federal Reserve Board.  Morgan’s right-hand man, Benjamin Strong, had successfully operated the system from the New York bank for fifteen years, but after he died, in 1928, guidance was lacking; the Fed failed to act as the Depression deepened.

In drafting the Banking Act of 1935, with the aid of economist Lauchlin Currie (later hounded out of Washington as a Communist), Eccles insisted on three key changes.  Ultimate decision-making power would shift to a Federal Open Market Committee, on which the governors would have a 7-6 majority; regional banks would be headed by presidents, chosen with the consent of the Board, instead of chairmen picked by their boards of directors; and the lending authority of the central bank should be broadened during a panic. The system would still be privately owned; its relatively high degree of decentralization would be preserved; but no longer would it be too divided to act in a crisis. Sen. Carter Glass (D-Va) sought to sabotage the measure (he of the Glass-Steagall Act of 1933 had twenty years before had legislated the Fed into existence), but failed. The modern Fed emerged.

(Eccles’s unsuccessful attempts to persuade commercial bankers to create the secondary market for mortgage loans that ultimately was assigned to the government-sponsored Federal National Mortgage Association is another story.)

There were many other adventures.  Eccles saw the Fed through World War II, through the passage of the Full Employment Act of 1946, through the beginning of the Korean War. For seventeen years he lived at Washington’s Shoreham Hotel.  In 1950 he wrote an article for Fortune magazine criticizing continued support of Chiang Kai-shek and advocating the recognition of Communist China. Once the war in Korea was concluded (the editors, who worked for Chiang booster Henry Luce, dissociated themselves from Eccle’s views but published the article.. The next year, Eccle’s term expired. He went home to Logan..

He wrote his book and returned to business, after a failed run for the Senate, in which voters were surprised to learn he was registered as a Republican. (It was a different GOP back then.) Eccles maintained a lively interest in foreign affairs as a director of the family construction company, Utah International. At a White House dinner in 1965, he confronted President Lyndon Johnson over his escalation of the war in Vietnam.  He lived long enough to see the US helicopter retreat from Saigon.

Eccles embodied a peculiarly Mormon ethic of public service, full of frontier practicality  (as Boston often has represented Puritan ideals and Philadelphia Quakerly ways). His was a role reprised by Willard “Mitt” Romney, who, as governor of Massachusetts, put a mandatory health insurance reform in place, presumably as the model for a national plan. (Romney eventually buckled under Tea Party pressure and disavowed the aim.)

Because I am interested in that health insurance program, I found myself wondering if Health and Human Services Secretary Kathleen Sebelius might survive and eventually enter the public service Valhalla as Eccles did? It depends critically on the testimony she gives this coming week about what went wrong with the government health insurance website. That last-minute decision to require would-be browsers to register was a profound mistake.  What was the thinking behind it?

Sebelius is a key figure in the administration, in charge of putting Obamacare to work. A two-term governor of Kansas, she stepped up to do the job when former Senate majority leader Tom Daschle, who framed the policy, was knocked out of consideration by a conflict of interest. She chose to stay on rather than run for an empty Kansas Senate seat. Like Eccles, she is something of a legacy; her father, John “Jack” Gilligan, a former Democratic governor of Ohio, served in the US House of Representatives and voted for Medicare. Those frontiers have beckoned her, too. This is no time to give up.

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6 Comments

  1. Here are a few more recent takes on Eccles. I spent a good chunk of my 10 years at the University of Utah working on Eccles papers.

    http://www.academia.edu/887077/A_Hands-off_Central_Banker_Marriner_S._Eccles_and_the_Federal_Reserve_Policy_1934-1951

    http://economics.utah.edu/publications/2012_04.pdf

    Tuesday, October 29, 2013 at 4:02 pm | Permalink

  2. I think that it was A.P. Giannini, founder of the Bank of America, who invented the multi bank holding company (Bancamerica Corp) in the 1920s. In the 30′s he was forced to divest his non-California banks, which was spun off as Transamerica Corp.

    Wednesday, October 30, 2013 at 12:01 am | Permalink

  3. admin wrote:

    According to Hughes, Giannini got the idea from Eccles. dw

    Wednesday, October 30, 2013 at 12:19 am | Permalink

  4. Jan wrote:

    The conventional notion that Marriner Eccles was a Keynesian is at best half right.

    Granted, Eccles was one of the many people in both the US and Europe who anticipated Keynes’s later diagnosis of “underconsumption” (or “overproduction,” which is the same thing).

    But while Keynes held that the 1929 downturn had caused underconsumption, Eccles held that underconsumption had preceded and caused the downturn.

    Nowadays, Eccles’s argument would be called “secular stagnation.” This is utterly different from the timid, conventional, and almost surely wrong Keynesian business-cycle argument. In the Keynesian world, deficit spending would be sufficient for a full and sustainable recovery. In the Ecclesian world, deficit spending might ease the pain, but a full and sustainable recovery would require….???

    So, Mr. Eccles, what did cause the underconsumption that in turn caused the crisis in 2007-2008? Too much income inequality, you say? Or maybe too much warre of thrift among the world’s sovereign states?

    Or maybe both?

    Wednesday, October 30, 2013 at 7:12 am | Permalink

  5. Dryly 42 wrote:

    Excellent review of an estimable man. Also included sketches of economists such as Paul Douglas when University of Chicago was a much more positive force than in recent time.

    I would argue no one is equal to George Cattlet Marshall, however.

    Tuesday, November 12, 2013 at 6:57 pm | Permalink

  6. Dryly 42 wrote:

    I have read the two citations of Matias Vernengo posted above and can recommend them.

    The thought occurred to me that it was FDR who chose both Marshall and Eccles. Both served the nation extraordinarily well.

    Tuesday, November 12, 2013 at 10:17 pm | Permalink

One Trackback/Pingback

  1. On Marriner Eccles | The Penn Ave Post on Tuesday, October 29, 2013 at 6:47 pm

    […] at 2:47 on October 29, 2013 by Mark Thoma David Warsh: Beckoning Frontiers: The Federal Reserve System remains in the news. Sen. Rand Paul (R-Ky) has promised to oppose the […]

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