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The Federal Reserve

A History of the Federal Reserve Bank of Atlanta, 1914-1989


Introduction

Origins of the System

The New Bank Meets “The World War”

The Bank Meets Its First Crisis

High Winds from Havana

Droning through the Roaring Twenties

Governor Black Meets Black Friday

The Collapse

The Fed Rebuilt

World War II

The Postwar Period

The Bank in the 1960s

The Making of a Leader

Technological Pioneer

The Most Efficient Bank

The 1980s: New Challenges

Moving Forward with Forrestal

Conclusion

Leaders of the Atlanta Fed

Acknowledgements

World War II

t he combination of the Depression and World War II had a decisive effect on the economy of the Sixth District. Agricultural commodities had rebounded quickly from the 1920 crash, but the 1930s created lasting changes. The long Depression and soil depletion loosened the South’s dependence on cotton specifically and agriculture generally. Many southern farm workers, particularly blacks, had migrated north to better-paying industrial jobs during the prosperity and manpower shortages of the 1920s. However, the South was fertile ground for industrial and commercial development once the national economy began to pick up during the war.

The South readies for industrial development
The leaders of the Atlanta Fed sensed that the region had turned a corner by 1938, when President Newton reported, “The industrial development and economic expansion of the lower South have been slow in arriving. There are now some indications that the South in the next few decades will develop at an accelerated rate. . . . If this proves to be true, the banks of our District have ahead of them an exceedingly important period in their history. . . . Indeed, through much of our region the continuing retreat of agriculture necessarily implies a continuing diminution of banking resources, and this puts before us one of the most difficult problems that any banking system is compelled to face . . . that is, the task of facilitating the orderly transfer of capital in our southern economy from areas of contraction to areas of expansion without the accompaniment of collapse. . . .”

Newton was largely on target about the economic transition that lay ahead, but he could hardly have foreseen how quickly it would happen. World War II was about to throw the production capacities of the nation into high gear. The expansive wartime fiscal policy promoted such rapid and widespread growth that it obviated the need for banks to make these hard choices about allocating scarce credit. The national economy surged forward in a wave of industrial output that lifted the South by a greater margin than other regions, aided by some shrewd leadership from the Atlanta Fed.

The economic transformation caused by World War II was stunning. High unemployment quickly turned into full employment and then acute manpower shortages. Washington switched from encouraging consumer spending to stifling it because suddenly there were not enough goods available for consumers who now had money to spend. In fact the Reserve Banks discovered that one of their biggest headaches was enforcing Regulation W, a complicated set of restrictions on consumer credit. Ration stamps were coming, and so was inflation, but not to the extent that some bankers and economists feared. Military bases in the South swelled with recruits, and fledgling industries started in the 1920s or even quietly during the 1930s now had back orders. The government did not hesitate to take direct economic action to step up war production, so it both commandeered the Federal Reserve System and circumvented it.

Research digests war financing
Among the output stimulated by the war was that of the research department of the Atlanta Fed. During the war years, before his departure to Trust Company, economist Malcolm Bryan found sudden demand for economic projections and analysis and a wealth of material to digest. He cranked out page after page about the demands of wartime production, the implications of massive federal borrowing and spending, the ways to control inflation and, finally, the transition from a wartime to a peacetime economy. In January 1941, for example, he told the board of directors that price increases could be anticipated as the nation approached full production and had to turn to less efficient plants and labor, as well as less economical sources of material. In August, he reported that shortages were developing in metals, especially pig iron; that civilian consumption, particularly of durable goods, would have to be drastically restricted; and that automobile production likely would be curtailed. The practical limits of employment were being approached, and wages and wholesale commodity prices were rising in a pattern that pointed toward inflation.

His September discussion of bank reserves explains one important consequence of the exploding economy: “[T]he banking system within the next twelve months will, in all probability, be called upon to take from 24 to 30 billion dollars in Government securities. With the present excess reserves this cannot be done, since only approximately 15 billion dollars is now available for such purposes. There are three possible methods that might be followed in obtaining the additional funds with which to purchase securities needed in financing the Government’s war program: (1) further reduction in reserve requirements; (2) open market purchases on the part of the Federal Reserve System; and (3) borrowing by commercial banks through the Federal Reserve Banks. To do the job required, possibly all three of the methods enumerated above will be employed.”

The Bank lures business south
Neely’s move to give the Bank a strong research department and a respected economist was well timed. Neely and Bryan were aiming to do more than analyze the economic conditions of the Sixth District, however. They intended to change them. Neely, who was active on the War Production Board, was using Bryan and the Bank to help him bring business to the District in ways the Bank never had contemplated before. In September 1940 Neely told the Atlanta board that Bryan was building a case for locating new plants required for defense output within the Sixth District. At the February 1941 board meeting Bryan and Neely discussed why the Bank was having trouble in its efforts to encourage primary defense contractors to award subcontracts to Sixth District firms. The problem, Neely explained, lay in the way Washington let its contracts, and he argued that only by arranging direct negotiations between District subcontractors and prime contractors could the Bank succeed in channeling defense spending to the Sixth District.

At the February 1943 board meeting, Neely used a map of the Sixth District to show the location of military bases, defense industries other than textiles, and textile businesses having defense contracts. It was graphic evidence of how the war was feeding the District’s economic revival. The military bases and the five million men they had brought to the District, as well as the industrial growth caused by the war, would feed the District’s postwar economy, Neely said, predicting that the Bank’s research program would prove useful in attracting new industries to absorb the postwar industrial slack.

Coping with fiscal agency overload
Fiscal agency activity in the Reserve Banks burgeoned because of the massive government bond offerings. By August 1942 the Sixth District had 126 employees in that department, up from 28 before the war. They were needed. Safekeeping of war bonds was a formidable job in 1942. A report by director W.D. Cook explains why: “The department issued about 40-50 receipts for Savings Bonds per day. A great number of people bring their bonds to the tellers’ windows and desire to wait for the receipt, on which must be typed a complete description of the bonds, which requires, in some instances, 30-40 minutes for completion. . . .

War Savings Bonds
Processing of War Savings Bonds generated a great deal of activity in Atlanta.
“War Savings Bonds coming in for redemption have increased substantially, and the department is handling at present about 1,350 bonds and issuing about 1,000 checks per day. We find that about 5% of all bonds are defective and are not in order for payment. Those that are defective require letters and new requests for payment, and it is frequently found necessary to communicate with the registered owners two or three times before the bonds can be paid.” Nationwide, the fiscal agency staff swelled to half of the Federal Reserve System work force.

The Bank came in for some disagreeable work policing the subscriptions to bonds issued in the various war loan drives. The war effort had sharply reduced commercial banks’ options for acquiring interest-earning assets in the private sector, and the banks thus had a voracious appetite for these bonds. In addition, the System had agreed to purchase a sufficient quantity of government obligations to support as low an interest rate as possible for financing the war. Under this arrangement, called the “peg,” banks could essentially sell as many securities back to the Fed as they wished, and, when they did, new reserves were created that could, in the eyes of the Treasury, potentially add to inflationary pressures. Feeling that individuals were more likely to hold on to their securities, the Treasury wanted to place more of the debt in the hands of individuals, and disallowed banks from subscribing to securities in the last six war loan drives. Individuals could therefore profit by reselling their securities to banks. Under these conditions, it became the Reserve Banks’ onerous task to investigate would-be buyers to see if they had the resources to hold such an investment to full term or if they had borrowed short-term money to finance some quick profit taking. Commercial banks were suspected of trying to buy bonds under the names of their customers, and the Atlanta Fed had to engage in out-and-out detective work to see that speculative investments were prevented. Buyers were not always easy to identify. One well-to-do citizen was approved for a $100,000 purchase, while another person, for whom no information could be found, finally was allowed to buy $500,000 of bonds. The unknown buyer turned out to be the chauffeur of the well-to-do purchaser, as one retired Fed officer recalls the story.

Despite a strong tendency for the nation to rally around the President and the war effort, the massive federal deficits and the New Deal programs extending government influence did not sit well with some of the conservative business leaders of the South. When such business leaders sat on the board of directors of the Federal Reserve Bank, awkward political situations could develop. The Atlanta Fed struggled with such a problem in 1943, when director Fitzgerald Hall, president of a Nashville railroad company, introduced a resolution. Among other things, it called for a balanced budget, an end to federal aid, a return to the gold standard, an end to all immigration, and reform of antitrust laws to prevent concentrated economic power.

The resolution was a slap at the Roosevelt administration and perhaps also the Board of Governors. For the Atlanta board to take such an official position would have embarrassed Neely, who opposed the resolution. But many directors shared Hall’s opinions. It wasn’t easy to convince Hall and his allies that it would be inappropriate for the board of a Reserve Bank to take official action on such subjects.

The conditions of war posed unusual operations problems for the Federal Reserve Banks. Holdings of foreign governments in U.S. banks were frozen as European nations fell before the Nazi onslaught; banks waited for the Treasury Department to determine which “government,” if any, to recognize as legitimate. After the bombing of Pearl Harbor, the Treasury Department called President McLarin with orders to direct banks to freeze the funds of all Japanese nationals living in the Sixth District. The Atlanta Bank also was instructed to work with customs officials, national bank examiners, and Treasury representatives to seize Japanese businesses in the Sixth District and help prepare an inventory of the confiscated property.

The shifting balance sheet
The war whipped Reserve Bank operations out of the doldrums of the late 1930s in a spectacular manner. A great deal of the war financing bypassed the old and suddenly cumbersome system of supplying credit through the Federal Reserve System by allowing member banks to rediscount eligible loans. In stark contrast to World War I and its postwar years, rediscounts dwindled and finally disappeared during World War II. The Atlanta Bank’s portfolio of earning assets at the end of 1944, for example, consisted almost entirely of Treasury securities distributed from the System’s account. There were no discounted loans from member banks. The Reserve Banks became almost exclusively holders of government debt.

Commercial banks financed $95 billion of the $380 billion war debt, as the Fed augmented their asset capacity by supplying ample reserves. The money supply more than tripled between June 1940 and the end of 1945, and U.S. government debt increased from one-fourth to two-thirds of all U.S. debt. Thus a large portion of the banking resources of the nation, which had seemed so plentiful and so neglected in 1938, fueled the war effort, and both the activity as well as the assets of the Atlanta Fed soared. Concern over weak earnings disappeared, notwithstanding the System’s support of artificially low rates to mitigate the government’s borrowing costs. Net earnings at the Atlanta Bank climbed from $246,000 in 1941 to $4.3 million in 1945, still short of 1920’s record $6 million. Financial considerations in the future would gravitate toward careful budget management.

Overcrowded again
Because of the growth of wartime activity the Atlanta Fed, for the first time in 20 years, felt the squeeze of inadequate space. All Sixth District offices became seriously overcrowded, as the staff needed to handle the load climbed from 799 in 1940 to 1,492 in 1945. The war effort ruled out new buildings during those years, but additional space was leased in New Orleans in 1942 for use by the special government financing agencies. By 1944 the Bank began to search for sites and to develop plans for expansion after the war ended.

In the midst of all this frantic activity, one traditional activity was dropped. Due to restrictions on tires and gasoline, as well as a manpower shortage, the Bank suspended its bank and public relations programs and stopped sending officers on routine visits to District banks. For the same reason, bringing selected branch directors to Atlanta board meetings also was suspended during the war. While the war pushed membership concerns into the back seat, the problem was far from solved. Sixth District banks continued to be reluctant to join the System. From a starting point of 381 member banks in 1914 and a high point of 543 in 1922, membership in the District had fallen to a low of 309 in 1933, then edged up during the 1930s and 1940s to reach 351 by 1950. By contrast, there were 837 nonmember banks in the District in 1950. Still, because the Depression had wiped out thousands of banks, the proportion of Sixth District banks which were members had increased from 26.2 percent in 1922 to 30.0 percent in 1944 and 1950.

Developing future officers
Personnel policies received a great deal of attention between 1936 and 1945. The new Board of Governors wanted a stronger, better-educated staff to carry out its more ambitious program and hired C. Canby Balderston (later to become a governor of the Board) to help District Banks develop hiring and training programs to meet their future needs. From the very beginning, however, the Washington Board resisted higher salaries, particularly for senior officers. Once systemwide analysis made it clear that salaries in Atlanta were the lowest in the System, pay scales became a perennial subject for discussion in the Bank. Lower wages and salaries were characteristic of the South. By matching prevailing salaries paid by commercial banks in the District, the Atlanta Fed fell behind other Districts. In October 1941, for instance, the Atlanta board noted that the Sixth District ranked last in salaries and was paying only 83 percent of the System average. First the Depression, then the war, and finally concern about postwar inflation made the Board in Washington determined to hold down salaries in the System, so the compensation issue remained on the table.

In response to a Balderston recommendation, however, the Atlanta Bank launched an officer-development program and began to move its promising young men around the District to season them and complete their knowledge of the Bank. There were no women officers, in spite of wartime ratios that made 78 percent of the Bank’s 1945 staff women. Actually, the Bank named its first woman officer back in 1927 when it appointed Mary E. Mahon assistant cashier of the Jacksonville branch. Historically that choice proved to be a rare exception, though, and it was not until the 1980s that a significant number of women officers began to be appointed.

Fiscal Agency Department
This picture of the fiscal agency department in the 1940s reflects the vital part played by women on the Bank's staff during World War II.

Check-clearing phenomenon
One of the great successes of the Federal Reserve System was the quick, efficient check-clearing system it fostered. Because major commercial banks maintained accounts with Federal Reserve Banks and the District Banks maintained accounts with each other, check settlement had become a quick and certain process, and the use of checks had grown proportionately to improvements in the system. Even before automation entered the picture the District Banks and their branches became prodigious check processing centers. As Fortune Magazine noted in its February 1940 issue, “The U.S. is the most checkbook-minded country in the world. It is by check that the corporations talk to each other. . . and by check that a substantial portion of the grocery, butcher and gas bills is paid. The total of check transactions last year [1939] has been estimated at around $600,000,000,000.

“The U.S. dollar, whether in its tangible [cash] or intangible form [checks], is the blood stream of U.S. business. But its management is also a business. . . . It is the progenitor of about 280 clearing houses, of which the New York Clearing House is the oldest. To the organization of dollar exchange is devoted more than 6,000 miles of wire in the Federal Reserve System, over which the regions of the U.S. daily settle their balances—Richmond drawing on Atlanta, Atlanta drawing on Boston, Boston drawing on St. Louis, Chicago drawing on New York, in a telegraphic flow of money that totaled one estimated $100,000,000,000 in 1939.”

Check Clearing
Employees clearing checks by hand in the 1940s.

The continuing battle over par clearing
The Sixth District certainly was part of this network, but it suffered from what was becoming a unique problem: nonpar banking. That practice had become an anachronism by 1945. Progress dictated that it go away, and it did in most Districts, but the country banks of the Sixth District held onto it doggedly and made life difficult for the Federal Reserve Bank, which was committed to par clearing as a standard for the payments system. This resistance by nonpar banks retarded somewhat the development of the Atlanta Federal Reserve Bank as a clearinghouse. Although the number of checks processed by the Atlanta Fed were substantial and increased from 48.7 million in 1941 to 82.8 million in 1947, this figure lagged behind other Reserve Banks. Earlier System data show Atlanta ranking 11th in 1937 with 45 million, well below the System average of 87 million.

Back in 1938 President Newton had noted that the Sixth District contained 5.1 percent of the nation’s Fed member banks but almost 30 percent of its nonpar banks. “Thus while the nonpar situation so far as the country as a whole is concerned is not the problem [it once was], it is still an important source of irritation and annoyance in the Sixth District; and I am sorry to add that the problem in this District does not appear to be abating as time passes. Indeed, the contrary is apparently true at the moment.”

He was right. Statistics from 1941 show that all nonmember banks in the Boston, New York, and Philadelphia Districts paid checks at par. Only 1 in Cleveland and 12 in San Francisco did not. Only 52 of the 484 nonmember banks in the Atlanta District, however, did pay at par, making nearly 90 percent of the District’s nonmember banks nonpar banks. Among the other Reserve Districts, only Minneapolis approached that level, with about 81 percent of its nonmember banks being nonpar banks. Since nonpar banks were fervently opposed to Fed standards, the Atlanta Fed had little opportunity to increase its membership.

In spite of a clear national trend toward par clearing, the nonpar bankers took their case to the U.S. Congress in 1944, and a determined effort led by Sixth District bankers pushed a bill through the House that would have enshrined nonpar banking. It was defeated in the Senate, however. More than 100 witnesses testified in favor of the bill, in which both “the Board of Governors and our own Bank came in for a full share of criticism,” President McLarin reported. Legislators from Sixth District territory either voted for the measure or did not vote.

Bankers in Georgia also pushed for state legislation that year to declare checks drawn on nonpar banks to be legal tender, forcing the recipient to absorb the exchange charge. This proposal also failed, but stirred up high feelings. As McLarin noted in a 1944 report, “We may expect . . . that the issue will plague us considerably during the coming year. Tempers have been aroused over the problem and our Bank will largely be the center of the controversy.” While progress was slow and hard-fought, it was inevitable, however, and by 1951, for the first time since the Atlanta Fed opened, par banks in the District outnumbered nonpar banks, 615 to 601.

Postwar battles
As World War II drew to a close, attention at the Federal Reserve System shifted to managing the transition to a peacetime economy and controlling inflation. The experience of World War I haunted economic planners, who feared an outburst of inflation followed by a depression as bad as that which preceded the war. Marriner Eccles, the Board chairman who had done so much to forge the role of the Fed and monetary policy, had vigorously supported expansion of money and credit to combat the Depression. Along with the Board in Washington, Eccles had cooperated with the Treasury Department during most of the war, supporting the price of low-yielding bonds to keep the government’s debt cost as low as possible. Once the fighting ended in Europe and the Pacific, though, Board members had their own war to fight. They became militant inflation fighters, and they considered interest rates their primary weapon. But Treasury refused to give up the “peg,” which supported bond prices and effectively fixed interest rates.

What ensued was perhaps the most important battle in Federal Reserve System history. It cost Eccles his chairmanship and gave his successor, business executive Thomas B. McCabe, a brief, unhappy tenure that began in 1948. When the “accord” that removed the peg finally was reached in 1951, Treasury’s top negotiator became the Fed’s new chairman, and William McChesney Martin went on to provide calm, steady leadership to the System through much of the 1950s and 1960s.

The battle over the peg was fought largely in Washington, although the whole System felt the policy struggle since it was difficult to battle inflation with a significant handicap. Atlanta’s Bryan participated in this struggle to end the peg. In Atlanta, the Bank’s annual report for 1947 described “the wave of inflation that gripped the country throughout the year.” The Fed, senior economist Lloyd B. Raisty explained to the Atlanta board in June 1948, was combating inflation by restricting consumer installment credit, encouraging higher interest rates on certain unpegged short-term government bonds, raising the discount rate, raising reserve requirements, urging voluntary restraints on bank and insurance company lending, and selling government bonds on the open market.

If the Fed were unable to raise interest rates, Mr. Raisty said, further creeping inflation would result, but with “no immediate possibility of a sudden collapse of the boom on the one hand or of a runaway or galloping inflation on the other,” according to the minutes. Adjustments to a peacetime economy were more easily made inside the Bank. As war-related activity subsided the staff of the Atlanta Fed fell by 135 persons after the summer of 1944.

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