World War II
World War II
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
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
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
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
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
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.
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
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.
“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.”
The continuing battle over par clearing
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.
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.