,
20 tweets,
3 min read
Read on Twitter
A favorite theme in the history of bank supervision that @SeanVanatta and I are writing (coming in 2019!) is how the tangle of federal banking bureaucracy was a burr under the saddle of some in the Fed for a long time.. A quick thread on Marriner Eccles from 1949. /1
Eccles had been dethroned as Fed Chair in 1948, largely because he had fought hard against what he had regarded as the unlawful consolidation of banking by Transamerica, the Bank of America predecessor. /2
(Fun fact: Eccles is current Vice Chair for Supervision Randy Quarles's grandfather-in-law; Quarles's last job before the Fed was managing the Eccles family fortune.) /3
But Eccles stayed at the Fed after this slight, at first with a promise from Truman that he would become the Vice Chairman. After accepting Truman's offer--which I suspect but cannot prove was not offered in earnest--Truman ghosted Eccles and didn't fill the Vice Chairmanship /4
There, old Eccles raised hell. I've told (part of) the story of Eccles's role in the Accord before, but he also really, really hated what the FDIC had become. /5
This made him a dissenting voice. In 1950, on its way to getting its own statute and its own building, the Chairman of the House Banking Committee was effusive, if hyperbolic, in a way that reflected a national mood grateful for the end of banking crisis: /6
"I want to say that I do not think there is any agency of the Government that is more entitled to the gratitude of the people than the Federal Deposit Insurance Corporation." Keep in mind: the US Military had just defeated the Nazis, so.... /7
But Eccles saw the FDIC as trying to usurp the Fed. Congress created an asymmetry in the FDIC, since you could become a member of the FDIC but not the Fed; but you couldn't become a member of the Fed without also joining the FDIC. Why does this matter? /7
Because the FDIC-insured banks weren't subject to the same reserve requirements as the Fed banks, for monetary policy reasons, Fed had higher requirements. And so the Fed suffered--of the 9,000 banks in 1950, only 2,000 were Fed member banks. But majority were FDIC banks /8
The 1947 Hoover Commission had advocated for the consolidation of bank supervisory functions, but the FDIC and state banks fought hard against this idea. Eccles was appalled. /9
“The establishment of a system of insurance of deposits by the Federal Government was one of the great accomplishments of the Congress in the direction of fostering public confidence in the banking system...." he began, warmly /10
"I favored Federal deposit-insurance legislation at a time when most of my fellow bankers were denouncing it. But I never expected, and I am certain Congress never intended, that this protection for depositors would be used either to hamper effective national mon'y policy..." /11
"...or to give any class of banks special advantages over others. I regret to say that the Federal Deposit Insurance Corporation has been used to discourage membership in the Federal Reserve System and to weaken effective national monetary policy.”/12
Eccles advocated for uniform reserve requirements. If he couldn't have that, he wanted the Fed and the FDIC to compete against each other, without requirements that Fed banks had to be FDIC insured (the alternative was already available). /13
"Are you serious about this?" a confused Senator Paul Douglas asked. Douglas was one of the leaders of congressional oversight of banking, money, and credit. /14
Yes, was the answer. Better to have one system, like the Hoover Commission recommended. But short of that, put the Fed "in a position to at least protect itself or defend itself." /15
That...didn't happen. We didn't normalize Fed membership across the system until 1980. But this skirmish shows just how deeply wedded into the DNA of the system this bureaucratic cacophony in federal banking. /16
I'll end with Eccles again. How many people have said the same? Including during the Dodd-Frank debates, when Dodd's enthusiasms for bank supervisory consolidation ended by a bipartisan super thumping. /17
Eccles: "There is unnecessary duplication and triplication of offices, personnel, effort, time, and expense. While the maintenance of separate and often conflicting viewpoints may serve selfish interests, on the old principle of “divide and conquer,” it seems to me..." /18
"...that this should not prevent improvements wherever possible in the organization of a Government already overburdened with complexity and bureaucracy.” /end (finally)
