Tape 150 - Alan Greenspan, Monetary Growth, Recession? Bank Failures
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- | Hello, this is Rose Friedman, inviting you | 0:03 |
on behalf of Instructional Dynamics to another | 0:05 | |
of our biweekly conversations with Milton Friedman, | 0:08 | |
Professor of Economics at the University of Chicago. | 0:12 | |
We are taping this interview on Wednesday July 24th, 1974. | 0:17 | |
Yesterday, Mr. Nixon formally confirmed the rumor | 0:23 | |
that has been making the rounds, that Alan Greenspan | 0:27 | |
is being named Chairman of the Council of Economic Advisors, | 0:30 | |
what is your reaction? | 0:33 | |
- | Well Mr. Greenspan is an excellent person for the job, | 0:35 |
the question, and the crucial question, | 0:40 | |
is whether the job is one in which even an excellent person | 0:42 | |
can, under present circumstances, have much of an impact. | 0:47 | |
Alan Greenspan has, in the first place, very close links | 0:50 | |
to many of the top figures in Washington. | 0:54 | |
He was one of the first people | 0:57 | |
who joined Mr. Nixon's pre nomination staff in 1967, | 1:00 | |
when the first person onboard that group that worked | 1:08 | |
in advance of the convention in outlining | 1:12 | |
and developing Mr. Nixon's programs and policies, | 1:16 | |
the first member of that group I believe was Pat Buchanan, | 1:18 | |
who is still at the White House as a speech writer, | 1:21 | |
a second early member was Martin Henderson, | 1:26 | |
a young man who subsequently worked at the White House | 1:28 | |
as a special assistant to the President, | 1:31 | |
and also in the first year of the Nixon administration, | 1:34 | |
as a special assistant to Arthur Burns, | 1:37 | |
who was at that time Counselor to the President, | 1:39 | |
I believe that Alan Greenspan was about the third | 1:44 | |
of that group of people who joined, though I'm not sure, | 1:46 | |
but at any rate, he was with that group | 1:49 | |
as, more or less, director of research | 1:51 | |
for the campaigning staff, he worked after the convention, | 1:54 | |
during the campaign, in the same position, | 2:00 | |
he has not up to now held a formal position | 2:04 | |
within the Nixon administration, | 2:07 | |
though I am sure he has been offered a number, | 2:09 | |
he has preferred to stay on the outside, | 2:13 | |
but he has certainly been a close informal advisor | 2:15 | |
to Mr. Nixon, to the people in Washington. | 2:18 | |
In addition, he was a student of Arthur Burns' at Columbia, | 2:21 | |
although he never, never has received a doctoral degree, | 2:26 | |
primarily because he went on into the business consulting | 2:31 | |
world, rather than into the academic world. | 2:35 | |
So in terms of his links with people in Washington, | 2:40 | |
he certainly knows them well, they know him, | 2:43 | |
he has confidence in them and they have confidence in him. | 2:46 | |
With respect to his general political economic philosophy, | 2:50 | |
he started out essentially as a, what's come to be called | 2:54 | |
an objectivist, a follower of Ayn Rand, | 2:59 | |
this is a doctrine in which for the present purpose, | 3:05 | |
and a major point about it is that it stresses | 3:09 | |
non-intervention, it's a very libertarian point of view. | 3:11 | |
Alan I think has moved somewhat away from the extreme, | 3:15 | |
from the full position which Ayn Rand and her followers | 3:22 | |
would hold, they would give government a much smaller place | 3:25 | |
than he would, but he would give it | 3:29 | |
a much smaller place than most people. | 3:30 | |
He is a strong believer in the free market, | 3:33 | |
he has been consistently and persistently opposed | 3:35 | |
to price and wage controls, he never was | 3:39 | |
one of those people who jumped on the band wagon | 3:41 | |
for price and wage controls in 1971, | 3:43 | |
he was a believer in cutting government spending | 3:46 | |
as much as possible, he is a believer in the importance | 3:50 | |
and role of money in determining economic developments | 3:54 | |
and in the importance of a moderate rate of monetary growth. | 3:57 | |
He has one other feature which distinguishes him, | 4:03 | |
sofar as I can see, from every other former | 4:05 | |
chairman of the council of economic advisers, | 4:08 | |
with one exception, all past chairman of the council | 4:12 | |
have been academic economists, the one exception | 4:16 | |
is Leon Keyserling who is not an economist at all, | 4:18 | |
but a lawyer, and who I may say | 4:21 | |
was not one of the more impressive chairmen, | 4:24 | |
in the main therefore, the council's chairmen | 4:30 | |
have been not only economists, but academic economists. | 4:32 | |
Alan Greenspan is certainly a very well trained, | 4:36 | |
very knowledgeable economist, but he is not | 4:38 | |
an academic economist, his career has been with a firm | 4:41 | |
of Townsend-Greenspan, though which really means | 4:44 | |
a firm of Greenspan, it was originally, | 4:47 | |
there was originally a man, Townsend, | 4:50 | |
who had set up a Townsend consulting firm that Alan joined | 4:52 | |
shortly after he finished his graduate work, | 4:54 | |
the firm was expanded and became Townsend-Greenspan, | 5:00 | |
Mr. Townsend died, and essentially it's Greenspan's company, | 5:03 | |
his own personal company, this has been a consulting firm | 5:07 | |
that has been, that writes and puts out reports | 5:11 | |
on current business conditions, does special analysis | 5:14 | |
for particular industries and so on, | 5:17 | |
and has obtained over the years | 5:19 | |
an extraordinarily high reputation, indeed I would say, | 5:20 | |
probably, it has the highest reputation of any | 5:24 | |
of the large number of private economic consulting firms, | 5:27 | |
its clients are a number of some of the very biggest | 5:32 | |
businesses in this country, as well as | 5:35 | |
brokerage houses in New York and so on. | 5:37 | |
So that Alan Greenspan comes to the position | 5:42 | |
of Chairman of the Council of Economic Advisors | 5:45 | |
with a much closer connection with the business world, | 5:47 | |
a much more pragmatic background | 5:51 | |
than the academic economists, | 5:54 | |
but I don't want to give the wrong impression, | 5:56 | |
he's pragmatic in the sense of means, | 5:59 | |
but not in the sense of objectives or ends, | 6:01 | |
the values I've described he holds very strongly, | 6:04 | |
I am morally certain that Mr. Greenspan | 6:07 | |
would not have joined the administration | 6:11 | |
unless he had had assurances from them, | 6:13 | |
and that they proposed to follow the old time religion | 6:16 | |
they've been talking about, of fighting inflation | 6:19 | |
through trying to cut down the government budget, | 6:22 | |
through a moderate monetary stance, and through, | 6:24 | |
and with the avoidance of price and wage controls, | 6:27 | |
now that doesn't mean they will do so, | 6:31 | |
after all, prior to 1971, Mr. Nixon was following | 6:34 | |
that policy then, but that didn't prevent him | 6:38 | |
in the summer of 1971 from going in | 6:41 | |
for voids and price controls, | 6:44 | |
but if he did, if there were any such change, | 6:46 | |
I would think it highly likely that Mr. Greenspan | 6:50 | |
would resign rather than go along | 6:57 | |
with a change in that direction. | 6:59 | |
Now, this, I may say also that Mr. Greenspan | 7:02 | |
is a very attractive person personally, in the sense | 7:06 | |
that he is reasonable, not at all aggressive | 7:10 | |
or abrasive in any way, gets along very well with people, | 7:14 | |
so I think he's an ideal person for the job. | 7:19 | |
The question that bothers me is not about him, | 7:22 | |
or not about his views, but about whether anybody | 7:25 | |
under present circumstances can exercise much influence | 7:28 | |
in that position, partly this is because the administration | 7:31 | |
is now, in its sixth year, | 7:36 | |
the lines of been more or less set, | 7:40 | |
but partly it is because, there is so little | 7:43 | |
the administration can do except exhort, | 7:46 | |
when it comes to the crucial elements needed | 7:49 | |
for a proper sensible economic policy now, | 7:52 | |
there is, and it's hard to say that they are anything other | 7:57 | |
than on the one hand, and the three things I've mentioned, | 8:01 | |
first, reduction in government spending, | 8:04 | |
second, a moderate rate of monetary growth, | 8:08 | |
and third, the avoidance of wage and price controls. | 8:10 | |
The one thing the administration can pretty clearly do | 8:13 | |
is to avoid wage and price controls, | 8:16 | |
in that negative sense, it has some scope fraction. | 8:18 | |
But beyond that, what can the President do? | 8:21 | |
He can exhort congress to reduce spending, | 8:24 | |
it is hard for me to believe that he can, | 8:29 | |
under present political circumstances, | 8:30 | |
do anything very effective in the way | 8:32 | |
of impounding funds that congress legislates. | 8:33 | |
He can plead with the Federal Reserve | 8:38 | |
to reduce the rate of monetary growth, | 8:42 | |
the Federal Reserve is technically independent, | 8:44 | |
but more important, at the moment, | 8:47 | |
it is from a purely political point of view, | 8:49 | |
far more independent of the President than he is of them, | 8:51 | |
that doesn't mean that the Federal Reserve is independent, | 8:55 | |
but its political links, the things that will affect it | 8:58 | |
are much more likely to come via congress, | 9:03 | |
and via its constituency the banking community, | 9:06 | |
than it is via the President, | 9:08 | |
and therefore it is very hard for me to say | 9:10 | |
that the President is at the moment in a position | 9:14 | |
to exert much influence on the course of events | 9:17 | |
accept by exhortation and by, what I must say, | 9:21 | |
would be a very very important thing, | 9:26 | |
avoiding wage and price controls, | 9:28 | |
after all, as I have stated repeatedly on these tapes, | 9:29 | |
I believe our present parlor situation dates directly | 9:33 | |
from the imposition of price and wage controls | 9:37 | |
on August 15th, 1971, and hence, | 9:39 | |
that there is no action that Mr. Nixon could have taken | 9:42 | |
that would have done more good for the country | 9:45 | |
than the negative action of avoiding | 9:47 | |
putting on those controls, | 9:49 | |
so I do think that is an important, | 9:52 | |
but beyond that as I say, Mr. Greenspan can primarily exert | 9:55 | |
an influence as so far as he is more effective | 9:59 | |
than his predecessors, or than anyone else, | 10:02 | |
in persuading congress to keep down spending, | 10:04 | |
or in persuading the Federal Reserve, | 10:06 | |
to slowdown the rate of growth, I certainly wish. | 10:09 | |
- | Well, has the Fed being slowing the growth of money? | 10:11 |
- | Well I sound like a record in which the needle | 10:15 |
has gotten stuck, because all I can say is the same thing | 10:17 | |
that I have said each time over past weeks | 10:21 | |
when I have taken up this matter, | 10:24 | |
there is as yet no sign whatsoever in the actions | 10:26 | |
of the Fed as opposed to the statements and pronouncements, | 10:30 | |
that there is any real slowdown | 10:35 | |
in the rate of monetary growth, | 10:38 | |
that it is departing in any significant way | 10:40 | |
from the trends of the past three or four years, | 10:43 | |
now this may seem not quite to fit in | 10:46 | |
with some of the recent figures, | 10:49 | |
for example, I have in front of me the report | 10:50 | |
of the Federal Reserve Bank of St. Louis, | 10:53 | |
the latest one available, which is for the week | 10:55 | |
ending July 10th, and it shows that over the prior year, | 10:57 | |
from the week ending July 11th, '73, | 11:03 | |
to the week ending July 10th, '74, the annual rate | 11:06 | |
of growth of the narrow money supply M1 was 5.6%, | 11:09 | |
as I have noted repeatedly, the trend rate of growth | 11:15 | |
over the past four years has been 6.7%, | 11:17 | |
and so anyone who looks at that single figure | 11:22 | |
is likely to say, well now isn't that wonderful | 11:25 | |
if that is really moving? | 11:27 | |
However, if you take a look at the chart that underlies | 11:29 | |
these numbers and look at the more detailed movements, | 11:32 | |
you will find that the base figure of July | 11:36 | |
happens to be a period when the money stock | 11:39 | |
was well above the long term trend, it was abnormally high, | 11:42 | |
in the next four months, the money supply did not grow | 11:47 | |
at all in the United States as the Fed | 11:49 | |
pulled the money stock back down somewhat below the trend, | 11:52 | |
in consequence, that 5.6% really grossly understates | 11:56 | |
the sort of trend rate of growth, | 12:01 | |
what I have done is very different, | 12:04 | |
I have plotted on the chart, the logarithmic straight line | 12:06 | |
which shows a steady 6.7% rate of growth, | 12:11 | |
and I have been plotting that week after week on the chart, | 12:16 | |
the numbers for the money stock, the narrow money stock, | 12:19 | |
over the past four or five months have simply fluctuated | 12:22 | |
around this line, some weeks they have been above it, | 12:28 | |
some weeks they have been below it, | 12:31 | |
but they have shown no systematic tendency to go below it, | 12:32 | |
and that shows up if you look at the rates | 12:36 | |
of monetary growth in numerical values of the table, | 12:38 | |
that St. Louis puts at the foot of that chart, | 12:42 | |
it was 5.6% over the past year, | 12:45 | |
but it was 7.8% over the past nine months, | 12:48 | |
it was 7.2% over the past seven months, | 12:52 | |
it was 9.4% over the past five months, | 12:56 | |
as you can see, these month to month comparisons | 12:59 | |
can give you a very widely varying rate, | 13:02 | |
if you look at the broader money stock M2, | 13:05 | |
which on the whole, I am inclined | 13:08 | |
to regard with greater concern, | 13:09 | |
exactly the same thing is true, | 13:12 | |
that has been growing over the past three or four years | 13:14 | |
at an annual rate of close to 10%, about 9.7, 9.8%, | 13:17 | |
those numbers have been more consistently a little lower | 13:23 | |
over the past year, they are 8.7% for the year, | 13:26 | |
and even the highest, which is for seven months, | 13:30 | |
or I'm sorry, which is for nine months, is only 9.7%, | 13:33 | |
and yet when I plot on the chart the trend line, | 13:39 | |
the actual money stock has been below the trend | 13:44 | |
for perhaps the last two or three weeks, | 13:47 | |
you could, it could be that what's happening in that series | 13:50 | |
is the beginning of a slow deceleration, | 13:54 | |
but I'm very, very reluctant to reach any conclusion | 13:57 | |
at the moment, partly because there is so little evidence | 14:02 | |
of any slowing down, but also because disintermediation, | 14:06 | |
that is to say the tendency for people to cut down | 14:12 | |
on time deposits and convert them | 14:15 | |
into higher yielding market paper, has clearly tended | 14:18 | |
to slowdown the growth of M2 rounded to M1, | 14:23 | |
but if you put it all together, what you can see is, | 14:28 | |
that my best judgment is as yet not proved, no evidence, | 14:32 | |
there is no sign, the one good thing you can say | 14:38 | |
is there is no sign of a recent acceleration | 14:41 | |
in monetary growth, maybe, maybe there are a few clouds | 14:43 | |
in the sky ahead that suggest a deceleration. | 14:48 | |
- | Clouds? | 14:51 |
(laughs) | 14:52 | |
- | Well, you're quite right. | |
- | Sun? | 14:54 |
- | Sun, rays of the sun, but I think | 14:55 |
that as yet the evidence is very tenuous | 14:58 | |
and you better keep the Scotch verdict. | 15:01 | |
- | Well turning to another subject, | 15:04 |
does the decline in real GNP in the second quarter | 15:07 | |
mean we can confidently say we're in a recession? | 15:10 | |
- | Many people will be remarking that, have remarked, | 15:14 |
the papers have been full of it, | 15:17 | |
that we have had two quarters of declining GNP in a row | 15:19 | |
and that means we have a recession. | 15:21 | |
I've never, as I've noted here often, | 15:24 | |
that does not seem to me to be the, either the accepted, | 15:27 | |
or a good definition of a recession, | 15:30 | |
as I mentioned earlier, if we went down 6%, | 15:33 | |
at an annual rate of 6% in the first quarter, | 15:37 | |
and up at 1% in the second quarter, | 15:39 | |
would that make a recession? | 15:41 | |
Would that mean there was no recession? | 15:43 | |
While 2.5% down in each of the two quarters | 15:46 | |
which would leave you at the same end | 15:49 | |
pointing that there was a recession, | 15:50 | |
that's too simple minded a test, | 15:52 | |
the test which really is used by the National Bureau, | 15:55 | |
which has become accepted as the unofficial arbiter | 15:59 | |
of whether there is a recession or not, | 16:02 | |
is a much more extensive one, and has to do | 16:05 | |
with the breadth as well as the depth of the decline, | 16:07 | |
and from that point of view, one has to say, | 16:12 | |
looking at the classical kind of a recession, | 16:15 | |
the kind the Bureau has called in the past, it is still | 16:17 | |
very hard to say that this one has been a recession, | 16:20 | |
the aggregate total output alone | 16:24 | |
shows a substantial decline, if you look at the depth | 16:28 | |
of GNP, real GNP, it is comparable to the decline | 16:31 | |
in earlier declared recessions, 1970, 1960, '61, '57, '58, | 16:36 | |
and so on, however, look at other aggregates, | 16:44 | |
in particular the aggregate that bothers me the most, | 16:49 | |
and that I find most mysterious, is total employment | 16:52 | |
and unemployment, the unemployment rate | 16:56 | |
has only gone up trivially, it's only gone up to 5.2%, | 16:58 | |
a much smaller rise in the unemployment rate | 17:02 | |
than during any of the earlier recessions, | 17:05 | |
in addition, total employment has continued to rise, | 17:10 | |
industrial production has declined somewhat, | 17:15 | |
but the amount of decline in the index | 17:18 | |
of industrial production is much smaller | 17:20 | |
than it has been in earlier recessions, | 17:22 | |
and so you go from one series to another and what you find | 17:25 | |
is that the slowdown has been very concentrated, | 17:28 | |
primarily automobiles and construction, | 17:36 | |
and almost nowhere else, you find very little evidence | 17:38 | |
in the labor market of a great deal of ease, | 17:42 | |
you do not find that evidence either | 17:45 | |
in the level of unemployment, nor do you find it | 17:47 | |
in average hours per week, ordinarily during a recession | 17:51 | |
average hours per week decline with an easier labor market, | 17:55 | |
nor do you find it in any significant slowing down | 17:59 | |
in rates of wage increases, | 18:02 | |
so that I think one has to say that while clearly | 18:05 | |
there has been a slowdown in the economy, | 18:08 | |
there has been what the new, the phenomemon | 18:10 | |
which the Bureau has dubbed somewhat infelicitously | 18:14 | |
in my opinion, growth recessions, there clearly has been | 18:18 | |
a growth recession, that is a decline in the rate of growth, | 18:21 | |
I'm afraid you still cannot give an unambiguous statement | 18:26 | |
as to whether there has been a real recession, | 18:30 | |
now clearly, I should make it clear that my own bias | 18:33 | |
is obviously in the direction of saying | 18:38 | |
there has been a recession, since, as you will recall, | 18:39 | |
I started predicting nearly a year ago, | 18:42 | |
that there was going to be a recession in late 1973, | 18:47 | |
early 1974, and hence, there is a strong temptation | 18:51 | |
to make my prediction self-fulfilling by declaring | 18:56 | |
that there has been a recession, | 18:59 | |
and yet I think if you look at all the figures, | 19:01 | |
you have to say that the verdict here, | 19:03 | |
as in the case of whether the Fed has shifted | 19:05 | |
the monetary restraint is not yet in, | 19:08 | |
if we continue moving along our present lines, | 19:12 | |
if that real GNP continues to decline, | 19:16 | |
it is hard to believe that it will not sooner or later | 19:20 | |
show up in the form of unemployment, | 19:22 | |
so either of two things ought to happen, | 19:25 | |
either the unemployment index ought to start rising | 19:27 | |
fairly rapidly fairly soon, or else we're going to have | 19:29 | |
another one of those many recessions of the kind that we had | 19:34 | |
in '66, '67 that was never called a real recession. | 19:37 | |
- | We've been holding a question from Mr. Parker | 19:41 |
which we have for some time now, | 19:44 | |
but it seems particularly relevant now, | 19:46 | |
in view of all the financial difficulties, to answer it, | 19:49 | |
Mr. Parker's question is as follows, | 19:55 | |
I recall some years ago a tape which you made | 19:58 | |
on the failure of the Bank of the United States, | 20:00 | |
on several occasions since then you have mentioned | 20:03 | |
this failure, but the original tape which I am unable | 20:06 | |
to locate mentioned the part that J. P. Morgan | 20:08 | |
and his antisemitic posture had on this failure, | 20:11 | |
for your more recent subscribers, I wish you might consider | 20:16 | |
repeating what you said at that time. | 20:19 | |
- | Well the reason why this is kind of appropriate | 20:21 |
and timely, and it's not simply repetition, | 20:24 | |
is because there is, I suppose amusing, | 20:28 | |
I suppose disturbing coincidence, between the experience | 20:33 | |
of the Bank of the United States in the one hand | 20:37 | |
and of the Franklin National Bank on the other, | 20:39 | |
let me recall to you that the Bank of the United States | 20:43 | |
which failed on December 11th, 1930, I believe in one | 20:47 | |
of the former tapes I made a mistake and said 1931 | 20:52 | |
and somebody called my attention to it, | 20:55 | |
but it was December 11th, 1930, | 20:57 | |
that the original Bank of the United States | 21:00 | |
which failed on that date, was not an official bank, | 21:03 | |
the title of Bank of the United States | 21:07 | |
made it sound like an official bank, because there was, | 21:09 | |
- | You mean it was not a government bank? | 21:13 |
- | It was not a government bank, quite right, | 21:14 |
it was official, but it was not a government bank, | 21:16 | |
there were two banks of the United States in the early years | 21:19 | |
which were formed and the one of which terminated in 1860 | 21:22 | |
and then one in 1836 when there was a big bank war | 21:25 | |
between Biddle and Jackson over whether the charter | 21:29 | |
of the Bank of the United States should be extended, | 21:32 | |
but that bank having disappeared, | 21:34 | |
this new Bank of the United States | 21:36 | |
was a purely private bank, it was the largest bank | 21:38 | |
in the United States that had ever failed up to that time, | 21:42 | |
there were some very special features associated | 21:46 | |
with its failure, and that's what brings out the coincidence | 21:49 | |
with the Franklin National Bank, | 21:51 | |
the Franklin National Bank has not yet failed, | 21:54 | |
but clearly it's in great difficulties, | 21:56 | |
the Bank of the United States was one | 21:59 | |
which was not very popular with fellow bankers in New York, | 22:04 | |
and the major reason it was not popular was its name, | 22:08 | |
because of its name it was interpreted | 22:11 | |
as being an official bank, particularly by immigrants, | 22:12 | |
and that it was a new aggressive, rapidly developing bank, | 22:16 | |
which had attracted a great many customers | 22:21 | |
among the immigrant and foreigner population | 22:23 | |
of the United States, now the Franklin National | 22:26 | |
is not quite in that position, | 22:28 | |
but it has certain similarities, | 22:29 | |
it is a new bank, it was an aggressive bank, | 22:32 | |
it was a bank that was expanding very rapidly, | 22:34 | |
that was having lots of branches, | 22:37 | |
particularly in Long Island, | 22:40 | |
and that was regarded by other banks | 22:42 | |
as rather a brash newcomer, | 22:45 | |
the second special feature of the Bank of the United States | 22:48 | |
and the feature that Mr. Parker is recalling, | 22:51 | |
is that it was one of only two banks in New York | 22:54 | |
at that time, I say two banks, | 22:59 | |
and I'm sure it's two sizable banks, | 23:02 | |
maybe there were some small banks, | 23:04 | |
but of the major banks, it was one of only two, | 23:05 | |
in which the board of directors | 23:09 | |
and the ownership was predominately Jewish. | 23:10 | |
The reason this is highly relevant, for several reasons, | 23:15 | |
one of which was the general antisemitism on the part | 23:20 | |
of the banking community, the other special feature | 23:22 | |
of J. Piermont Morgan that I'll come back to, | 23:24 | |
but the Bank of the United States got into trouble | 23:28 | |
because of alleged speculation by some of its directors, | 23:30 | |
in this case it was, and if I remember rightly, | 23:33 | |
in copper, it wasn't foreign exchange, | 23:35 | |
Franklin National Bank, the extensible reason | 23:37 | |
for its trouble was speculation in foreign exchange, | 23:41 | |
at this time, the New York Clearing House, | 23:46 | |
Federal Reserve Bank of New York, | 23:50 | |
in the case of banks that got into trouble, | 23:53 | |
had a strong tendency to develop a plan to save the bank, | 23:56 | |
and indeed just a week or two before | 23:59 | |
the Bank of the United States got into trouble, | 24:01 | |
another bank about the same size, which was in trouble, | 24:03 | |
had been saved by a plan involving a guarantee fund | 24:07 | |
put up by other banks in the Clearing House, | 24:11 | |
the crucial feature in these rescue operations | 24:14 | |
was the role that J. Pierpont Morgan played at that time, | 24:19 | |
there was generally a tripartite business, | 24:22 | |
a bipartite business, J. Pierpont Morgan on the one hand | 24:24 | |
and the Clearing House banks on the other, | 24:28 | |
it was J. Pierpont Morgan having put up | 24:30 | |
I think it was 25 million dollars in the case | 24:32 | |
of the bank a week earlier, and the original plan | 24:34 | |
which the Federal Reserve Bank of New York developed | 24:38 | |
for saving the Bank of the United States, | 24:42 | |
involved J. Pierpont Morgan participating | 24:45 | |
in a guarantee fund, and involved merging | 24:48 | |
the Bank of the United States with another New York bank, | 24:54 | |
and this is where the second coincidence | 24:57 | |
with the Franklin National Bank comes in, | 24:59 | |
of all the banks in New York, | 25:02 | |
which bank do you suppose they chose to merge? | 25:03 | |
The Bank of the United States, the other bank | 25:07 | |
which had predominately Jewish ownership | 25:10 | |
and Jewish board of directorship, namely, | 25:12 | |
that what was then called the Manufacturers Trust Company, | 25:15 | |
now with respect to the current Franklin National Bank, | 25:19 | |
what bank do you suppose is being talked of | 25:22 | |
as the most prominent merger partner | 25:24 | |
for Franklin National Bank? | 25:25 | |
Well, what is now being called familiarly Manny Hanny, | 25:28 | |
namely Manufacturers Hanover Trust Company | 25:32 | |
which is the bank that resulted from the merger | 25:35 | |
of the original Manufacturers Trust with the Hanover Bank, | 25:38 | |
so that the merger partner is exactly the same this time, | 25:42 | |
the proposed merger partner as it was in 1930, | 25:46 | |
now, let me go back to J. Pierpont Morgan | 25:50 | |
and how that affected this, because this is itself | 25:53 | |
a long and interesting story, back before World War One, | 25:56 | |
J. Pierpont Morgan senior had been pillar rating | 25:58 | |
an insurance investigation in New York by a lawyer, | 26:01 | |
I now forget whether it was Brandeis | 26:04 | |
or some other famous, Cordoza or one of the other, | 26:07 | |
it was one of the very famous Jewish lawyers, | 26:09 | |
and he had really been pillar rating, | 26:13 | |
we have on record, thanks to a great gossip, | 26:15 | |
Hamlin who was on the Federal Reserve Board, | 26:18 | |
and who kept his diaries, of a lunch which he had | 26:20 | |
with J. Pierpont Morgan junior during World War One, 1918, | 26:23 | |
when there was a great controversy going on | 26:28 | |
about whether Felix Warburg should be made a member | 26:30 | |
of the Federal Reserve Board, and the campaign | 26:33 | |
was extensively on the ground that Warburg | 26:35 | |
had too many German interests, | 26:37 | |
but the real reason was that Warburg was Jewish, | 26:39 | |
and J. Pierpont Morgan says to Hamlin in the course | 26:42 | |
of this lunch, now I'm gonna get even | 26:45 | |
with those Jews for what they did to my father, | 26:47 | |
well comes 1930, comes the Bank of the United States | 26:50 | |
and the proposal that it be saved | 26:53 | |
and that J. Pierpont Morgan contribute 25 million dollars | 26:56 | |
to this, I don't guarantee that number, | 26:58 | |
but a substantial sum to the guarantee fund | 27:01 | |
as he had to other bank funds, and he refused to do it, | 27:03 | |
now, in and of itself that's only a circumstantial case | 27:09 | |
for saying that it was antisemitism that was responsible | 27:15 | |
for his not going along, but the case is much stronger | 27:20 | |
than that, because it turned out that there | 27:23 | |
was an insurance, there was a banking commissioner | 27:26 | |
of the state of New York who was sued in the courts | 27:29 | |
on the grounds that he should have closed down | 27:32 | |
the Bank of the United States earlier, and part | 27:34 | |
of his defense was that the Bank of the United States | 27:37 | |
was really a very solid, sound bank that would have been | 27:39 | |
perfectly alright if this rescue plan had gone through, | 27:42 | |
and he testified in the course of the court hearing, | 27:45 | |
as in it's open and the record and the public record, | 27:47 | |
that racial considerations, and I think he used | 27:50 | |
the word racial and not religious, | 27:53 | |
played a very large role in the unwillingness | 27:55 | |
of Morgan and the others to go along and saving | 27:58 | |
the Bank of the United States, | 28:01 | |
I might note to complete the story, | 28:02 | |
that the Bank of the United States was undoubtedly | 28:04 | |
a perfectly sound and solid bank, | 28:06 | |
and that if indeed the rescue operation had gone through, | 28:09 | |
it probably would have survived in perfectly good shape, | 28:16 | |
it was liquidated during the worst years of the depression | 28:19 | |
from 1930 to '33, but it ended up paying off 92.5 cents | 28:21 | |
on the dollar for every deposit, a dollar a deposit, | 28:26 | |
and that was under the adverse circumstances | 28:30 | |
having to be liquidated and liquidated | 28:32 | |
under those conditions, approximately the failure | 28:34 | |
of the Bank of the United States was a major event, | 28:37 | |
it set off a train of bank failures that really started | 28:40 | |
a sharp intensification in the depression in early 1931, | 28:44 | |
I don't mean to say that if the Bank of the United States | 28:49 | |
had been saved, you might not have had such runs, | 28:51 | |
some other bank might have failed and the same thing | 28:54 | |
might have happened, but from a proximate point of view, | 28:56 | |
December 11th, 1930, marks a drastic change | 28:59 | |
in the character of the depression, from being | 29:04 | |
a severe recession without liquidity and banking problems, | 29:07 | |
it was turned into a major financial collapse, | 29:11 | |
that's why I remember that date so well. | 29:14 | |
Now let's come back to Franklin National Bank today, | 29:16 | |
many people have been concerned | 29:20 | |
and there has been widespread discussion of the possibility | 29:21 | |
that it might also trigger off a great depression | 29:24 | |
and a financial collapse of this kind, | 29:26 | |
I do not believe that that is likely to be the case, | 29:29 | |
the crucial difference between the situation then and now, | 29:32 | |
or I should say there are two crucial differences | 29:36 | |
between the situation then and now, | 29:38 | |
the fist crucial difference is the existence | 29:41 | |
of FDIC, thanks to FDIC there is simply no chance | 29:43 | |
that you are going to have runs on perfectly good banks | 29:48 | |
by ordinary depositors lining up for blocks long | 29:53 | |
trying to take out their money, | 29:56 | |
because even if Franklin National were allowed to go broke, | 29:58 | |
as it should have been allowed in my opinion to do, | 30:02 | |
the second big difference is that the attitude | 30:05 | |
of the Federal Reserve and the monetary authorities, | 30:08 | |
they have in my opinion swung too far from the one extreme | 30:11 | |
to the other, from the viewpoint of staying out, | 30:14 | |
they have gone to the viewpoint of going in | 30:17 | |
on too large a scale, I think it would be a healthy thing | 30:19 | |
at the moment, assuming, maybe I'm wrong, | 30:22 | |
maybe Franklin National is a perfectly good and sound | 30:25 | |
and solid bank and it can be preserved | 30:27 | |
without any undo government intervention | 30:31 | |
or without any undo subsidy, | 30:34 | |
but if not, if it really is a bad bank, | 30:36 | |
if it's really in a poor condition, | 30:39 | |
why I think there is, it would be a good thing | 30:40 | |
if it were allowed to go broke, | 30:43 | |
but I think those two differences are very crucial, | 30:45 | |
and they make it almost inconceivable | 30:49 | |
that you could now have a banking collapse | 30:53 | |
of the kind that was triggered by the failure | 30:55 | |
of the Bank of the United States in 1930. | 30:58 | |
- | I think this brings us to the end of our tape, | 31:03 |
thank you very much, remember subscribers, | 31:06 | |
if you have any questions or comments please send them | 31:08 | |
to Instructional Dynamics Incorporated, 430 Ohio Street, | 31:11 | |
Chicago, Illinois, 60611. | 31:16 | |
We shall be visiting with you again in two weeks. | 31:20 |
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