James McAfee - General Counsel, Federal Reserve Bank of Richmond
Published December 1, 1997 | December 1997 issue
Since Carter Glass has been dead for over 50 years, we were naturally surprised that he agreed to be interviewed by The Region. We were surprised, too, at how little the intervening years had altered his appearance and opinions. A short man, scarcely taller than Napoleon, with a hawk nose, alert eyes and white hair brushed stiffly back, he closely matched photographs handed down from the middle of his Senate career. Woodrow Wilson claimed that Glass, as a member of the House of Representatives, had "snarled the Federal Reserve Act through Congress out of one side of his mouth" and speculated that Glass might have accomplished even more using his whole mouth. We saw what Wilson meant. As Glass spoke with us in a provincial Virginia drawl, he plied mostly the left side of his mouth, like Popeye, the Sailor Man, and his famously literate, pugnacious and old-fashioned views seemed imperfectly restrained by the formal courtesies typical of his time, place and profession. Out of deference to his extreme advanced age of 139 and perhaps worried about his reputation for being easily provoked, we eased into the following conversation as gently and graciously as we knew how.
REGION: Senator, thank you very much for coming. It's a wonderful privilege to meet the man who invented the Federal Reserve System.
GLASS: It's nice to be here; I don't get out much any more. As to my inventiveness, some informed people might tell you I invented the Securities and Exchange Commission, too, but I don't make such claims myself. The true mastermind of the Federal Reserve banking system was Woodrow Wilson. I was glad to play a role in bringing his vision into being, perhaps even a central role, but many others made constructive contributions worth remembering. There were also a multitude of blackguards who obstructed progress, some of whom later stepped forward to claim credit as fathers of the child they had tried to strangle in its crib. I am likely to remember them, too, for a long time.
REGION: Maybe we will get to them, but I'd rather start by finding out how you like the current state of banking in the country. One of the most dramatic developments in banking has been the introduction this year of nationwide branching. Does this cause you any concern?
GLASS: None whatever. If people had listened to me, we might have had national branching a great many years ago. Before the Federal Reserve was created, we studied Canada's banking system and continued to watch Canada over the years. Not a single bank in Canada failed during the Depression, while thousands of our banks flocked into receivership. The reason was simple. Canada had a few banks branched across the continent, while we were plagued with swarms of little pawnshop banks and one-crop banks that could no more meet the Federal Reserve's membership standards than you or I could become Caliph of Baghdad. It was foolish not to let these banks be absorbed as branches into larger member banks.
REGION: With due respect, Senator, I never heard that you advocated nationwide branching.
GLASS: Observant people might tell you that above all else I am a practical man. I advocated what I thought I might have some chance of getting. For a while my aim was to let national banks branch throughout their Federal Reserve districts, as we let Reserve banks do, but President Roosevelt, whose advisers knew more about political tides than about sound economic principles, wouldn't support anything more than countywide branching. We had studied the problem for 35 years, and I would cheerfully have pressed for unlimited branching, but it had taken us 16 difficult months just to push a very timid branching measure through Congress. I never heard anyone argue against branching except local bankers intent on maintaining their monopoly on the credits of their communities, but country districts had great influence over legislators, and in the circumstance, I thought statewide branching was as ambitious a goal as I could realistically pursue.
REGION: Aren't you concerned, though, that nationwide branching may weaken the dual banking system?
GLASS: I hope it may. I never had any use for the state banking systems. For the most part, they added weakness to the economy. Some state charters allowed dangerous powers and illiquid investments, and this siren song bewitched a worrisome number of national banks. Each time we tried to introduce some sensible, conservative reform of abuses in the national banking system, national bankers objected that we would hobble them in their competition with inadequately restrained state banks. A uniform system of deposit banking throughout the country would have been a very healthy thing.
It startled me that Congress enlarged the powers of state banks so that interstate branching will not disadvantage them. In my day, Congress could no more tell state banks what they could do or where they could do it than state legislatures could dictate to national banks. When the Attorney General of the United States was asked, at my prompting, how Congress could constitutionally rein in the state banks, he confessed that the task was beyond his imagination and ingenuity. But even if it were constitutional, it would be unnecessary for Congress to help state banks. Once Congress authorized national banks to branch all over, state legislatures would have been pulled along in the current. Worse than unnecessary, federal help is unwise. The national government should not prop up the dual system. It has been the curse of our banking business. I used to say that knowing there were far more state bankers to vote against me than national bankers to vote for me, but that did not bother me the least in the world.
REGION: In fact, I read that you rarely paid attention to any of your constituents.
GLASS: What rubbish people print! I paid attention to my constituents, and I was happy to oblige them whenever they were in the right.
REGION: How do you feel about product expansion, particularly securities powers? The Federal Reserve has been dismantling the Glass-Steagall Act's walls between commercial and investment banks. As one of the architects of those walls, do you regret the changes?
GLASS: If you put yourself in my place and time, you would have done as I did. Our subcommittee did not act out of any prejudice or in a whimsical or inadequate way. We consulted practical bankers and experts extensively. We did everything but sleep with experts, and we learned that national banks had created affiliates as a way of doing precisely those things that the National Bank Act prohibited them from doing. Apart from Edge Act corporations and that sort of thing, affiliates were the slippery conjurations of lawyers. Shrewd men operated them and entwined the parent banks in great difficulties. Banks lent their names, prestige and tradition of sound banking operations to these affiliates, and on that basis did people invest and transact business with them. When calamity struck, not all bankers felt a responsibility to the citizens they had enticed. Not all bankers could afford to.
Our subcommittee heard testimony about many virtuous affiliates, but we also heard of abuses, especially in securities dealings, and the weight of informed opinion was that the affiliate system was riddled with vicious practices. Two of the country's most eminent bankers who testified had already got rid of their affiliates without any governmental prompting, but opinion varied about whether affiliates should be liquidated, or whether they should be separated from the commercial banks, or whether their powers should be trimmed and they should be subjected to more or less severe supervision, as banks were.
We could not single out exceptional cases. Congress must act by general legislation, and in the end we aimed for a happy medium. We allowed a decent period for banks and their securities affiliates to uncouple, and we subjected other affiliates to greater or lesser safeguards and supervision, depending on their activities. We hoped those measures would answer the public's loss of confidence, protect depositors and investors, and help prevent Federal Reserve facilities from being used in support of stock and commodity gambling, which had brought on the Depression and about which I had been warning for 14 years or more, though I was never simple enough to think I could end gambling.
If I may speak personally, I think commercial banks should stick to commercial banking, if that is still feasible. I am also concerned that Federal Reserve Board members should remember that their oaths of office require them to treat the anti-affiliation law as a guide, not an obstacle. They would be recreant to usurp the legislative function. Setting that concern to one side, however, the Board seems to be trying to accomplish many of the same goals as we were, except of course that it does not seem to mind stock gambling as it should and as we did, and it must protect the deposit guaranty fund, which we lost no sleep over.
REGION: Let's talk a minute about that. The insurance of S&L deposits put the government to great expense not long ago. Does that experience lead you to support any particular reform of deposit insurance?
GLASS: "Great expense" is a tepid description of a catastrophe. The best reform of government insurance would be to wash the land entirely clean of it, though it take all the waters of Abanah and Pharpar to do it. If it were not so tragic, it might be amusing how many people discovered the problem of moral hazard only after the savings and loan associations went bust. When we passed the Federal Reserve Act, we knew all about moral hazard. One version of our currency bill would have devoted half the Reserve banks' excess earnings to deposit guaranty, but every plan that experts and politicians devised was either a sham or would have visited the sins of reckless banks either upon the government or upon banks that themselves bore no taint of wickedness or improvidence, and would thus encourage sin. No one ever proposed a solution to that problem that satisfied me, or has yet. When I stood before the House of Representatives in 1913 and declared that not one dollar of government funds should ever go toward the guaranty of bank deposits, the welkin rang with applause from both sides of the aisle.
REGION: But surely the government bears a responsibility. Bank failures impose calamitous losses on individuals who are not well positioned to protect themselves.
GLASS: In my experience, once a man learns that he is at risk, he will find a way to protect himself. And there is no better learning experience than to see his neighbor lose a portion of his deposits in a panic. Remember, too, that in my day, bank shareholders were doubly liable to their bank's creditors, as Reserve bank shareholders are still. That double liability, though sometimes circumvented, was an extra protection for depositors and a healthy incentive for shareholders to keep a watchful eye over bank managers, but the extra local liability and supervision are gone and taken over now by Washington, like so much else.
President Wilson, the best educated president we have ever had in political philosophy, deplored philanthropic government, but the country has grown accustomed to it. Protecting citizens against loss is a philanthropic goal, but as we predicted in 1913, the national government cannot keep bank losses at a tolerable level, once it has shifted risk to itselfor, rather, to its taxpayerswithout a mammoth and expensive bureaucracy to dictate banking practices in ever more minute and oppressive detail to experienced and practical bankers. I am more persuaded than I ever was that the government should not be in this business.
REGION: That confuses me. Isn't your name on the bill that put the government in this business?
GLASS: A legislator may sponsor a bill for different reasons. He may embrace it to thrust it forward, and he may embrace it to hold it close; he may like some features of a bill better than others; and in emergencies he may support emergency measures that are unsuited to calmer times. It was clear that the country needed prompter and more orderly arrangements for liquidating banks. A man wrote me from Missouri, for example, that his bank had been six years in the hands of a manipulative receiver and he had not seen one cent of his money. I also recall a Montana bank whose affairs could not be wound up in under 28 years. Those problems deserved legislative correction.
REGION: It's too bad you needed a banking crisis to get that legislation.
GLASS: It is nearly impossible to get banking reformation in this country without a crippling national emergency, and even then, bankers tell us to wait for better times because their situation is precarious and reform will break them. But when better times arrive, they tell us to wait yet awhile, because reform will upset their fragile prosperity. Bankers and their myrmidons and hired pigwidgins always threaten a torrent of disasters. They think the time is always right to reform others and the time is always wrong to reform them. Furthermore, if Congress waits as bankers instruct and gives some new villainy time to take hold and become familiar, bankers then defend the practice as if it were a birthright of finance handed down to them from Justinian by way of the Medicis and Alexander Hamilton himself, with which it would be impious and disruptive for the government to interfere.
In this fog of selfish rhetoric, all a poor member of Congress can do is keep a list of needed improvements and bide his time until a financial catastrophe gives him his chance, and then he must legislate at once or wait for the next debacle. This is a wasteful, unscientific process. It delays useful remedies until the banking system is racked with infection, and it brings in desperate cure-alls, quack nostrums and overdoses that may be worse than the disease and, though meant to be temporary, often continue for decades after the fever breaks.
REGION: As you know, Vice Chair Alice Rivlin has charge of a committee that is considering, in a methodical way and in advance of any crippling emergency, whether the Reserve banks should continue in the retail payments business. Do you have any advice for her? [Editor's note: When Sen. Glass spoke with us in August 1997, the Rivlin Committee on the Federal Reserve in the Payments Mechanism had not announced its recommendations.]
GLASS: I am dismayed to see her committee so solicitously interested in the opinions of bankers. I would be far more interested in the effects of change on commerce, industry and agriculture than its effects on banks. The whole point of the Federal Reserve Act was to make banking the servant of commerce instead of its master. If we had heeded the selfish arguments of bankers in 1913, Reserve banks might never have gotten into the check collection business in the first place. The par collection system established by the Federal Reserve Act was one of our crowning achievements, and it is unfortunate that it has never received the attention it deserved.
Before the Federal Reserve banks got into the act, banks extracted exchange fees and collection charges that were totally fictitious and unjustified by any costs. These charges constituted an outrageous tax upon commerce and industry, and many country banks lived handsomely off their undeserved profits. The mails were clogged with checks being sent in the most roundabout ways to avoid these tolls, and consequent delays raised the risks of collection and discouraged people from accepting checks in payment of obligations. The establishment of a nationwide par collection system through the Reserve banks, despite a decade of bitter and unscrupulous opposition by bankers and even some discouragement by the Federal Reserve Board, virtually wiped out these toll gates on the highway of commerce. It may be that bankers have become angels in the past 80 years, but I suspect they are still just men.
REGION: And women.
REGION: They aren't just men; we have women bankers.
GLASS: All right, but my point is that they are not angels, and I would be slow to turn the payments system entirely back to those who manipulated it so shamelessly in the past. Indeed, if we heeded the protestations of bankers, we might never have had a Federal Reserve System at all. You may recall that Sen. Aldrich, determined to scuttle our bill, once gave a famous speech, the text of which ran to 62 printed pages and showed a surprising erudition, for that gentleman had humbly kept his scholastic tendencies well hidden for his entire life up until then. Many claimed that Sen. Aldrich's legislative efforts had inspired the Federal Reserve Act, but in his speech, he himself proved this claim to be utterly false by condemning each and every important element of our pending Federal Reserve bill. Perhaps the only truthful thing he said that day was that our plan faced the almost unanimous opposition of the nation's bankers. In meetings of the American Bankers Association, anyone who ventured a favorable word about our currency bill was howled down and almost ejected bodily. To within one hour of its final passage, the bankers kept up their violent fusillades.
Those who for decades have tried to construct a central government bank on the frame of our regional Federal Reserve banking system often argue that member banks have too much influence and control, but the vituperative opposition of bankers at the time suggests to me that we achieved almost exactly the balance we aimed fora democratic arrangement, as President Wilson said, in which government and private interests collaborate.
REGION: Has that balance been preserved? Is it fairly reflected in the current relations between the Reserve banks and the Board of Governors?
GLASS: It would be astonishing if the Reserve banks and member banks didn't think the Board of Governors had far too much control over their business and if the Board of Governors didn't think it had far too little. That's been a constant feature of Federal Reserve banking through history. It's human nature, and banking is full of human nature. But I expect that any disagreements you have today are just airy shadows of the disagreements of the System's first 20 years.
REGION: It was President Wilson himself who had the Federal Reserve Board created as a capstone to control the System, wasn't it?
GLASS: This is a thorny subject. As you know, a great fight over the currency bill was whether the banking system would be dominated by the government or by bankers. We were determined to enact organizational arrangements that would achieve a practical balance, yielding neither to money trust plutocrats nor radical utopians. Politicians are too tempted by inflation and bankers are too tempted by profits to give either one of them unchecked control of the credit system. The foundation of the president's vision, not just in banking, but throughout the economy and society, was "a free field and no favor." He rightly thought the government should set and enforce rules of fair play and let private competitive interests operate with maximum freedom within those rules.
To achieve the right balance, we entrusted several specific decisions of national import to an altruistic government board of men with no ties to bankingPresident Wilson insisted on this point and there was no good argument against it either then or nowand we gave them general supervision over Reserve banks, which were to be controlled by managing boards predominantly but not exclusively chosen by member banks. Our bill put the government in charge of Reserve banks in the same way that the Comptroller of the Currency is in charge of national banks. We gave few powers to the Reserve banks that national banks had not exercised, and we gave few powers to the Federal Reserve Board for its control of Reserve banks that the Comptroller had not been exercising for 50 years in his control of national banks. Indeed, Dr. Willis and I initially thought that the Comptroller, rather than any new governmental commission, should supervise the Reserve banking system because of his experience supervising the national banking system. Congress might have done that if the Comptroller had not been regarded as too arrogant and powerful already or if President Wilson had not come up with a better idea.
REGION: You make this balancing act sound very lofty, but wasn't it really just a political compromise to buy necessary support?
GLASS: I may know as much as you about legislative procedures and strategies, maybe even a little more. After 1907, there was nearly universal agreement that reform of our barbarous currency system was desperately needed, but there was nearly universal disagreement about what kind of reform was desperately needed. Consequently, many operational details of our bill, as it emerged from conference, reflected compromises among men of strong views. All legislation involves compromise, but we never diluted our fundamental principles.
Apart from any political reasons for the Federal Reserve Act's mixture of private and public interests, there were sound theoretical and practical reasons. As a matter of theory, it is a good idea to have a federal Food and Drug Act, enforced by an altruistic federal Food and Drug Administration, but it would be a bad idea to have federally operated drug stores and grocery stores, especially if they traded with only a select fraction of the citizenry. Moreover, as a matter of practicality, you could not expect the government to operate the Reserve banks, any more than you could expect the Interstate Commerce Commission to operate the railroads, because the government had no experience as a commercial lender and no successful history in managing business enterprises generally. I suppose that has changed. The Reserve banks have let their lending business wither and, in the meantime, the government has become a very active, though not necessarily a wise or expert, lender and guarantor of loans. Both developments are deplorable.
REGION: This is interesting to me but not very relevant because the Banking Act of 1935 completely changed the balance of authority within the System.
GLASS: It is true that Gov. Eccles tried to put the Board fully in charge of the Reserve banks, and he was willing to let the president control him if only he could control the Reserve banks. I am very gratified to say that, except in one or two cosmetic ways, Congress thwarted this vain and Faustian megalomania. We received from Eccles, consulting no one but himself, a bill that was saturated with poison and would have made the Federal Reserve a door mat of the administration. We returned a bill that actually increased the Federal Reserve's independence from the arts of partisan political vandals. We did not leave enough of the Eccles bill with which to light a cigarette. If you study the law, you will see that, except for open-market investments, the respective powers and responsibilities of the government and the Reserve banks were left largely intact. Moreover, the Secretary of the Treasury was taken off the Board, as I had tried to accomplish for some time without hurting the secretary's feelings. In the 1920s, the Board acknowledged that it had no legal power to interfere with the operational details of the regional banks, and its legal power hasn't changed.
REGION: I think you could find different opinions about that.
GLASS: It is not a matter of opinion; it is a matter of record.
REGION: Aren't you quibbling? As a senator you fought to prevent President Roosevelt from enlarging the Supreme Court, and you were victorious legislativelythe court's membership stayed at nine. But as a practical matter President Roosevelt got what he really wanted, not more justices but more sympathetic justices. In the same way, you kept some of Gov. Eccles' more ambitious proposals off the statute books, but in practice, didn't he get the centralization and control he really wanted?
GLASS: I hope, sir, you do not regard the statute books as quibbles. A man's duty is to keep his word and an officeholder's duty is to do not what he thinks best but what the law commands. Honorable men will keep the bargains they make and those the government makes for them.
REGION: Honorable women, too.
GLASS: Certainly, men and women both.
REGION: I gather that you consider yourself generally as a champion of the prerogatives of Reserve banks, as against those of the Board of Governors.
GLASS: I hope you may find that I have been a faithful champion of the sensible balance of authority that Congress prescribed. I opposed the Board both when it overstepped its powers and when it feebly failed to use them fully, and I have contended against the Reserve banks, the New York Reserve Bank and the Secretary of the Treasury when any of them became headstrong or inert. I hope you may find that I criticized with an even hand all who deserved criticism and praised all who deserved praise. When Gov. Eccles assaulted the Reserve banks like the wolf on the fold, naturally I defended them; but when others attacked the Board unfairly, I defended it with equal vigor.
REGION: Earlier you said that Congress had left the Board of Governors' legal power much as it was, but in 1980 the Monetary Control Act gave the Board some explicit authority over Reserve banks' budgets.
GLASS: I had forgotten that, and it's best forgotten. The Monetary Control Act is disgraceful legislation. It forces Reserve banks to do business with every mongrel depositary in the country and, for all I know, Guam and American Samoa besides. Sen. Huey Long and Gov. Eccles labored at different times to pack all manner of unsuitable institutions into the Federal Reserve System, and I am happy to say the Congress squashed those schemes as it would a mosquito. The privilege of doing business with a Reserve bank should be an inducement for banks to measure up to very high standards and by degrees to raise the tone and safety of the banking system across the nation.
REGION: But the System had to ask for the Monetary Control Act. It was losing members hand over fist. Before long we might not have had any reserves left.
GLASS: The right answer was to make membership attractive, not to force all institutions to maintain reserves or to give them privileges of members even if they were grossly unfit for membership. There was nothing new about mass conversions from membership and manipulation of deposits to minimize reserves, but when we encountered those problems, we did not resort to coercion. It is a sign of degenerate failure when a government has to coerce behavior that was formerly voluntary.
REGION: But you didn't give national banks any choice about being members.
GLASS: But we didn't take away their choice about being national banks.
REGION: One way to make membership attractive would have been to pay interest on reserves.
GLASS: That would suit me. Paying no interest originally served a purpose that no longer exists, and if the federal government weren't so desperate for money because of its profligacy, no one would object in the least. It would seem fair and businesslike. You might also give the Reserve banks' shareholders a better return, a variable return anyway, on their stock investment to increase their incentive to supervise the management of the banks vigilantly. Not so great a return as to impugn the Reserve banks' public-interest outlook or to divert note issue profit into private pockets, but enough to maintain a right balance of interests. I tried to do this, both in 1913 and again in the Hoover administration, and it would have had a good effect. The member banks capitalized the Reserve banks and supported them. The government has never contributed one dollar to their maintenance but has received much from them. Stolen from them, too, sometimes, in ways that would make Ali Baba's 40 robbers blush.
REGION: As you know, there has been a lot of talk about consolidating Reserve bank operations and perhaps closing or relocating Reserve banks to reflect the country's modern demographics. Is that a sound idea?
GLASS: If you don't mind indulging an old man's reminiscences, you have touched on one of the most ancient organizational debates in the history of the Federal Reserve. Very soon after the Reserve banks opened for business, presidentially appointed members of the Federal Reserve Board took it into their minds to turn the regional banks in Atlanta, Dallas, Kansas City and Minneapolis, and possibly Boston and Richmond, into branches of other Reserve banks. The Board had absolutely no legal right to do this, but it finagled a contrary opinion from an obliging New York lawyer. I remonstrated strongly against them, though I doubt it had a decisive effect. The Board didn't fully surrender until the attorney general had rebuked it sharply twice. So far as I am aware, this is the only occasion President Wilson ever considered interfering with the Federal Reserve's business. He thought the proposal to consolidate Reserve banks so lawless that he briefly entertained the idea of dismissing the appointive members of the Federal Reserve Board and starting over with a more responsible crew.
REGION: President Wilson was generally quite careful to leave the Board alone, wasn't he?
GLASS: I wish some of his successors had been so scrupulous. With Presbyterian self-denial, the president made bipartisan appointments to the Board, though Congress had determined not to require it, and he protected the Board from the spoils system, to the lasting chagrin of many members of Congress. President Wilson believed strongly that the Board members should feel absolutely no political restraint. For that reason, he avoided contact with them, hoping to set a tradition that future chief executives would respect. Ironically, you might say President Wilson valued their independence more than they did, because two Board members complained to me bitterly about what they perceived as the president's aloofness and indifference to them. In any event, the crisis over the disestablishment of Reserve banks passed, and the president did not intervene.
REGION: Is the point of your anecdote that we have the right number of Reserve banks and in the right places?
GLASS: Not necessarily. The Board's proposal upset me not because it was unsoundalthough many criticisms could be made of it on that countbut because it was patently illegal. I say that not as a lawyer or one skilled in statutory interpretation but as an author of the sections of law at issue. It would also have harmed the Board to have defied Congress in such a way. But I never had a strong opinion about how many Reserve banks we needed or where they should be. We left that decision to an Organization Committee of experts, and I did not quarrel when the Senate reduced the minimum number of possible Reserve banks from 12, as our bill prescribed, to eight. Three would have been too few, because that would have given the System the flavor of a central bank, instead of a regional banking system, and the country was decisively opposed to creating a central bank. Also, if we had too few Reserve banks, it would have frustrated our purpose of decentralizing reserves and dispersing them regionally. If we had too many, some would be precariously capitalized and might be unable to care for themselves. But anywhere between five and 30 or so, I would have listened to argument. I am not immune to good suggestions.
With better sense, however, the Organization Committee would have established eight Reserve banks, as the law permitted it to do, instead of 12. I was one of the few members of the banking committees who thought the System should start with the minimum number. If you find you have too few, it is not that hard to open a new one, but it will be the devil to close one if you find you have too many. People who want to tinker with the System today may discover that.
I do not sense that any region of the country is at a particular disadvantage these days, although I am not in good touch with current conditions. Certainly, the Reserve banks, as sovereign but sympathetic corporations, should coordinate their activities in economical ways. That is common sense, but I would hate to reach a point where New York and Washington dominated the conversation and the other regions could not have a seat at the table and manage their own affairs as suits them each best. It is important to give places like Minneapolis a responsible role. I understand the calls for narrower accountability, but dispersing authority among seven governors, 12 presidents, to use the modern terminology, and several score directors, acquainted with local conditions, rather than concentrating authority in a few people in Washington or in just a few money centers, always appealed to me. I don't want the Secretary of the Treasury to have an easy time getting cozy or dictatorial with the men who make the Federal Reserve's decisions.
REGION: And women.
GLASS: Yes, yes, of course, men and women. In any event, institutional redundancy was deliberate in the Federal Reserve and is still advantageous, although it might entail some inefficiency. Efficiency might dictate that we abolish one or the other house of Congressand in moments of frustration I may have daydreamed about abolishing the house of which I was not a member at the timebut there are other considerations both in lawmaking and in banking.
REGION: Of course, the most vital conversations for several decades have been taking place not at the Reserve banks or the Board but in the Federal Open Market Committee.
GLASS: As you might guess, I am not at all happy to see that. A bond-secured currency was the precise thing we tried for 50 years to escape. We fought for a currency accepted not because of the taxing power of the sovereign but because of the security of a gold reserve and current commercial assets, a currency responsive to supply and demand that would expand and contract automatically in response to the business requirements of the country, not one managed and manipulated by men. Or women, either, I hasten to add. Now, somehow, we have converted the Federal Reserve from a commercial banking system to an investment banking or money-market system, and we have precisely the fiat government currency that we denounced so fervently.
REGION: That should not surprise you; from the start Federal Reserve notes were government notes.
GLASS: Dad-bum it, sir, they were not meant to be! President Wilson gave them the label just to give Secretary Bryan the shadow of a government issue. There was never any substance to it; it was a mere thought.
REGION: Would it be fair to say that all your concerns about the currency and the Federal Reserve's organizational structure are rooted in your horror of inflation?
GLASS: I am not ashamed to be horrified by inflation; inflation is horrible. I am old enough to have used greenbacks, which we called shin plasters, worth 34 cents on the dollar, and for 60 years I have carried in my pocketbook a tattered, worthless 100-million mark Reichsbank note, once worth $46,000, as a souvenir of the ruin that inflation brings after its intoxication palls. I greatly fear printing-press economics, and an unredeemable paper currency can never reassure me.
It is not, of course, the Federal Reserve's fault that the government abandoned the gold standard, but we were better off with it, and abandoning it was entirely unnecessary. It is not, of course, the Federal Reserve's fault that the government's financing needs are of a gargantuan magnitude even in peacetime, but we would be better off if there were much less government to finance. And it is only partly the Federal Reserve's fault that true commercial banking has withered, but it is regrettable that it has.
REGION: I doubt that modern economists could agree with you about some of those things.
GLASS: I doubt that modern economists could agree about anything, but if they could agree on something, it would not surprise me that they might prefer a system that depends heavily on economists in place of one that depended chiefly on practical commercial bankers.
REGION: I'll defend modern economists at another time, but even 60 years ago expert opinion was divided.
GLASS: Experts have been as often mistaken as other people in some matters, particularly these little sub-professors who troop to Washington to grind someone's axe for pay after only a fortnight's study of a problem, giddy and cocksure from their small sip at the Pierian spring. But you are right that in the 1930s opinion was divided. Idiotic opinion favored a planned economy and a managed currency, and sensible opinion opposed them. The problem with a managed currency is that it needs wise, even omniscient, individuals in charge, and the Federal Reserve, though sincerely attentive to inflation and blessedly successful lately, has had its share of conspicuously mediocre men in high positions over the years. ... Would you care to interject a word here, sir, in behalf of mediocre women?
GLASS: I am gratified to see at least that chivalry is still practiced; nothing beside remains. Some System officials have been mediocre; some have been unwise; and so far as I am aware, in over 80 years not a single one of them, man or woman, appointed by a president or elected by directors, has been omniscient. Furthermore, even some of the brainiest Federal Reserve officials have clearly believed from time to time that they could deliberately inflate the currency to just the right point and then stop, a notion that may appeal to theoreticians but could never appeal to knowledgeable historians.
REGION: Do you have any final advice for us?
GLASS: Not really. I was glad to help slay some of the dragons of my generation, but as a disciple of Thomas Jefferson, I am content to leave the earth with its continuing problems to the living.
REGION: I would not have guessed from your remarks this afternoon that you were the least bit content to do that.
GLASS: Well, I set out to do it, but when I see faulty logic, mistaken facts and garbled history, I just cannot help but point it out. Congressman Henry Gonzalez said he never desired a job at the expense of keeping quiet. He and I see eye-to-eye about that. It is likely, though I will not admit it, that in the bivouac of life I have been wrong more often than right, and I may be wrong now, but I have kept my conscience, and I could wish that Diogenes, as he passes his lamp through the political cemetery, may pause at my sepulcher and give an approving nod.
REGION: I hope you will not mind my being frank with you.
GLASS: Not in the least. I have a reputation, I'm sorry to say, for being that way myself.
REGION: Truthfully, looking forward to this interview, I was expecting you to have relented a little and adjusted more gracefully to the changes that have occurred in our government, economy and society.
GLASS: You thought I might have detached myself by now from gold and the Constitution and become reconciled to the quantity theory of money and a benevolent state that would be the envy of Mussolini, where minions of bureaucracy have full sway to dribble out fabulous sums picked from the pockets of taxpayers yet unborn. You saw that Gov. Eccles cooled down, and you thought I might have, too.
REGION: Well, probably I did.
GLASS: I can't imagine why you expected me to relent; I never learned that habit.
REGION: Maybe not, but you were always buoyant and practical. You played the cards you were dealt to maximum advantage, even a New Deal. I thought that you would recognize that modern society has permanently discarded some of the things you valued and would make the best of those changes.
GLASS: I'm sorry if I disappointed you. I am a traveler from an antique land, an unfortunate relic of constitutional government. I spent my entire life shoring up Jeffersonian democracy, and I don't care to mar the record now. If you were looking for someone who was in touch with Woodrow Wilson's ideals, principles and hopes for reserve banking but was not too proud to adjust hopefully to monstrous change, you would have done better to interview President Sproul. [Editor's note: Allan Sproul, president of the Federal Reserve Bank of New York from 1941 to 1956, was, among other things, a careful observer of the organizational dynamics of central banking and an articulate theoretician on the subject.]
REGION: I'm not disappointed, only surprised a little. It was an honor to meet you.
GLASS: Very well.
Although Carter Glass was openly scornful of politicians who accepted help with their speeches and writings and let others put words in their mouths, he asked James McAfee to review the transcript of his remarks for this magazine and to make editorial suggestions, some of which he took. McAfee is general counsel of the Federal Reserve Bank of Richmond and has been associate secretary of the Federal Reserve Board and chief counsel of the Marshall Islands Legislature. The views Senator Glass expressed in the interview do not necessarily represent or even resemble the views of the editors, the Board of Governors of the Federal Reserve System or any Federal Reserve bank. Indeed, to be perfectly frank, we cannot be entirely sure they represent the views even of Sen. Glass.