In 1933 the hit song in the jazz clubs was “Stormy Weather.” Adolf
Hitler was chancellor of Germany. And the Ninth District, together with
the rest of the country, was mired in the deepest financial crisis in
the nation’s history. Over the previous three years, more than 900 of
the district’s banks—about 39 percent of the total—had shut their doors.
In March President Franklin D. Roosevelt had declared a “bank holiday”—a
10-day hiatus in which all banking and trading in securities were
suspended. When the banks reopened, many struggled to survive, saddled
with bad loans and scant earnings opportunities. Bank officers lived in
daily fear of runs on the cashier’s window by jittery depositors.
Stormy weather, indeed. And the economic forecast called for more pain.
One in four Americans was unemployed. Many people so distrusted the
banking system they kept their cash in safe-deposit boxes rather than in
savings accounts. Few bankers believed that the Federal Reserve System
could do anything to improve things; created 20 years earlier to prevent
financial panics, the Fed had failed to stop the country from sliding
into the Great Depression after the stock market crash of 1929.
If ever there was a time for strong leadership at the Minneapolis Fed, it was 1933. The man who took on that unenviable task was John N. Peyton, a banker from Duluth who as state commissioner of banks had taken firm measures to stabilize Minnesota banks after the crash. In May, Peyton succeeded the deceased John R. Mitchell as Federal Reserve agent and chairman of the board. Over the next 19 years—through a dramatic restructuring of the Federal Reserve System during the Depression, the financial stresses and sacrifices of World War II and rapid changes in banking practices after the war—Peyton would mold the Minneapolis Fed in his own image: rock-solid yet approachable, a source of strength and succor in turbulent times.
In Peyton’s time the Federal Reserve wasn’t the prime mover of monetary
policy that it is today; Congress and the U.S. Treasury controlled—or
tried to control—the money supply through tax policy and, in wartime,
price and wage controls. Action by the Federal Open Market Committee
(FOMC) to curb inflation or stimulate business and job growth was either
ineffective or of secondary importance in guiding the economy. Regional
Reserve Banks, with the exception of the powerful New York Fed, had even
less to do in carrying out monetary policy. So in Minneapolis, the big
man known to his employees as “the boss” expended most of his enormous
energy close to home, honing the bank’s operations and cultivating
relationships with district banks.
Above all else, Peyton was a master of public relations well before that
term became part of the boardroom lexicon. By tirelessly promoting the
Minneapolis Fed as an institution vital to the district’s economic
health and by educating both bankers and the general public about
finance and monetary policy, Peyton redeemed the Federal Reserve System
in the eyes of local stakeholders. Some bankers and business leaders may
have disliked Peyton, who could be brusque and overbearing when the mood
suited. But they couldn’t ignore him, or the central role the Federal
Reserve played in the commercial life of the Northwest, as the region
was often called in Peyton’s day.
This portrait of Peyton’s life and times is drawn from the recollections
of Clarence W. Nelson, former director of Research at the Minneapolis
Fed; Reserve Bank and public library archives; and a remarkable
scrapbook of newspaper clips, letters and photos belonging to Betty
Peyton of Minneapolis, Peyton’s daughter-in-law.
Large and in charge
“Tackling big jobs just comes naturally to Mr. Peyton,” commented the Minneapolis Journal when the Federal Reserve Board appointed Peyton to
the Minneapolis Fed. The reference was both to his accomplishments and
to his imposing physique, put to good use on the football team at Yale
University. Six-foot-three and 230 pounds, the 48-year-old Peyton
literally towered over most of his contemporaries. And he had an outsize
personality to go with his
large frame—dominating, but tempered with
genuine warmth that inspired loyalty and cooperation.
John Newton Peyton came from a long line of bankers. His father,
Hamilton M. Peyton, had founded a bank in Duluth before the Civil War.
After graduation from Yale the younger Peyton spent three years keeping
the books for a gold mining company in Montana, but at his family’s
urging he returned to Duluth, founding his own bank—what would later
become the Pioneer National Bank of Duluth—at the age of 27. Peyton was
the last head of the Minneapolis Fed to cut his teeth in commercial
banking; his successors, from Oliver S. Powell on up to current bank
president Gary Stern, rose through the ranks of the Federal Reserve
System, or had backgrounds in academia or nonbanking professions.
As banking commissioner, Peyton gained national kudos for his resolute
handling of Minnesota’s banking crisis. Appointed by Gov. Floyd B. Olson
in 1931, as bank after bank in the state sank under a tide of red ink,
Peyton set up a program in which depositors of failed banks could
partially recover their losses by redeeming state certificates secured
by assigned claims against a bank’s remaining assets. After the bank
holiday in 1933, Peyton subjected all state banks to exhaustive
examination, refusing to let a bank reopen unless it was 100 percent
solvent. Minnesota’s reorganization was seen as a national model for
restoring public faith in banks, and its architect was soon being
mentioned in Washington, D.C., as a candidate for comptroller of
currency as well as an executive post at the Minneapolis Fed.
But Peyton’s swift, bold actions as commissioner didn’t endear him to
some Minnesota bankers who believed they had been treated unduly
harshly. In a November 1933 letter to the editor, the Minnesota
Independent Bankers Association called Peyton a “reactionary of the
iciest water” and accused him of conspiring with Roosevelt and bank
holding companies to do away with country banks.
In 1933, as called for in the original Federal Reserve Act, each Reserve
Bank operated under dual leadership: a governor in charge of internal
administration and a Federal Reserve agent with broader public
responsibilities. At the Minneapolis Fed, housed in a fortress-like
neoclassical building at the corner of Fifth and Marquette, William B.
Geery was governor.
Sharing power didn’t sit well with Peyton, who occupied an office
directly across the bank’s second-floor marble foyer from Geery’s.
According to bank lore, the two men conversed only when obliged to,
content to glower at each other through their open doors. Within a few
weeks Peyton had imposed his will on the milder-mannered Geery. “By
official title he became Federal Reserve Agent and Chairman of the
Board, but most employees who served under him thought of him simply as ‘The Boss,’” writes Clarence Nelson in a history of the bank published
in 1964. [See more on the history of the Minneapolis Fed.]
Order out of chaos
Displaying the same flair for organization and force of personality that
got things done in banking and state government, Peyton went to work.
Stopping bank runs was imperative; upon request, the Minneapolis Fed
would deliver hundreds of thousands of dollars overnight by rail or air
to relieve banks besieged by depositors. So was fielding a crack team of
examiners. In the depths of the Depression, ensuring that surviving
banks in the Federal Reserve System remained healthy was crucial to
rebuilding public confidence in depository institutions. The Banking Act
of 1933 expanded the supervisory powers of the Fed, extending its
examining authority to bank affiliates. Under Peyton, itinerant
Minneapolis Fed examiners gained a reputation for rigorous
examinations—and for offering their financial expertise to bank managers
struggling to keep their heads above water.
Peyton also strove to save time, space and money in bank
operations—check clearing, bank examining, currency distribution,
statistical reporting and other day-to-day functions that Reserve Banks
still perform, albeit with more automation.
While Peyton was putting his stamp on the bank, wholesale changes in the
structure and mission of the Federal Reserve System were occurring as
Congress took steps to lift the country out of the Great Depression.
Clearly, the existing system of monetary checks and balances wasn’t
working. The Banking Acts of 1933 and 1935 made it easier for the
Federal Reserve to lend to banks (Reserve Banks could now accept
government securities, approved loans or even stock as collateral),
established federal deposit insurance and created a true central bank
whose power was concentrated in Washington.
A reconstituted governing body, renamed the Board of Governors, gained
the right to sanction or override changes in the discount rate (the rate
charged for overnight borrowing from a Reserve Bank) proposed by
individual Reserve Banks. The FOMC came into being to oversee securities
trading throughout the system. And, symbolizing regional banks’ loss of
autonomy, the post of governor was abolished at the district level.
Henceforth there would be one chief executive at each bank, the
president. Peyton became president of the Minneapolis Fed in 1936,
formalizing the existing power relationship in the executive offices.
Geery took the unpaid position of chairman and agent.
Two years later Peyton became a member of the FOMC, joining in heated
discussions about how to pull the country out of a steep recession,
caused in part by earlier Board action to raise reserve requirements.
But in the late 1930s, the U.S. Treasury and Congress, not the Federal
Reserve, called the shots on most monetary matters, implementing an“easy money” policy that bloated the money supply and depressed interest
rates. As hard times wore on, Peyton devoted most of his attention to
the affairs of the Ninth District. He favored a strong supporting role
for individual Reserve Banks within the framework of the new order; in a
speech years later, he likened the district banks to 12 pillars in a
building, holding up the overarching roof of the Board and FOMC.
The people’s bank
More than any previous bank chief, Peyton went to great lengths to show
bankers and the general public that the Minneapolis Fed was more than
just a government overseer and monetary clearinghouse. In the 1930s he
launched a series of public relations and educational initiatives that
established the Fed also as a financial partner for banks, a fount of
knowledge about economic conditions and trends, and a community forum.
In 1935 the Minneapolis Fed commissioned “an experiment in public
education”—a 30-minute movie that revealed the inner workings of the
bank. Viewers at high schools, colleges, and civic and business
gatherings were treated to shots of the bank vault with its huge iron
gate, rooms full of file clerks and money counters, and uniformed guards
armed with submachine guns (the better to thwart holdups by gangsters).
Aware that the Federal Reserve was not held in universal high
esteem—more than a few bankers in the region, especially those in small
towns, viewed the central bank as an arrogant, clueless meddler in their
affairs—Peyton assigned several senior employees to visit every bank in
the district “to improve the feeling toward the bank.” These “fieldmen”
regularly called on nonmember as well as member banks to chat with
managers about business conditions and their need for Fed services such
as intercity check clearing (also offered at that time by large“correspondent” banks such as Northwest National Bank and First National
Bank) and discount loans. Recruiting new members of the Federal Reserve
System—without being too obvious about it—was part of the job.
In another bid to raise the Federal Reserve’s profile and showcase the
benefits of membership, the Minneapolis Fed hosted a bankers’ conference
in 1938. In his opening address to more than 700 member bank
officers—the largest-ever gathering of bankers in the district—Peyton
said that the Fed sought to improve both its relations with member banks
and the quality of its services. Other speakers flown in for the weekend
conference at Minneapolis’ Hotel Nicollet discussed still-depressed
economic conditions and a new banking practice called installment
finance—letting customers buy cars, refrigerators and other household
goods on time. As with everything Peyton was involved in at the bank,
the program ran like clockwork, adhering to a strict schedule.
The conference was a hit with bankers and the business press, and the
following year, 850 bank officers attended, hobnobbing in the spacious
Fed lobby and trooping over to the Nicollet to dine and listen to
speakers. In the evening everybody piled into cars to see the Ice
Follies at the Minneapolis Arena.
At the 1940 conference, the mood was upbeat. Businesses were still
reluctant to take out loans, despite extremely low interest rates. But
according to Minneapolis Fed monthly reviews of business conditions,
department store sales were up, increasing amounts of ore were being
shipped from the Iron Range and farm income in the district was the
highest since 1931. At last the U.S. economy was waking from its
decade-long stupor, prodded by overseas demand for everything from steel
to cotton to butter. There was a war on in Europe.
Mr. Peyton goes to war
During World War II the Federal Reserve System placed itself totally in
the service of the U.S. Treasury, to a degree unimaginable today. The
Roosevelt administration wanted to keep interest rates low to help
finance huge defense expenditures, and the Board under Chairman Marriner
S. Eccles obliged, doing little to restrain expansion of the money
supply as the wartime economy revved up. In 1941, U.S. banks held over
$7 billion in excess reserves (funds above mandatory minimums), most of
it in the form of government securities. To control inflation, the Board
recommended higher taxes, wage controls and selective curbs on consumer
credit, including regulations that discouraged installment purchases of
In Minneapolis, Peyton toed the official line on countering the
pernicious effects of idle money, advocating regulation of wages and
farm prices (up 15 percent in the district over 1940) in a speech to a
convention of state bank supervisors in September 1941. He also asked
supervisors and Fed bank examiners to help banks resist the temptation
to invest their excess reserves in nonessential capital loans, or loans
backed by high-priced farmland. Instead, bankers should concentrate on
selling defense savings bonds, being heavily promoted as a military
financing tool even before Pearl Harbor. Bankers would not only be doing
their patriotic duty by filling the Treasury’s war chest at low interest
rates; they would also be striking a blow against inflation by selling
bonds to the public, thereby taking money out of consumers’ pockets and
averting further credit expansion.
Peyton himself was an effective pitchman for government debt,
spearheading two war bond drives. As head of the district’s war finance
committee in the fall of 1941, Peyton urged employers to set up
voluntary payroll deduction plans for the purchase of defense bonds.
Such plans were particularly successful in the manufacturing centers of
Minneapolis and St. Paul; at one company 88 percent of employees
participated, raising $3,000 per month for the war effort. In March
1943, Peyton kicked off another bond drive, announcing a sales quota of
$175 million for the district.
“This is everybody’s war and War bond purchases are everybody’s duty,”
Peyton told 1,100 bank officials and businessmen assembled at Hotel
Nicollet. “Every family in this area must become a part owner in our
government’s national debt—the debt that is being incurred to save those
very individuals from Axis oppression.” A veritable war bond army—each
of 1,480 banks in the district had a defense bond chair, who worked
under one of 250 county committees reporting to the Minneapolis
Fed—swung into action. North Dakota declared a state holiday to promote
bond sales. By May the district had exceeded its quota, raising $300
million ($3.4 billion in today’s dollars) from bond sales to the public.
District banks contributed another $140 million in bond purchases.
As the Treasury’s fiscal agent, the Federal Reserve increased its
workload considerably during the war. By 1943 the number of employees at
the Minneapolis Fed had soared to over 900; to accommodate them all, the
bank rented an annex in the new
Farmers & Mechanics Savings Bank
building on Marquette Avenue.
Not all the extra paperwork involved keeping track of Treasury payments,
or administering securities for various federal agencies.
The bank’s “defense industry bureau,” staffed by engineering and other technical
experts, provided detailed information on defense contract needs to
manufacturers in the district, either directly or through member banks
(who stood ready to lend to successful bidders). In early 1941
Fed-facilitated contracts won by district manufacturers included orders
for iron castings, die jigs, galvanized tent shields and brass-headed
hammers for aircraft maintenance.
The annual bankers’ conference was suspended during the war, but
otherwise the Minneapolis Fed maintained its outreach efforts to the
banking community and the public. In 1942, the bank published an
illustrated primer on the banking system and the Federal Reserve System,
the first put out by any Reserve Bank. And two years later the research
department produced its first issue of “Farm News,” a pamphlet that gave
farmers and country bankers the latest on crop conditions, commodity
prices, government price support programs and agricultural best
practices. The November 1944 edition contained an item about a new
pesticide called DDT, used extensively by the U.S. Army, that would soon
be made available to farmers.
Pent-up demand for the good life exploded after the war, fueled by
federal budget surpluses that by 1948 had largely retired the national
debt held by commercial banks and the public. Increased spending coursed
through the district’s economy, bringing prosperity unknown since the
1920s. In April 1946, department store sales in the district were 50
percent higher than in the same period the year before, according to the
Minneapolis Fed’s statisticians. Soaring farm income and higher wages
swelled district bank deposits to triple the levels at the outbreak of war.
The banking industry was changing with the times, catering much more to
consumers than before the war. Young workers were opening
pay-as-you-go checking accounts. More and more people were taking out
installment loans to finance cars, washing machines and other major
purchases. Banks were actively marketing their wares, advertising loan
rates in newspapers and courting customers in the lobby.
Meanwhile, the Federal Reserve System was stuck in the past—under the
thumb of the Treasury, unable to raise interest rates to control
inflation (which spiked in 1946 after the relaxation of wartime price
and wage controls) without permission. Unwilling to increase the costs
of government borrowing, the Treasury kept interest rates low, and the
Federal Reserve subservient, until the early 1950s.
But there was one way that a Reserve Bank could become involved in the
brave new world of banking: through community-building and economic
education. More than 1,200 district bankers attended the Ninth
District’s 1946 bankers’ conference in Minneapolis, eager to commune and
exchange ideas after years of isolation during the war. Optimism
reigned. John H. Williams, an economic adviser to the New York Fed,
forecast at least five years of prosperity, and another expert lectured
on the vast promise of atomic energy. White-haired now, Peyton presided
over the proceedings like a king at court, insisting as before that
speakers stick to a split-second schedule, upon pain of banishment from
Later that year Peyton organized the Federal Reserve Forum, a training
seminar covering both the ethical and technical aspects of bank
leadership. “The banker today is probably the strongest link in the
defense of private initiative in this country,” Peyton said in his
opening speech, exhorting over 450 cashiers, assistant managers and
other junior bank officers to work toward the welfare of the community,
not just the bottom line. Topics covered in the two-day program included
bank investment policy, advertising, customer relations, farm finance
and lending to veterans.
For the first time ever at a Minneapolis Fed bankers’ event, women
participated in the sessions. Before the war the only women at bankers’
conferences were delegates’ wives and Fed “office girls” who served as
hostesses and guides. At this event, several female cashiers and
assistant cashiers attended in a professional capacity. At future forums
and spring bankers’ conferences, more women—many of whom had entered the
banking field to fill in for men away at war—would break up the sea of
After the war Peyton also instituted “reciprocal trade tours” for
business leaders and Minneapolis Fed officers. Captains of industry
learned about Federal Reserve operations and regulatory duties; Fed
executives learned about new developments in commerce, such as the
latest techniques in tractor manufacture—the subject of a 1947 tour.
The Korean War began in 1950, sending tremors through the Federal
Reserve System. The president of the San Francisco Fed wrote to Peyton
and the chiefs of other inland Feds, asking them to take custody of
Twelfth District securities for the duration of the war. (Peyton
declined, pointing out that in the nuclear age, his bank was just as
vulnerable to attack.) And in Washington, the Board—now chaired by
Thomas McCabe—was worried about the inflationary effect of potential
wartime budget deficits. A rift between the Board and the Treasury over
the Fed’s role in monetary policy had been widening for a couple of
years, and the war brought matters to a head. The Federal Reserve wanted
to restrain credit growth by shrinking reserve balances to raise
interest rates; the Treasury preferred to keep interest rates low to
help finance government debt and stave off postwar depression.
In 1951 the rift was closed in what became known as the Treasury–Federal
Reserve Accord. As an FOMC member in early 1951, Peyton attended a
pivotal meeting with President Harry Truman and urged the Committee to
defend its position, which ultimately prevailed. Alarmed by the
inflation threat and swayed by the arguments of McCabe and Allan Sproul,
president of the New York Fed, the Treasury released the Federal Reserve
from bondage. For the first time in 20 years, the Board and the FOMC
could act independently of the Treasury, making binding portfolio
decisions and controlling interest rates through discount lending and
In the spirit of Fed-Treasury détente, U.S. Treasurer Georgia Neese
Clark visited the Minneapolis Fed in May 1952. Escorted by Peyton on a
tour of the bank, Clark autographed dollar bills for bank employees.
Big shoes to fill
The boss retired the next month at the age of 67. Oliver Powell, his
former lieutenant and successor, wired Peyton from Washington, where he
was serving on the Board: “I realize that I am following a mighty big man.”
Others agreed with Powell’s assessment of the man who had led the
Minneapolis Fed for half of its existence. The Fed “has become one of
the constructive and directing forces in the financial and commercial
life of the Northwest under the long presidency of John Peyton,”
commented the St. Paul Dispatch. “Your leadership and personality even
overshadowed the bank itself,” wrote a Mitchell, S.D., banker in one of
dozens of farewell letters Peyton received from Board members, district
bank presidents, state officials and corporate CEOs.
In retirement Peyton stayed active in public and business affairs for
another 15 years, chairing the World Affairs Center at the University of
Minnesota and going on monetary missions to Austria and Cuba for the
Foreign Operations Administration headed by former Minnesota Gov. Harold
Stassen. He died in 1975.
For all of Peyton’s power and influence, complete control of the
district’s financial affairs eluded him. Throughout his tenure the large
national banks maintained rival correspondent networks in the district,
resisting his efforts to bring more small state banks into the Fed fold.
And Peyton either failed (or declined) to come to grips with an issue
that had long been a thorn in the Federal Reserve’s side: nonpar
banking. For decades “exchange” fees skimmed from checks remitted for
payment by out-of-town banks had been a lucrative source of income for
small nonmember banks, especially in Minnesota and the Dakotas. Under
Peyton the practice continued, possibly because lingering resentment
from his days as Minnesota banking commissioner stymied attempts to
broker a solution. It was left to Hugh Galusha Jr., president of the
Minneapolis Fed in the late 1960s, to finally stamp out nonpar banking
in the district.
But Peyton succeeded spectacularly in establishing the Minneapolis
Fed—and by extension, the Federal Reserve System—as an institution that
works, one that looks after the best interests of banks and their
customers. Through his managerial skill, educational initiatives and
what the Minneapolis Star in 1952 called his “prodigious capacity for
acquaintanceship,” Peyton largely restored public faith in the central
bank that had been lost during the Depression. In an era in which the
Board played second fiddle to the Treasury in monetary policy, he made
the Federal Reserve matter.
Fifty years ago, every banker and businessman in the district knew about
Mr. Peyton’s bank, and what it stood for. His successors at the
Minneapolis Fed would build on that legacy.