America's Money Machine

Where Two Tides Meet 207
billion. In order to earn on the deposits held, the banks invested the
difference, totalling $19.7 billion, in securities, of which $12.7 billion
were government securities. During approximately the same interval,
also, the Federal Reserve banks had increased their holdings of government
securities by some $1.9 billion.* In short, government was replacing
business as the great user of credit, and the banks had become the
principal suppliers of that credit. Ofthe increase offederal interest bearing
debt from the time Roosevelt took office in 1933 until June 1936,
totalling $12.4 billion, some $1 1 billion had been lent by the banks. The
banking system was becoming primarily an agency for financing the federal
deficit.
At the November 14 meeting ofthe American Bankers Association, the
issue of the government's spending program and its inflationary consequences
came to a head. Both Eccles and Glass had been asked to address
the convention. Eccles agreed on condition that he be the final speaker,
and thus be given the last word. When Glass learned this he sent his
regrets. Eccles was still on hold-over appointment, and in fact Roosevelt
had not yet announced his appointments to the new Board ofGovernors.
Nevertheless, Eccles boldly defended his policies.
Orval W. Adams, the incoming president ofthe Association, had called
upon the bankers to boycott government bonds as a form of pressure to
reduce deficit financing. Eccles answered by recalling how the government
had bailed out the banks following the Crash, and declared that
orderly economic progress required a degree of government intervention.
"The government," he asserted, "must be the compensatory element
in the economy: it must unbalance its budget during deflation and create
surpluses in periods of great business activity." 1
A week later Eccles issued a statement which in effect denied that there
was undue speculation in the stock market, or that an inflation existed.
His Statement was generally interpreted as another Coolidge-like blessing
on the stock market rise, and the New Yorker quipped: "After its
unfortunate experience with pigs [the New Deal pig slaughter program]
the government has decided not to shoot the bulls."2 Roosevelt also
mildly warned Eccles of the dangers of too much optimism.
Meantime, the Federal Reserve Advisory Council on November 21
adopted resolutions recommending Federal Reserve action to reduce
*Figures for year end holdings of government securities by all commercial banks were
not compiled prior to 1936.