by Paul R. Spitzzeri
The Federal Reserve has been in the news frequently lately largely because of President Donald Trump’s heavy criticism of the central bank and its chair, Jerome Powell (whose term ends in May, though firings have been threatened since the President began his second term, and Kevin Warsh has been nominated as successor), with much of his ire concerning the unwillingness of the Fed to dramatically cut interest rates, which Trump believes will boost the economy.
In January, grand jury subpoenas were issued through the Department of Justice (Attorney General Pam Bondi was fired yesterday by the President) purportedly presaging criminal indictments concerning the massive overhaul of the Fed headquarters in Washington, D.C. A few weeks ago, a federal judge quashed the subpoena issuances, determining that “the Government has offered no evidence whatsoever that Powell committed any crime other than displeasing the President” and that the move’s “dominant (if not sole) purpose is to harass and pressure Powell either to yield to the President or to resign or to make way for a Fed Chair who will.”
Where this drama will lead is, of course, an important and notable question and so, too, are frequent calls for abolishing the Fed, including among those who argue that its creation was unnecessary and led to frequent inflationary cycles, despite claims otherwise. One advocate for closing the central bank called its work “legalized counterfeiting” and asserted that the best path forward is that, without the Fed, “banks would be on their own; no more lender of last resort or taxpayer bailouts.” This, it is asserted, would mean that “the inflation dragon would be slain” and “the boom-and-bust roller coasted ride leveled.”
In its defense, the Fed avers that it was created “to make the American banking system more stable” after waves of panics involving runs and suspensions (our earliest local example was the failure of the private bank of Temple and Workman in 1876) that took place frequently during the 19th century. Moreover, there was the cited issue of “inelastic currency” as Congressional legislation in the 1860s set the table for currency being national bank-issued notes connected to how many federal bonds held by banks. It was added that the supply was unaffected by demand changes, including when runs occurred.
It was thought that the best solution was to quickly increase the amount of notes to meet liquidity demands from the public, so the Fed was formed with its Federal Reserve note, which is the main form of American currency and issued as stated. Additionally, it was felt that enhancing currency and credit flows so that banks could meet those liquidity needs was an essential function.
Congress passed the founding legislation in late 1913 and the 23 December edition of the Los Angeles Times called the bill “one of the most far-reaching measures relating to finance that has been enacted in many years.” An organizing committee comprised of the secretaries of Agriculture and the Treasury and the Comptroller of the Currency were to get the Fed in operation, while banks had 60 days to apply and a year was allowed for the government to force the closure of any national bank that would not do so.
The paper added that the Fed’s creation “will give the banks a place to quickly convert their assets into cash in time of need, and that will bring out new Federal currency when it is needed and retire it when money becomes ‘cheap.'” Existing structures for reserves from all banks required by law were considered insufficient “in times of sudden financial demands when banks have loaned up to the full limit of their resources,” so, it was observed,
The basic principle of the new law is to get these reserve funds out into circulation when necessary without lessening the safety of any bank, and to provide a place to which local banks may rush in a crisis and get cash for the “prime commercial paper” they hold in their vaults.
This is to be accomplished through a chain of regional reserve banks or “reservoirs of reserves,” in which all banks shall deposit a stated part of their reserves. Under the new system when a financial flurry comes, the banks can take commercial paper, such as notes, drafts and bills of exchange to these “reservoirs,” and secure the use of their own reserves, or if necessary, even the reserve of other banks, by depositing this security.
The new regional banks will receive about one-half of the bank reserves of the country. They in turn will be permitted to loan back to the banks all but 35 per cent of these reserves, so that in case of emergency millions [of dollars] of cash can be brought into circulation quickly. The banks will have to pay for these loans, however, . . . and this charge is expected to prevent the too free use of the reserves held by the regional banks.
The new paper for emergencies and which was to be retired, of course, was the Treasury note printed by that department and issued to the regional reserve banks with guarantees from the government. Also mentioned was the seven-member Federal Reserve board, consisting of the Treasury secretary, Currency Comptroller and five appointed members, of which two were to be bankers, but no one was to have any affiliation or own stock in a bank.
Moreover, up to a dozen cities were to be chosen for branch bank locations as headquarters for districts and member banks were to own stock in the branches equal to 6% of their capital and surplus and the capital of the branches was to be that amount of the total amount of all the institutions within the district. While national banks were required to be members, state banks could only join if reserves were up to the national standard and when they permitted federal examinations.
The branch banks were to be run with a board of nine directors, with three selected by the Federal Reserve board and the rest elected by the branch, while a notable provision was that the branches could buy from members discounted prime commercial paper (meaning those bills of exchange, drafts and notes) whenever the members wanted to turn these into cash. This also involved the ability to work with discounted “acceptances based on the importation or exportation of goods.
With respect to the Treasury notes, they were to have distinctive marks for each district or regional reserve bank and one of three Fed- appointed directors was to be responsible for being the “Federal reserve agent” and have charge of a portion of the notes issued. If a regional bank wanted to pay out more funds than it had in cash, it could place discounted commercial paper with the agent in exchange for Treasury notes, but there had to be a setting aside in gold of 40% of the value, that being protection for the issue along with government guarantees, so that redemption in gold could be had through the federal treasury.
In addition to the 40% gold reserve, the regional banks were to keep general reserves of 35% and a tax was imposed if the gold reserve dropped below 40% and that would affect the rates member banks were charged on rediscounts. The Fed board had the power to control the system’s operations, including requiring one branch to loan to another in need, suspend restrictions regarding regional branch reserves and remove the latter’s directors if needed. Lastly, the Times observed that,
While the banks retain control of the boards of the regional reserve banks, the connection with the Federal reserve board is only through an advisory council, made up of one representative from each Federal reserve district.
There was local interest in having a branch of the Fed established in Los Angeles, but a committee formed to look into the possibility, determined, according to the Times of four days later, that that 6% requirement for the total capital and surplus of member banks meant that there had to be $66,666,000.
The committee stated that, not only was there not enough of these funds in eligible institutions in southern California, but there wasn’t enough for those applicable in Arizona or Nevada either. It continued that there were many state banks not willing to participate “until they are assured of the absolute success of the new system.” Given this, it was all but certain that the only reserve branch bank was to be in San Francisco.
The continued meteoric growth of the Angel City and environs, though, was such that, by the end of the decade, there was enough money to satisfy the 6% requirement. Consequently, reported the Los Angeles Express of 2 January 1920, “the Los Angeles branch of the federal reserve bank . . . [which] comprises the nine Southern California counties and that part of Arizona which is in the 12th reserve district and most readily accessible to Los Angeles” opened that day in offices taking up the second floor of the Washington Building, which still stands at the southeast corner of Spring and 3rd streets and which houses the city’s office of the governor.
The following day’s Times published a photo of officials and staff posed at the counter in the lobby and another of about 30 of the personnel. The paper commented that the institution opened “without fuss or feathers” and “almost without a hitch” as advance training in San Francisco enabled for the smooth process by which the 12,000 square feet of space was occupied. It added that the opening “definitely gives Los Angeles a position in the financial world to which her growing importance entitles her.”
The local branch, which had some fifty employees, but was expected to have double that number as business grew with the city’s continued development, began with deposits of $25 million. It was commented, however, that “according to the latest statement of assets issued by the Federal Reserve Bank of San Francisco . . . member banks of Southern California [and portions of Arizona including Phoenix and Tucson] will have assets available to them exceeding $423,000,000.” Among the directors of the new institution were Isaac B. Newton (he must have been a man of some gravity), later chair of the San Francisco-based district and the well-known bankers Stoddard Jess, Henry M. Robinson and John F. Sartori.
With another decade of remarkable growth in the Angel City, a movement arose for a purpose-built building with ample room for the expansion of the Los Angeles branch. The Express of 19 May 1928 reported that a bill from California Senator Samuel M. Shortridge, who sister Clara Shortridge Foltz was a prominent woman legal figure in Los Angeles, to allocate $800,000 for a structure received the required support from that chamber’s banking committee. A site at the northwest corner of Olive and Tenth streets, the latter soon renamed Olympic Boulevard for the 1932 summer games, was purchased for the edifice.
Nine days later, however, the Times noted that, although the legislation was passed by the Senate, it was likely to die during the current session “because of the refusal of Representative [Louis] McFadden of Pennsylvania, chairman of the House Banking and Currency Committee, to call his committee together to reconsider the project.” Apparently, Democrats wanted more financial and other information in order to justify the edifice and Representative Joe Crail of Los Angeles rushed to obtain the material only to find that McFadden, for some reason, did not want to call for the committee to meet again.
It wasn’t until the start of 1929 that, observed the Hollywood Citizen-News of the 9th, that McFadden’s committee (which he chaired from 1920-1931) approved a joint resolution of both houses of Congress for the $800,000 appropriation and did so without any discussion. On the 21st, the Express relayed the news that the full House voted to authorize the funds and sent the bill to President Calvin Coolidge, who was in the last weeks of his administration before Herbert Hoover succeeded him, for his signature.
The following day’s Times, in its coverage, added that,
Debate in the House of Representatives developed the fact that Los Angeles is the largest branch-bank city in the country and the largest city not having its own Federal Reserve building; also that the Los Angeles bank handles more business than any other branch bank in the United States.
The new structure was to increase space by about double “and will be constructed on a plan that will permit [the] addition of three extra stories or a wing if still more space is needed in the future.” The article concluded with the remark that some $400,000 in furnishings, including “the latest type of vaults,” were to expanded out of existing monies that the Fed had for such purposes.
On the last day of the month, observed the Express, the outgoing chief executive signed the branch bank building bill and the following day the Times noted that the Los Angeles Chamber of Commerce sent its expression of thanks to Rep. Crail, communicating to him that, “this is a fine development for Los Angeles and reflects real credit on your ability.”
The Times, in its number on the final day of February, informed readers that, “the Federal Reserve Bank will commence operations in the near future on a permanent home” and added that “estimates of the total cost including vaults, equipment, furniture and fixtures, have been made and, together with the purchase price of the property, an investment in the neighborhood of $2,000,000 will be involved.”
Architectural plans were initiated in March 1928 by the father-and-son team of John and Donald Parkinson, responsible for so many prominent buildings in the city and they “call for a five-story and double basement steel frame Class ‘A’ Building,” allowing for the possible enlargement as noted above. The paper remarked that “the architectural design of the building is to be ‘modernized classic,'” or Classical Moderne with aspects of Zigzag Moderne incorporated.
As work progressed through the spring, the structure was prominent among those that were revealed to show that construction in downtown Los Angeles was at a stronger pace than in 1928 and this approach continued in October just before the crash of the stock market in New York City that ushered in the Great Depression.
There were, however, some public criticisms of the project, including one in the Express of 29 March which stated that Senator Shortridge, prodded by labor groups, “lodged a protest that American window-making firms were being ignored” in favor of British ones, though John Parkinson told the paper he was unaware of this.
On the final day in April, the Times noted that both California senators and two representatives from Los Angeles County heard from unions about the displeasure of the construction contract given to Detroit firm, P.J. Walker Company in the absence of competitive bids, while it was charged that Walker was “open shop,” or non-union, and cut wages for its workers. Senator Johnson indicated he would discuss the matter with the Fed, but the contract remained in place.
Jackson A. Graves, a lawyer and banker of over a half-century in Los Angeles, discussed the edifice in a “Some Observations” article in the Times of 1 May, in which he alleged that the San Francisco directors of the Fed did not discuss with Angel City banks about its plans, even though Newton was a local. Graves was bothered by the fact that the structure was more than a mile from the new City Hall and caustically commented,
In the name of common sense, why should this building not have been located near the other public buildings of the city and county? Had Los Angeles been consulted, a location near the Civic Center would have been unanimously chosen. Either the Natick House site or the Nadeau Hotel site would have been an admirable place for this bank building and would have cost less, size considered, than the Tenth-and-Olive-streets location, which is to be decreased in size by the widening of Tenth street. Queer things, past the understanding of ordinary mortals, happen in this world of ours.
Still, work pressed on and mention was made in the Times at the end of June regarding the massive amount of steel, some 140,000 pounds, that were conveyed using the “Granddaddy of All Gondolas” for freight by rail and the paper added that “because of the unusual clearance required by the big car, it was preceded over its route west by special railroad instructions and signals” before the material was dropped for fabrication at the Llewellyn plant of the Consolidated Steel Corporation.
In its 6 October edition, the Times informed readers that “work is now progressing on facing the exterior” of the building, slated to cost $1.25 million and which “will be one of the most massive of its size in the city.” That 1,600 tons of steel was said to be equivalent to that used in edifices double the height.
While a target date for completion was the first of 1930, the bank building did not open until 26 April. In advance of this, the Express of the first day of the new year remarked that “particular attention has been given to interior lighting” as “the most modern devices and methods” were employed, along with the heavy use of Venetian blinds “and direct glare eliminated both of natural sun rays and interior artificial lighting.”
There were two basement levels, with one comprising the boilers, carpenter’s shop, central tube system machinery and storage, while the other contained the coin and currency vault, receiving, tellers’ spaces, the mail room and security quarters. The main floor included offices and meeting rooms for officers and directors, as well as the collection and discount departments. A mezzanine housed the telephone operators, the supply clerk and the building mechanic.
The chief clerk, outmail section, the telegraph office, the currency sorting and the exchange area were on the second floor and a special elevator linked this space with the basement for safety and security. The third level housed accounting and filing and the Fed’s examiner’s office, while the fourth floor contained the transit department. Lastly, the top floor included the cafeteria, a doctor’s office and the restrooms.
The 30 April issue of the Los Angeles Record included a review of the edifice by Merle Armitage, a remarkable figure who came to the Angel City in 1923 and, the following year, co-founded the Los Angeles Grand Opera Association and managed it until 1930, while for much of the Great Depression years he ran the Philharmonic (Temple) Auditorium. He also collected art, was an editorial and art director for Look magazine, was a notable book designer and wrote volumes on composers George Gershwin and Igor Stravinsky.
Armitage felt that the bank structure was “in many respects the most distinguished building in Los Angeles” and was “a monument to straightforward design, beauty of mass, restraint in decoration and honesty in materials,” thanks to the collaboration of the Parkinsons with decorator Herman Sachs (born Segall in Romania), who was also a painter and whose work at Union Station is remarkable, as well as for Bullock’s Wilshire (now the Southwestern Law School), City Hall and the Title Insurance and Trust Company Building.
The critic added that “Sachs is a type of cosmopolitan who will help to enrich America” and “further modern practices of the machine age” but not impose European concepts in so doing. The decorator’s “rich background and his undeniably fine esthetic judgment” was such that the work of the new age “will leave a heritage of beauty unknown to any other period.” Otherwise, Armitage pronounced, “in [the] wrong hands, it will bring hideous ugliness into our civilization,” but Sachs “will help to swing the scales.”
The “really noble work” included “very chaste bronze grill work,” the bronze entrance doors, the ceiling of acoustic metal divided by plaster in the main bank room, accounted “one of the finest of its kind in Los Angeles or in any other city,” the bronze lighting fixtures and more. Armitage adjudged that “the whole . . . is an honest use of honest materials without over-decoration and over-elaboration,” while “all non-essentials, all meaningless designs are swept away and the real beauty of fine useful things comes through.”
The structure embodied “good architecture, good decoration and good judgment” and “stands as a rebuke to ostentatious, meaningless, over-decorated buildings of which there are far too many in Los Angeles.” Armitage prophesied “the Federal Reserve bank will be good taste and good style 100 years from now.” While a new bank edifice was completed in 1987, the original structure was converted, as so often the case with downtown business buildings, to what are called the Reserve Lofts.
To close, it is interesting to see this comment in the Los Angeles Illustrated Daily News from 25 April 1930, the day before the bank opening, as Financial Editor J.W. Ward lamented the continued mania for stock speculation, even after the market crash of the prior fall should have taught a hard lesson, and he added,
The Federal Reserve bank has been subjected to severe criticism for the futile efforts it made last year to stem the rising tide of speculation, and it is probably that it will not again venture to warn the public against excesses in view of the reception its advice was accorded on the previous occasion.
Whether the Federal Reserve should remain in existence is too broad a question for me to conceive or comment. At the very least, it represents a central banking model that has been widely adopted around the world, and regulating the operations of private commercial banks does seem essential.
However, I am not entirely convinced of its effectiveness in preventing financial crises. Over the 113 years since its establishment, we have experienced one major crisis after another – from the Great Depression, to the oil-triggered crises of the 1970s, to the savings and loan crisis of the 1980s, the dot-com bubble around 2000, the housing bust of 2008, and most recently, the COVID-induced financial shock.
As for its district branches, I do believe they have become increasingly redundant. Perhaps in the 20th century, the central office relied more heavily on them to carry out policies, oversee local operations, gather information, and provide liquidity.
However, in today’s era of real-time, streamlined digital information, reliance on regional branches should be significantly reduced – or even eliminated – provided that their information systems become more effective and intelligent than those currently demonstrated by agencies such as IRS, Social Security Administration, the DMV, and even many large banks.