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Chicago Fed History: 1940-1964

Suddenly thrust into the Second World War on December 7, 1941, the U.S. girded itself for a major financing effort. One day after the attack on Pearl Harbor, the Board of Governors announced that it was "prepared to use its powers to assure that an ample supply of funds is available at all times for financing the war effort. ..."1 

Financing a War

Liberty Loan Fleet.

Once more, the Chicago Fed found itself responsible for coordinating the Seventh District's bond drives. The Bank's recently appointed president Clifford "Hap" Young was designated chairman of the regional War Finance Committee. Volunteers were recruited, additional quarters rented and new employees hired. Unlike the First World War, the Bank did not encounter any initial lethargy. The "aroused American public," according to the Bank's monthly business review, flocked to buy savings bonds after Pearl Harbor. The first bond drive was a huge success raising $13 billion nationwide — $4 billion more than originally targeted.

It was only a beginning. "Millions more must take part in payroll savings plans and must invest hundreds of millions if we are to do our job," Secretary of the Treasury Henry Morgenthau declared in 1941. "Our plans at the Treasury for financing war are based upon the belief that the American people will want to assume a big share of the cost of the war of their own free will."2

As it turned out, the American people were more than willing to assume a big share of the cost. The U.S. Treasury held eight war loan drives that raised a total of $157 billion. In each drive, the District and the nation as a whole oversubscribed, and the World War I total of $21 billion in Liberty bonds was dwarfed.

Once again, the war effort had a tremendous effect on the Chicago Fed's operations.

Liberty Loan volunteers.

About 1,500 Chicago Fed employees — one-third of the Bank's staff — were involved in war financing activities. The Chicago office alone handled 50 million securities worth $24 billion or $3 billion more than the entire amount raised nationwide in the First World War.

But as the Fed concentrated on the war effort, it assumed a passive role in monetary policy. At the onset of the war, the Board of Governors announced that it would "exert its influence toward maintaining conditions in the United States Government security market that are satisfactory from the standpoint of the Government's requirements." Essentially, this meant that the Federal Reserve pegged interest rates on Treasury securities.

The Federal Reserve Bulletin noted in February 1943 that the "policy of the Treasury and of the Federal Reserve System has been directed toward the stabilization of prices and yields of marketable securities. Investors... know that prices and yields are stabilized and that they will obtain no higher yields by deferring purchases. ..."

To maintain this stability, the Fed pledged to buy Treasury securities at a predetermined rate. Member banks that wished to acquire reserves usually sold Treasury bills to Reserve Banks. In effect, the initiative of member banks determined the amount of reserves in the banking system.

Postwar Growth — Fed Style

By the end of the war, the Fed had grown restive under these restrictions. In 1946 the Federal Reserve discontinued pegging interest rates for short-term securities. In March 1951, after numerous conferences, the Federal Reserve and the Treasury announced a "Full Accord" on future policy. Bond prices and yields were gradually allowed to seek their own level as dictated by overall credit requirements.

At the time of the Treasury Accord, the Federal Reserve had its three monetary policy tools in hand — open market operations, reserve requirements, and the discount rate. Through the 1950s, the Fed generally followed a policy aimed at moderating the severity and duration of cyclical readjustments, a strategy described by Federal Reserve Chairman William McChesney Martin as ''leaning against the wind."

Although much of the responsibility for monetary policy was now centralized with the Board of Governors, the Reserve Banks were responsible for measuring and evaluating the economic trends in their district — acting as observation posts scattered throughout the nation. In the 1940s, Chicago Fed President Young began the practice of holding meetings of the Bank's board of directors outside of Chicago to help obtain a grass-roots "feel" for the Seventh District economy. As part of the same effort, he frequently traveled throughout the Seventh District to meet with farmers, bankers, and business leaders. "The day is past when a banker can sit at his desk and read reports," Young stated. "We have to get out and know what is happening."3 

Buoyed by a general policy of monetary and fiscal stimulus, the U.S. economy grew at a steady clip through most of the 1950s and early 1960s. The Seventh District prospered with the rest of the nation. The economy's vigor is reflected in the Bank's publications, which seemed to overflow with good news:

"In the year 1950, the Seventh Federal Reserve District as well as the nation reached new peak levels of economic activity. ...A listing of the accomplishments of the American economy in 1953 becomes almost a monotonous recitation of new record highs. ...1959 ended on a resounding note of strength. ...Activity in the Seventh Federal Reserve District advanced along with the nation during 1963. ..."

The District's economic growth was fueled by a healthy farm sector and heavy industry such as steel and autos. In its 1955 annual report — entitled "Growth and Prosperity in Five Midwest Cities" — the Bank noted that the District states accounted for 19 percent of the nation's personal income, one-fourth of factory output and nearly one-fourth of farm income.

In step with the growing economy, the Bank's service volumes soared in the 1940s and 1950s, particularly in the check collection area. Nationwide, the number of checks written by consumers rose from 4 billion in 1940 to 13 billion by 1960.4

Not all residents of the Seventh District shared equally in the post-war boom. Housing opportunities for minorities across the United States were restricted by redlining maps, created in the 1930s and intended to show risk areas for federal backing of home ownership programs. The neighborhoods categorized as risky for investment by banks were outlined in red. They were based almost entirely on race, and along with other de facto discriminatory policies in employment, education and other areas, excluded minority residents from the region’s prosperity.

Technology Appears on the Scene

As the largest check processor in the Federal Reserve System, the Bank began to feel increasing pressure. In 1941, the Chicago and Detroit offices together processed 271 million checks. By 1956, the Bank was operating 24 hours a day to clear more than half a billion items annually. Approximately 40 percent of the Bank's employees were engaged in clearing checks. The operation was, according to the Bank's annual report, the "world's largest check-clearing installation."

Complicating the Bank's task was the labor-intensive, time-consuming nature of check clearing. Although proof machines were introduced in 1940s to help automate the process, each item had to be individually checked by an operator. The Federal Reserve System and commercial bankers began to explore the possibility of automating the process in the mid-1950s. The Federal Reserve and the American Bankers Association worked with bankers, check printers, and business machine manufacturers to find an answer. The eventual solution was MICR — magnetic ink character recognition that would enable machines to "read" and automatically process checks.

In 1961, the Chicago Fed and four other Reserve Banks began to test automated check-sorting equipment from different manufacturers. Heading the project at the Chicago Fed were Vice President Harry Schultz and Assistant Vice President Carl Bierbauer. The goal was to automatically process 1,500 checks a minute on each machine, but there were a variety of initial problems. Bierbauer, who went on to become a senior vice president at the Bank, recalls, "There were days and weeks when things didn't go right. It wasn't a case where we just brought in a machine and it worked."

Despite setbacks, the Federal Reserve decided to introduce automated processing at all 12 Reserve Banks. "We had the new system, but in order to do anything about it we had to have checks that were magnetically encoded," Bierbauer said. "It was quite a job to sell to bankers the idea that we were going to have a brand new system and that they should start a program with their local check printers to encode checks. The new system also required check printers and business machine manufacturers to make substantial investments. "We went to them and asked them to believe that we've got something here and it will succeed if you cooperate."

Over a number of years, the MICR system replaced the proof machines. By 1964, 60 percent of the Bank's check volume was sorted on high-speed equipment. "It was hard work," Bierbauer said. "Progress was slow. But if we hadn't developed the system, I don't know how we would have handled all the checks. By the late 1960s we would have been in serious trouble. I'm sure that there were skeptics that thought it couldn't be done, but it's still running today."

A Time of Tranquility and Stability

Cushioned by the strong economy, banks prospered in the 1950s. The era was a pleasant change from the harrowing events of 1933. At that time, bankers' reputations had hit a low point and much of the Depression-era legislation was designed to prevent banks from engaging in "risky" activities. Surveying the scene in late 1933, H. Parker Willis described banking as "a discredited, hampered, and governmentally henpecked...occupation."5 American Banker correspondent U.V. Wilcox wrote in his 1940 book — aptly entitled The Bankers Be Damned — that the "bankers of America are — collectively speaking — in the national doghouse...Bankers are now being trained in the rules of rigid supervision, wearing their stripes with only occasional murmurs of protest."6 

While the stripes of rigid supervision were sometimes confining, they also proved to be fairly comfortable. With low-cost deposits and strong demand for loans, the task of making money with money was relatively simple. It was later characterized as the "3-6-3 era" of banking: pay 3 percent on deposits, charge 6 percent on loans and get to the golf course by 3 p.m.7

The attitudes of the time are reflected in the interviews of District bankers conducted by the Chicago Fed's Bank Relations Department. A 1953 report, for example, noted that the cashier at a bank in a small town in Michigan "could not understand why the other bank in town decided to raise its interest rate from 1 percent to 2 percent on savings deposits...." The cashier added that he had "plenty" of loan applications and that he had to foreclose on only one loan in the past nine years.

"The economic times were such that things were relatively calm," according to James R. Morrison, who served as a banker and a Federal Reserve examiner in the 1950s and 1960s and went on to head the Bank's Supervision and Regulation Department. "Competition is what drives all business and the competition then was very limited. People could bring money to banks or maybe an S&L, and that was about it."

Despite the tranquility of the banking system, the Bank's role in supervision and regulation continued to evolve as it had since 1914. In 1919, the Bank noted that the "growth of the Department of Examinations must of necessity be slow" with national banks under the jurisdiction of the Comptroller of the Currency and state banks under the purview of state banking departments. Field work was largely confined to cooperative examinations with state banking departments and inspections of state banks applying for membership in the Federal Reserve System.

During the bank holiday of 1933 the Bank's Examination Department came to the forefront, playing a crucial role in reviewing and licensing District banks. Working with other regulators and the Reconstruction Finance Corporation, the Chicago Fed helped to reorganize or recapitalize hundreds of District banks.

During the 1940s and the 1950s, the Department continued to examine state member banks in cooperation with state banking authorities. During this period, virtually all state banks were gathered under the federal supervisory umbrella. State member banks were regulated by the Fed, while nonmembers were overseen by the FDIC if they obtained deposit insurance. By the end of the 1950s, banks were supervised by a comprehensive, albeit confusing, federal regulatory structure.

The legislation of the 1930s, combined with favorable economic conditions and the cautious attitudes of bankers and regulators, made bank failures a virtual anachronism. From 1941 to 1964, only one member bank in the Seventh District failed. Throughout the nation, the number of failures was negligible.

As the Bank celebrated its 50th anniversary in 1964, it could look back on 20 years of general economic prosperity and stable banking conditions. There were, however, stirrings of change as interest rates creeped upward and bankers grew restive in the face of increasing competition. One development portending the heightened activity within the banking environment was the emergence of bank holding companies in the early 1950s. In 1956, Congress gave the Federal Reserve authority to oversee bank holding companies, a move that led to a major increase in the Fed's supervisory responsibilities. The pace of change would rapidly accelerate in the coming decades.

1Federal Reserve Bank of Chicago, 1917–1976, Business Conditions, Chicago, Monthly Issues.


3Federal Reserve Bank of Chicago, 1942–1971, The Commentator, Chicago, Various Issues.

4Federal Reserve Bank of Philadelphia, 1960, "How Banking Tames Its Paper Tiger," Business Review, July, pp. 2–11.

5Klebaner, Benjamin J., 1974, Commercial Banking in the United States: A History, Hinsdale, IL: The Dryden Press. 

6American Banker, 1986, 150th Anniversary Commemorative Edition, New York.


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