At Mr. Mellon''s

At Mr. Mellon's

A Saturday afternoon tennis party was in full swing at Banker Harvey Dow Gibson's home near the Creek Club in Locust Valley, L. I. Mr. Gibson was wanted on the telephone. When he returned to his guests he looked thoughtful. It had been Secretary Mellon, asking Banker Gibson to be in Washington the next day.

Secretary Mellon had been making other calls and on Sunday afternoon a powerful group of New York bankers assembled in Mr. Mellon's apartment at No. 1785 Massachusetts Ave. Governor George Leslie Harrison of the New York Federal

Reserve Bank was there. So were Thomas William Lamont (J. P. Morgan & Co.), Albert Henry Wiggin (Chase National), William C. Potter (Guaranty Trust), Charles Edwin Mitchell (National City), George Whitney (J. P. Morgan & Co.). The rich paintings (Rubens, Rembrandt, Reynolds) on the walls may have held their attention for a moment, but an air of tension and expectancy forbade anything except the business on hand. The bankers waited for one man who was speeding toward them from his camp on the Rapidan. President Hoover, discarding all precedent, entered the apartment shortly after his return to Washington. He soon laid before them a Hoover Super Plan to restore business confidence in the U. S.

Two steps were planned: 1) The quick creation of a privately operated company (National Credit Corporation) which would restore faith in the banks. 2) The passage of new laws through the next Congress which would prevent such a crisis in future.

The first move would stop people from withdrawing money from banks, stop banks from selling bonds to raise cash and so bring the bond market out of chaos. The second move would unlimber the Federal Reserve System so that it could itself perform the work undertaken by National Credit Corp.

Prelude. In early September the President began to be disturbed about U. S. banks. Comptroller of the Currency John William Pole reported a huge increase in the amount of currency in circulation.

Coming at a time of Depression, with little fall activity, such a thing could have only one meaning: hoarding of gold by the citizenry and by the banks. Federal Reserve figures for the week ended Oct. 7 showed $5,431,000,000 in circulation. That was an increase of $185,000,000 for the week, $944,000,000 for the year. Authorities said somewhere between $800,000,000 and $1,000,000,000 were being hoarded in socks, boxes, vaults and in banks.

The U. S. had lost $485,000,000 in gold since a few days before England dropped the gold standard. Some $525,000,000 had left through shipment or "earmarking," against imports of $40,000,000. Squarely facing the Comptroller was another mighty figure: over $1,000,000,000 tied up in closed banks. Gold exports could be stopped by raising the rediscount rate, the money in suspended banks might eventually be retrieved in part but hoarding by the people was a psychological matter, a mob spirit, dangerous, unreasoning.

Why Did They Hoard? The average man withdraws his money from a bank in gold or gold notes ("Seepage of deposits," President Hoover called it) for just one reason: he is afraid the bank will fail and his money will be lost.

The rich man hoards because in times of a currency panic the machinery of trade stops, and he can pick up bargains in stocks, bonds, real estate from panic-ridden unfortunates who will sell anything to get the precious metal.

Such obvious loss of confidence literally forces banks to hoard also. Fearing a run by its doubting depositors it must be fortified by an abnormally large amount of cash in its vaults. To do so they take their eligible paper to the Federal Reserve Bank in their district, rediscount it. If pressed, they must sell their secondary reserve of bonds and stocks in the open market, probably at a loss. Cash on hand in banks is sterile, earning nothing, doing good to no one, a tribute to fear.

Philadelphia. Bank failures began in the U. S. on a big scale in the fall of 1930, in agricultural sections which had suffered from low commodity prices and drought. Then came the dramatic and shocking collapse of Bank of United States in New York City (TIME, Dec. 22), tying up some $160,000,000. Warning had come in November with the collapse of Caldwell & Co., followed by a string of banks in Tennessee and Kentucky. Failures became more common, whole areas were affected. In August every large bank but one was closed in Toledo and wholesale failures followed throughout Ohio. As September wore on all banking eyes turned to Philadelphia. The situation there had been delicate ever since last December when the $45,000,000-in-deposits Bankers Trust closed its doors. By last week 39 other Philadelphia banks had failed, some $105,000,000 of the peoples' money had disappeared.

The rising tide of fear provoked runs on such old, conservative institutions as Philadelphia Savings Bank, Germantown Savings Bank. Every institution in the city was calling in its resources as fast as possible. A committee of 22 prominent men published an appeal in the newspapers pleading with the people to have faith in their banks. Among the appeal's signers were: Thomas Sovereign Gates, president of University of Pennsylvania; Dennis Cardinal Dougherty; Samuel Matthews Vauclain of Baldwin Locomotive; General William Wallace Atterbury of Pennsylvania R. R.; Cyrus Herman Kotzschmar Curtis; Mayor Harry Mackey.

On the same afternoon that Secretary Mellon was on the wire to New York the Philadelphia Clearing House denounced "pernicious hoarding," issued instructions to its members not to permit withdrawal of time deposits except on 30-days notice. All savings banks did the same. Philadelphia's plight was the immediate cause for the conference at Secretary Mellon's.

National Credit Corp, Not till late Tuesday did Wall Street hear of the impending "Little Congress" meeting that night (see p. 9). The President needed assurance of political as well as banking co-operation before he told the country his plan. When he secured this shortly after midnight Tuesday, the National Credit Corp. had assumed definite form and the public was appraised of a 500-million-dollar fund (later enlarged to a billion) to function as a stepping stone between the slough of the ordinary bank and the lofty security of the Federal Reserve. National Credit Corp. was quickly formed under the laws of Delaware with a capital structure of twelve shares of $100 par value stock. Twelve men were to direct it, one from each of the Federal Reserve Districts. Each would buy one share of the common stock, have one vote. Then the Corporation was authorized to issue up to $1,000,000,000 of debentures at par, and all banks in the country were requested to subscribe to the debentures in an amount up to 2 percent of their deposits. Before Wednesday morning dawned, New York banks, who hold $7,500,000.000 of the country's total $51,000,000,000 bank deposits, had spoken boldly through their Clearing House. They would take, they said, $150,000,000 of the debentures.

Chicago, the next biggest banking centre, was not heard from until Saturday. When Chicago's adherence was announced, Mortimer Norton Buckner, newly made president of the New York Clearing House and Chairman of the Organizing Committee of National Credit Corp. said the initial amount pledged was around $840,000,000.

Thawing Out. With this money in its till, National Credit Corp. will lend money to banks on securities which are not acceptable for loans at the Federal Reserve. Instead of having to sell these securities in the demoralized bond and stock market, banks can turn to National Credit Corp. and get a fair loan on them, thus unthawing frozen assets.

Reception. The plan's success depended on country-wide acceptance; small outlying banks had to be brought in as well as the huge city institutions. With this in mind the hoorahs of Wall Street were carefully hushed so that small-towners could be heard giving thanks, cheering.

Abroad the reaction was less favorable. In England, .Lombard Streeters referred to the plan as "a damp squib." Sir Walter Layton, Bank of England's representative on the Wiggin Committee, said it was "controlled inflation." In Paris the criticism was sharper, the eventual reaction on the Bourse violent. The third bank failure in Paris in ten days was announced, that of Banque Syndicale.

Unlimbering. The second phase of President Hoover's plan--unlimbering the Federal Reserve System--called for another fund, of from $500,000,000 to $1,000,000,000 of Government money. This would resolve within the Reserve System, assisting closed banks to repay their depositors. Farmers were handed a sprig of hope in the suggestion that the Government be authorized to buy more stock in the Federal Land Banks.

Lastly, the President said it was his purpose to discuss with Premier Laval of France "the question of such further arrangements as are imperative during the period of the depression in respect to intergovernmental debts."

A. B. A. While these stirring developments riveted all attention on Washington, the American Bankers Association was holding its 57th annual convention in Atlantic City. The bankers met in two open sessions, nominated new officers, drew up some resolutions, elected the new officers (Harry J. Haas of First National Bank, Philadelphia, president) and quietly returned to their homes to find out what had happened.

This file is automatically generated by a robot program, so reader's discretion is required.