Sunday, June 2, 2013

Jun 2 (1913) Which is worse, financial control of politics, or political control of finance?

Shows two arms emerging from the clouds and reaching across the landscape in opposite directions, on the right is the hand of the arm that extends from the left, it is labeled "Politics" and is about to grab hold of a building labeled "The Banks", and on the left, is the hand of the arm that extends from the right, it is labeled "The Banks" and is using its thumb to squash the U.S. Capitol labeled "Politics." First printed in Puck in Aug 1913.

On this day in 1913, the New York Tribune reports only a handfull of the 559 active government depository banks across the nation will refuse to pay treasury secretary McAdoo's proposed 2% interest charge on government deposits.

There was long a tradition of the US treasury parking its surplus deposits in banks across the country. These banks were called "government depositories," and they displayed the designation in their windows as a sign of financial solidity. To become a government depository, banks were selected by the secretary himself.  As such, the process was highly political, and often involved favors and campaign contributions.

The federal government was already charging 2% interest on deposits held at the 900 inactive depositories--those banks that  held just $1000 of government funds for the sole purpose of obtaining the "government depository" designation. Active banks tended to be the large and influential.  Though they carried higher government balances, they received them free of charge.

Secretary McAdoo announced the change in April 1913, in an effort to raise additional revenue and increase lending activity (he also distributed an additional $10 million in deposits).  Banks were furious, but ultimately only about 1% surrendered their government depository status.  Secretary McAdoo said:

"various banks in different parts of the country in expressing the willingness to pay the interest charge strongly commend the wisdom and fairness of the administrations new policy, although it necessarily reduces their profits."

Image is from the Library of Congress with the caption: Which is worse, financial control of politics, or political control of finance?

Further Reading

A book about politics and finance from the Progressive era: Progressives at War: William G. McAdoo and Newton D. Baker, 1863-1941, available at Amazon

William Gibbs McAdoo wikipedia entry

New York Tribune article

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Flannery O'Connor

You shall know the truth and the truth shall make you odd.