A History of the Federal Reserve Bank of Atlanta, 19141989
A History of the Federal Reserve Bank of Atlanta, 19141989
High Winds from Havana
High Winds from Havana
ven the conflict between the Bank’s top executives was overshadowed by a remarkable series of events that entwined the Federal Reserve Bank of Atlanta with the Caribbean island of Cuba. By operating an agency office in Havana in the 1920s, the Bank became embroiled in high adventure and bitter controversy for what is the most colorful chapter in its history.
It began innocently enough. The U.S. dollar had become Cuba’s official currency after the Spanish-American War, but, without a Federal Reserve facility there to put new currency into circulation and remove unfit bills, money deteriorated badly. Several New York and Boston banks, as well as some Canadian and Cuban banks, had offices in Cuba. The $40 million of U.S. currency circulating there was issued by the Federal Reserve Bank of Atlanta through its Jacksonville branch, the closest Federal Reserve office to Cuba. That currency issue was important to the Atlanta Bank because, while it produced no earnings, it would result in greater credit in the System’s gold settlement fund. The resulting gold reserve could be used to back proportionately more currency and increase the Bank’s ability to extend credit and acquire additional earning assets. Beginning in 1920, the Bank considered opening an office in Cuba from which to issue and retire currency and provide Fed services to the U.S. banks operating in Cuba. Wellborn and Harding exchanged letters early in 1922 on how the Atlanta Bank should serve the Caribbean island nation.
Battle for the territory
Atlanta newspapers turned the contest into “a minor Civil War between the southeast and the New England states,” according to Wellborn’s biographer. The press suggested that “eastern magnates” were trying to block the growing economic power of the South. The campaign was on, and the Atlanta Bank mustered its supporters. Atlanta based its case on geographical considerations—that Havana was 602 miles from Jacksonville but 1,875 miles from Boston—and the fact that Atlanta already was furnishing Cuba with currency and had built a larger, more expensive facility in Jacksonville than it otherwise would have needed, in order to meet Cuban demands. A Boston office in Sixth District territory would “inject an undesirable element of competition into the Federal Reserve System,” the Atlanta board said.
Harding (now of Boston) argued, according to Atlanta newspapers, that “Havana was financially nearer to Boston than to Atlanta” and that the U.S. banks operating in Cuba were all based in Boston and New York.
The Board awarded each Bank half a loaf on June 23 by approving Havana offices for both; the Boston Bank would take the cable business while Atlanta retained responsibility for the currency business, thus providing the physical money which could translate the cables into cash. Although Atlanta gained size from providing currency, Boston had the part of the business that produced income. Both Banks opened offices on September 1, 1923, but Atlanta continued to agitate for sole possession of the Cuban franchise.
Once the Sixth District office was opened, employees discovered that 100 percent of the currency was unfit and that some of it was counterfeit. With a Federal Reserve office now in town, however, the quality of the money soon improved, and banks in Cuba were able to reduce their store of vault cash.
A daring rescue . . .
Cuba had a history of banking and currency instability, and many of its citizens could remember two currency repudiations. U.S. currency and the presence of Federal Reserve offices, therefore, were reassuring and stabilizing. The first serious test of that strength came during the week of April 612, 1926. Rumors about a Canadian bank started a bank run that spread until, by the time Havana banks closed on Friday, April 9, they were virtually out of money. All of the $10 million currency reserve held by the Atlanta office had been paid out by that day. Without more currency by Monday, the banking system in Cuba faced collapse.
The Atlanta Fed began to receive a series of wires from its Havana manager that Friday, each requesting a larger shipment of currency. Deputy Governor Joseph L. Campbell in Atlanta wired back, asking for an explanation. When he learned what was happening he alerted Wellborn, who was in New Orleans for a meeting of the board of the Atlanta Bank, which, by tradition, met once a year in New Orleans. Wellborn caught the next train back to Atlanta, and officers in Atlanta worked feverishly throughout Saturday to assemble the $26.5 million in cash and arrange for its transportation to Cuba. Airplanes, while quickest, could not bear the weight of $26.5 million in 1926, so a three-car train to Key West was chartered. Campbell would head the party, taking with him three guards, two currency counters from Atlanta, and the assistant manager of the Jacksonville branch, W.S. McLarin. The train steamed away at 4 p.m., carrying the money in 42 pouches of registered mail. It stopped only for fuel and water and arrived four hours early at about 5 p.m. Sunday. The expedition was met in Key West by the managers of the Atlanta and Boston agency offices and the gunboat “Cuba,” under the command of Cuban postal authorities. Once under way, they were entertained at dinner by Cuban postmaster Jose Montalvo. There was little time for sleep on the l00-mile trip as the Bank officers drew up plans for counting and distributing the money once they arrived in Cuba.
They docked in Havana by 2 a.m., took the money to the Atlanta office, and distributed it to the Havana banks by 7 a.m. When the banks opened for business, they were brimming with currency and the run was beaten. The Americans were hailed as heroes. Pictures of the rescue team, standing alongside the gunboat, were published in a leading Havana newspaper. The tired bankers staggered off to local hotels to sleep, then returned to congratulations in Atlanta.
. . . and its bitter aftermath
The Board sent one of its members—former Memphis business leader George R. James—its general counsel, and its chief bank examiner to Havana to investigate. James brought his findings to Atlanta on May 29. He met first with Wellborn and three of the Bank’s directors in his hotel room on a Saturday afternoon. The investigators concluded that the demeanor of rescue had gone awry and that four members of the Atlanta party, including Deputy Governor Campbell, did become drunk on the boat. Campbell should “be eliminated from the Federal Reserve System,” the report concluded. It also noted “a feeling of jealousy and mutual distrust between the two Federal Reserve Agencies in Havana” and recommended that the Atlanta agency handle the entire operation. However, three members of the Board in Washington had said they would never vote to give Atlanta the whole Havana agency as long as Wellborn, Campbell, and director J.A. McCrary were associated with the Bank, James confided.
These conclusions, formally presented at a called board meeting on Monday, May 31, were denounced angrily, and the Atlanta board demanded a chance to conduct its own investigation. Three directors, led by E.R. Black, were appointed to investigate the matter.
The Atlanta board was particularly offended that James had discussed the situation in detail with Atlanta bankers. They considered a resolution asking Congress to investigate “this serious infraction of good morals and proper behavior on the part of a member of the Federal Reserve Board.” Suspicion hung heavy in the air. In a July 1926 letter Wellborn complained to a Treasury official about “the concerted and extraordinary attack upon the officials of our bank, which has proceeded even to the mortifying extent of having secret service men sent to Atlanta to investigate us. All of this is public talk here.”
The investigation by Black’s committee discovered that the charges originated with W.A. Rich, the manager of the Boston agency in Havana. Campbell’s alleged drinking was the focal point of September hearings in both Washington and Atlanta. He conceded that he had taken two drinks before dinner, but a parade of witnesses testified that he never appeared to be drunk.
The Black committee concluded that Campbell was not drunk and that all employees of the Bank performed well. The Federal Reserve Board concluded otherwise and ordered that Campbell be dismissed. Protesting the “grave injustice” of the “peremptory action of the Federal Reserve Board,” the Atlanta Bank nonetheless bowed to the power of the Board in Washington to terminate Reserve Bank employees. Campbell was allowed to resign, effective November 15.
The Boston office in Cuba was closed on January 1, 1927, and its duties transferred to the Atlanta office. The four-year fight ended in a hollow victory, however. Ironically, 1927 was the last profitable year for the Havana agency. Business declined, and the operation moved deeper and deeper into the red. By 1934 Atlanta was petitioning to close the agency, but the Cuban government and U.S. State Department resisted. A 1935 agreement shared the losses of the Havana operation among all 12 Reserve Banks. Then, on September 30, 1938, the doors closed for good on the Havana agency and on an exotic chapter of the history of the Federal Reserve Bank of Atlanta.