If the economic shocks of World War I brought business and elements of prosperity to the Atlanta Fed, the postwar consequences brought worries and one dramatic test of the Bank's ability to break the boom-and-bust cycles that had played havoc with the region's agrarian economy. The disputes between Wellborn and McCord had been settled just in time to leave Wellborn completely in control when the "bubble" of postwar inflation sent prices soaring and then crashing. Wellborn's daring leadership guided the Bank to one of its finest hours.
Wholesale prices more than doubled between 1913 and 1920, and retail prices rose almost daily once wartime restraints were relaxed. An overheated economy appeared to be getting out of control. Cotton, which had dropped from 12.5 cents to 7.3 cents a pound in 1914 when war broke out, had climbed to just over 39 cents by the end of 1919. This stimulation of the cotton economy brought prosperity and euphoria that even the spread of the boll weevil could not dampen. Once the war ended, southerners—like Americans generally—were ready to spend some of that money they had been making. Fed leaders grew gravely concerned about the feverish demand that prevailed. As Wellborn described it, "A short while after the armistice the public which had denied itself many luxuries during the war, turned around," giving rise to a period of "imprudent and unusual extravagance. Money was easily made, and was therefore easily spent. Those who had prospered on war contracts felt no restraint, and bought to the fullest extent . . . and naturally prices rose to unprecedented figures."
Despite Fed concerns, the Treasury Department continued to borrow actively throughout much of 1919 and resisted the higher interest rates that might have slowed the economy. Immobilized by Treasury demands, the Board in Washington recommended "direct action," a euphemism for preaching to bankers and consumers about the proper uses of credit. Wellborn, not only a good soldier but also a sincere critic of overconsumption, carried this message, focusing on that most conspicuous target of the buying binge, the pleasure automobile. In New Orleans, he insisted that bank credit should not be used to finance pleasure automobiles, which provoked a local car dealer to respond in a New Orleans newspaper: "If you want to take your family out for a recreation, take the street car. If cars do not run to the scenery you would like to see, stay at home. Tell Mr. Wellborn where it is and he will ride out in his automobile and come back and tell you all about it."
The bubble was swelling dangerously. By May 1920 the Atlanta board issued a rare statement to the press which said, "There is a great deal of financial strain throughout the country. . . . It would be an error. . . to fail to admit the seriousness of the situation. The condition is due to inflation, high prices, lack of production, extravagance and congestion of traffic." It urged personal economy as the key to correcting the situation.
The cotton growers find a friend
The bubble burst spectacularly in the summer of 1920, when cotton dropped from 40 cents a pound to 9 cents in just 60 days. Other commodities followed the same pattern. Cotton growers were caught with their crops in the fields and their market wiped out. It was for just such situations that the Federal Reserve Banks had been created, Wellborn believed, but he never had expected to confront the problem in such proportions. He did not hesitate, however, to put the full resources of the Bank behind the cotton crop of the South and the farmers and bankers who would fail if the crop did. Loans to member banks shot up from an already substantial $88 million earlier in the year to more than $182 million by November. In fact, Wellborn went well beyond the financial resources of the Atlanta Fed in his effort to supply credit.
The Federal Reserve System linked District Banks so that surpluses in one District could be used to meet unusual demand in another, and Wellborn now was drawing on the resources of the Federal Reserve Bank of Cleveland, which still had ample reserves against which it could advance funds by rediscounting. It was a daring strategy—or at least a sound strategy carried to such daring extremes that it brought protests from the Cleveland Bank and from Governor Harding of the Federal Reserve Board, with whom Wellborn had long discussed such an emergency in the cotton economy. The Board, Harding wrote, "agrees with the Cleveland Bank that it ought not to be required to lend an amount over $35,000,000 to a Federal Reserve Bank having a paid-in capital and surplus of only $11,000,000."
Pointing out the plight of cotton growers and farmers in general, Wellborn shot back, "This bank has conceived its plain purpose and duty to stand between the country and financial disaster. . . . [I]f this bank had failed to stand as a buffer. . . it would not only have failed in its duty, but it would have permitted a situation to develop which would have seriously affected all other sections of the country and every other reserve bank. . . . If the Cleveland Bank is 'restless' on account of the credit which it has in the past, and must almost of necessity in the near future (on account of its high reserve position) extend to Atlanta, the Cleveland Bank simply takes a rather narrow and personal view of the situation."
Wellborn did not flinch at Harding's hint that the Board in Washington might reveal the overextended position of the Atlanta Bank. "I do not question that your Board has a legal right to do this; but . . . I hardly think your Board would care to assume such a fearful risk. The mere publication of our actual reserve position might possibly have the effect of causing the failure of numerous banks—not only in this District, but in others as well—and bring on a panic of great magnitude."
When Harding continued to criticize the "too lenient" lending policy of the Atlanta Fed, an unrepentant Wellborn replied on December 23: "Your Board, it seems to me, is laboring under an error in thinking that it is our policy 'to carry loans indefinitely for member banks until cotton reaches a price that is satisfactory to the producers'. . . . [O]ur policy is merely to give them reasonable time to find a market in these disturbed times, in order to keep them from 'dumping' their products on the market at one time. To do otherwise at this critical time would force a disaster upon our agricultural and business interests that might perhaps have the effect of bringing on a state of panic and bankruptcy."
An advertisement for a Metter, Georgia, bank heralds its membership in the Federal Reserve System.
The sweet smell of success
Wellborn's strategy worked. The price of cotton rebounded to 20 cents a pound by September 1921, and the Atlanta Bank retired its borrowings from Cleveland by April of that year. The crisis passed. The prestige of both Wellborn and the Bank increased greatly as a result of such strong support for District enterprises. There was now a growing, grateful group of member banks, convinced of the value of membership. Nationwide, there were about 30,000 commercial banks in 1921, one-third of which were members. Of the 505 failures that year, though, 71, or only 14 percent, were member banks. Thus, in the eyes of many, the System was vindicated.
One member banker, according to Wellborn's biographer, Linton C. Hopkins, gave a vivid account of the crash in cotton prices: "It was plain, psychological panic," recalled J.R. Morgan, cashier of the Bank of Union Springs, Alabama. "All we country bankers could do was endorse notes and send them to the Federal Reserve. Governor Wellborn met every legitimate demand. . . . For its duration it was the worst we ever had, though it only lasted six to eight months. Governor Wellborn broke it by throwing the whole resources of the Federal Reserve behind the banks of the south."
Perhaps even sweeter were the 1922 comments of sometime adversary D.W. Crissinger, then Comptroller of the Currency and soon to be governor of the Federal Reserve Board. "We were inclined at first to disagree with Governor M.B. Wellborn of the Atlanta bank, in some of the policies which he pursued, but . . . he was right and we—the members of the federal reserve board—were wrong."
Cotton speculators made and lost fortunes in the crisis, and Congress held hearings to investigate charges that Federal Reserve actions had aided certain speculators. Although the Fed was absolved of blame, "Cotton Tom" Heflin, the Alabama senator, conceived a bitter hatred of W.P.G. Harding at this time. Max Wellborn and the Atlanta Fed, however, were almost universally admired. "Cotton Ed" Smith of South Carolina rushed up to shake hands with Wellborn after a hearing in Washington and to say that if everyone had acted as Wellborn did, there would have been no hearings to hold. It was a rare demonstration of the ability of a Reserve Bank to rescue the economy of its District.
Some crises were smaller in scope, such as one recorded by Stanley Williams, an early employee of the Bank: "Back in the early days of the Federal Reserve Bank we had several petty thefts; one I remember very well was the office boy they had in the money room who trucked money around. At that time the soiled money was cut in half so one half could be shipped, the other half was held pending receipt of the first shipment. Washington notified the Federal Reserve Bank that some of the shipments were short a few dollars, and the office boy admitted taking the money. Mr. Adelson got excited and rushed in and asked Mr. Wellborn about calling the police to come and get the boy. Mr. Wellbom said No, he would handle the matter himself. He called the boy in his office and talked with him for a long time. The boy knew the money was to be destroyed and he told Mr. Wellborn how he and his widowed mother had to exist on the little salary he was paid. Mr. Wellborn came out of his office and told Mr. Adelson they should call the police to come get the one that was responsible for putting the boy in the money department. Mr. Wellbom gave the boy one month's salary and told him it would be better for him to quit the bank and get another job and nothing more was done about it except getting the money department told off."
A power struggle ends
Tensions between Wellborn and McCord continued into the 1920s. In January 1924 both men were called to Washington to air their differences. In that meeting, according to McCord, he was told that the Board had been informed that "lack of accord between [him and Wellborn] was tending to militate against harmonious functioning of the offices of Governor and of Federal Reserve Agent. . . ." McCord left that meeting thinking he had convinced the Board that his own positions were reasonable ones.
A group of early directors, ca. 1920 (l to r): J.A. McCrary; W.H. Kettig; J.A. McCord; Leon C. Simon, a New Orleans branch director; and M.B. Wellborn.
But the following October, McCord was notified that he would not be reappointed. The "harmonious and efficient management of the Atlanta Bank" made it necessary for McCord to be dismissed, the letter explained. Stung by the result of what he concluded was "some unfair representation" of his role, the 67-year-old McCord wrote a long letter defending his reputation and recounting all of his disputes with Wellborn during their 10 years at the Bank. McCord's account generally is supported by Bell, the Bank's cashier, who in 1941 recalled Wellborn's "tactics of humiliation and disregard of Mr. McCord's official prerogatives." After an extended power struggle, Wellborn had won.
The reverses of the Bank's unfortunate first governor were not over when he was dismissed in 1924. Having been required by the Federal Reserve Act to dispose of his bank stock when he became governor and barred from seeking reemployment in a commercial bank, McCord lost his life savings in the real estate collapse of the late 1920s. The Bank had no pension plan for its first officers, and by 1941 McCord was living in poverty. Friends intervened to get him a sinecure as the Bank's first historian, at a stipend of $100 per month. He had begun the history before his death in 1943, for the document is cited in an article written for the Bank's 50th anniversary in 1964.