The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.
EMPLOYMENT, GROWTH, AND PRICE LEVELS
HEARINGS
BEFORE THE
JOINT ECONOMIC COMMITTEE
CONGEESS OF THE UNITED STATES
EIGHTY-SIXTH CONGRESS
FIRST SESSION
PURSUANT TO
S. Con. Res. 13
AUGUST 5, 6, AND 7, 1950
PART 6B—THE GOVERNMENT’S MANAGEMENT OF ITS
MONETARY, FISCAL, AND DEBT OPERATIONS
Printed for the use of the Joint Economic Committee
UNITED STATES
GOVERNMENT PRINTING OFFICE
38563
W A S H IN G T O N : 1959
For sale by the Superintendent of Documents, U .S. Government Printing Office
Washington 25, D .C . - Price 75 cents
JOINT ECONOMIC COMMITTEE
(Created pursuant to sec. 5(a) of Public Law 304, 79th Cong.)
P A U L H . D O U G L A S , Illinois, Chairman
W R I G H T P A T M A N , Texas, Vice Chairman
SENATE
H O U SE OF R E P R E S E N T A T IV E S
J O H N S P A R K M A N , Alabama
J. W I L L I A M F U L B R I G H T , Arkansas
JO S E P H C. O ’ M A H O N E Y , W yom ing
J O H N F. K E N N E D Y , Massachusetts
P R E S C O T T B U S H , Connecticut
J O H N M A R S H A L L B U T L E R , Maryland
J A C O B K . J A V IT S , New York
Study
of
R IC H A R D B O L L I N G , Missouri
H A L E B O G G S , Louisiana
H E N R Y S. R E U S S , Wisconsin
F R A N K M . C O F F I N , Maine
T H O M A S B . C U R T I S , Missouri
C L A R E N C E E . K I L B U R N , New York
W I L L I A M B . W I D N A L L , New Jersey
E m ploym ent, Grow th, and
P r ic e L e v e l s
(Pursuant to S. Con. Res. 13, 86th Cong., 1st sess.)
O tto E c k s t e in , Technical Director
J o h n W . L e h m a n , Administrative Officer
Ja m e s W . K
II
n ow les,
Special Economic Counsel
CONTENTS
WITNESSES IN ORDER OF APPEARANCE
Page.
Robert G. Rouse, vice president, Federal Reserve Bank of New York, and
manager, Open Market Account; accompanied by John J. Larkin and
Spencer S. Marsh, Jr., assistant vice presidents, Federal Reserve Bank
of New York______________________________________________________. . . . . .
Girard L. Spencer, partner, Salomon Bros. & Hutzler, New York, N .Y .;
accompanied by John Brown, office manager and senior cashier________
Murray F. Brown, executive vice president, C. F. Childs & Co., New
York; accompanied by Timothy Cantwell, vice president, trading
operations; Robert Van Cleave, vice president for research; and Charles
Giamondi, assistant treasurer and cashier__ ____ _______________________
Alfred H. Hauser, vice president in charge of investment division, Chemical
Corn Exchange Bank, New York; accompanied by Albert H. Shrader,
manager of Government bond department, Chemical Corn Exchange
Bank, New York________________________________________________________
Maurice A. Gilmartin, Jr., partner, Charles E. Quincey & Co., New York,
N .Y ______________________________________________________________________
Herbert N. Repp, president, Discount Corp. of New York; accompanied
by Robert M. Coon, vice president and treasurer; and Robert H. Bethke,
vice president, Discount Corp. of New York____________________________
1507
1558
1577
1622
1643
1659
STATEM EN TS AND EXH IB IT S
&
Brown, Murray F., executive vice president, C. F. Childs
Co., New York;
accompanied by Timothy Cantwell, vice president, trading operations;
Robert Van Cleave, vice president for research; and Charles Giamondi.
assistant treasurer and cashier___________________________________________
Gilmartin, Maurice A., Jr., partner, Charles E. Quincey & Co., New York,
N .Y ________________________________________________________ _____________
Hauser, Alfred H., vice president in charge of investment division, Chemical
Corn Exchange Bank, New York; accompanied by Albert H. Shrader,
manager of Government bond department, Chemical Corn Exchange
Bank, New York________________________________________________________
Repp, Herbert N., president, Discount Corp. of New York; accompanied
by Robert M. Coon, vice president and treasurer; and Robert H. Bethke,
vice president, Discount Corp. of New York____________ _______________
Exhibit:
Rebuttal of the “ Webb Chart” and accompanying statement___
Rouse, Robert G., vice president, Federal Reserve Bank of New York,
and manager, open market account; accompanied by John J. Larkin
and Spencer S. Marsh, Jr., assistant vice presidents, Federal Reserve
Bank of New York__________ __________________ ________________________
Spencer, Girard L., partner, Salomon Bros. & Hutzler, New York, N .Y .;
accompanied by John Brown, office manager and senior cashier______
1577
164?
1622
1659
1672
1507
1558
A D D IT IO N A L IN FO R M A TIO N
All insured commercial banks— profits or losses on securities
__1603
Changes in money supply, real gross national product, and interstate rates,
1946-58____________________ I ______________________________________________1607
Gross national product and money supply, 1946-58
__1608
Inflationary increases in the money supply before and after the Federal
Reserve-Treasury accord______________________ .
_
________ ____ 1606
Interlocking directors of Discount Corp. and sev en New York banks with
major financial institutions _
_______________________________ Facim;__ 1672
Correspondence re____________________________________________________ __1672
Letter of Rossant, M. J., Business Week, to Hon. Wright Patman
__ 1544
in
EMPLOYMENT, GROWTH, AND PRICE LEVELS
W E D N E SD A Y, AUGUST 5, 1959
U n it e d S t a t e s C o n g ress,
J o in t E c o n o m ic C o m m it t e e ,
,
New York N.Y.
The committee met at 10 a.m., pursuant to call, in room 110, U.S.
Courthouse, Foley Square, New York, N.Y., Senator Paul H. Douglas
(chairman of the committee) presiding.
Present: Senators Douglas and Javits, and Representative Patman.
The C h a i r m a n . The hour of 10 o’clock having arrived, the com
mittee will come to order.
The Chair wants to make a few preliminary observations before
we request the first witness to testify.
I have noticed a feeling on the part of some financial writers in
New York, and possibly these may also reflect the sentiments of some
members of the financial community, that Congress should not concern
itself about financial matters, about the money supply, the price level,
and other affairs; that these matters should be left to the Federal
Reserve Board and the Federal Reserve banks and the financial com
munity, in the sense that it is an act of impertinence for Congress to
come to New York and hold hearings about these concerns.
It is also implied by many financial writers that Congress is igno
rant and incompetent to deal with these matters. I think, therefore,
before we begin these hearings that it might be well to lay a basis for
our proceedings.
Someone once remarked that men needed not so much to be informed
as to be reminded, and, therefore, I think it is appropriate that we
should remember article 1, section 8, of the Constitution of the United
States, which gives powers to Congress and, indeed, imposes powers
upon Congress which Congress must perform.
Section 8, fifth paragraph, states, after the preamble:
Congress shall have power to coin money and regulate the value thereof.
So that the Constitution lodged in Congress the power of creating
what was then purchasing power and also the attendant responsibility
of regulating the value of money. The value of money, of course, is
the amount which it can purchase in the market. It is, therefore, the
reciprocal of the price level.
I f the price level doubles, the value of money falls in half. I f the
price level falls in half, the value of the unit money doubles. So that
the ultimate power over the price level, as over the creation of mon
etary purchasing power, rests in Congress. Congress cannot evade
that responsibility nor avoid that responsibility.
1505
1506
EMPLOYMENT, GROWTH, AND PRICE LEVELS
It is a difficult responsibility, but it is one which we neglect at our
peril. I f we were to neglect it, we would be subject to very proper
criticism for failing to concern ourselves with it.
Coming to New York, it might be appropriate also to recall some
of the history of the exercises of this powTer by Congress, to indicate
that in a very large percentage of cases it has been Congress wThich
has been adjudged to be correct in the light of history, rather than
the opinions of the dominant financial community in New York.
I was a graduate student at Columbia from 1913 to 1915 at the time
the Federal Reserve System was being formed and legislation estab
lishing it put through Congress. The 12 regional banks were set
up. I can well remember the bitter opposition of the New York
financial writers and papers to the creation of this System, the oppo
sition of the American Bankers Association and of the leading
financiers of the city.
But Congress, in its wisdom, prevailed rather than the New York
financial community, and now 45 years after the event by the happy
reconciliation of time most of the New York financial community
believes that it originated the Federal Reserve System, and the con
tributions of Carter Glass and Robert L. Owen and Woodrow Wilson
tend to be forgotten.
Similarly, in 1983 and 1934, after some of the facts connected with
the New York Stock Exchange dealings of the boom period and of
the depression began to come to light, I can remember the introduc
tion of bills in Congress calling for the regulation of the securities
market—the stock market.
I remember with a certain feeling of dryness the testimony of the
then president of the New York Stock Exchange, Mr. Richard
Whitney, stating that no regulation of the stock market was necessary
or at least not regulation of the type which was proposed. Never
theless, Congress went ahead and passed the Securities and Exchange
Commission Act, and I think the verdict after 25 years is that, on the
whole, Congress did very well.
Again I think the securities business rather believes that it orig
inated the Securities and Exchange Commission Act instead of
fighting it with all the power at its disposal. Similarly, the changes
in the Federal Reserve law which were passed in 1933 and 1935 were
done at the instance of Congress and while there may be some dispute
over details, on the whole I think they are regarded now as
constructive contributions.
I f I rrmy touch upon a matter of recent history, upon which there
is some difference of opinion inside of Congress and inside the Nation,
with honest men holding different points of view, when the question
of the accord came up, I think it was the pressure of Congress and
to some degree the pressure of the present chairman, the Senator
from Illinois, which led the Treasury to agree to the accord.
So it was Congress which fought for the independence of the
Federal Reserve Board from the Executive, That can be debated
back and forth and there are very honest men wiio differ with this
point of view. It is admitted that the Federal Reserve Board is the
agent of Congress. I do not use the term “ creature” of Congress.
That implies a servile relationship which I do not wish to attribute,
EM PLOYM ENT, GROWTH, AND PRICE LEVELS
1507
but Congress is the principal and the Federal Reserve Board and the
Federal Reserve System, their 12 regional banks, are our agents.
Now in view of the grave financial problems of the Government,
in view of the fact that the conditions of the money market affect the
general level of employment, rate of growth as well as the price level,
and the flotation of Government securities, the Joint Economic Com
mittee has felt its duty and obligation to come to the city of New
York and hold these hearings.
I want to make it clear that it does so in no spirit of antagonism to
any person or to any group of persons. We are honestly seeking to
grapple with a whole series of very perplexing technical questions.
We shall take for granted the good faith of those who testify.
Although this hearing is being held in a courtroom, I hope the
witnesses will not feel in any sense they are on trial. We shall try to
accord to them the courtesy and respect which we feel.
We are very appreciative that Mr. Robert G. Rouse, vice president
of the Federal Reserve Bank to New York, and manager of the open
market account, has agreed to come and clear up some of the points
about which we are somewhat uncertain.
I would appreciate if he would identify for the record the experts
who are with him.
STATEMENT OF ROBERT G. ROUSE, VICE PRESIDENT, FEDERAL
RESERVE RANK OF NEW YORK, AND MANAGER, OPEN MARKET
ACCOUNT; ACCOMPANIED BY JOHN J. LARKIN AND SPENCER S.
MARSH, JR., ASSISTANT VICE PRESIDENTS, FEDERAL I^SERVE
BANK OF NEW YORK
Mr. R o u s e . I would be very happy to, Mr. Chairman.
On my right is Mr. John J. Larkin, assistant vice president of the
Federal Reserve Bank of New York, and on my left is Mr. Spencer S.
Marsh, Jr., assistant vice president of the Federal Reserve Bank of
New York, both of whom are associated with me in the operation of
the System open market account.
The C h a i r m a n . Thank you very much.
Mr. Rouse, one of the things which has perplexed us is the relatively
small number of authorized dealers in Government securities in New
York as compared with the tremendous volume of transactions. For
example, the total amount of bills, notes, certificates, and bonds issued
by the Government last year amounted to over $62 billion. This
formed three-quarters of the capital issues of the Federal Govern
ment, State and local governments, and corporations.
I would say that the total volume of dealings in Government secu
rities in New York, both on the new issues and issues already out,
would be something in the magnitude of $200 billion a year.
That is approximately right, is it not?
Mr. R o u s e . I b elie v e so.
The C h a i r m a n . It is well known there are only 17 authorized
dealers. Isn’t that true ?
Mr. R o u s e . There are 17 dealers with whom we do business.
The C h a i r m a n . That is right.
Mr. R o u s e . Y o u have used the term “ authorized,55 Senator. I am
not clear what you mean by that. We deal with anyone.
1508
EM PLOYMENT, GROWTH, AND PRICE LEVELS
The C h a i r m a n . The New York bank acts not merely as the agent
of the Federal Reserve, but it also acts as the agent of the Treasury;
is that not true ?
Mr. R o u s e . Yes.
The C h a i r m a n . S o that your new issues will be handled through
the 17 dealers.
Mr. R o u s e . The new issues are handled largely initially through
subscribers.
The C h a i r m a n . D o you deal directly with the subscribers or do
you deal with the 17 dealers ?
Mr. R o u s e . T o the extent that we deal, we deal in the market
through the 17 dealers.
The C h a i r m a n . That is right. This would apply to the $ 6 2 billion
of Federal issues as well as in the volume of open market transactions
of the Federal Reserve.
Mr. R o u s e . That is correct. The $62 billion of new issues was
initially sold by the Treasury through the Reserve banks on sub
scription and subsequently may have been part of the open market
transactions of the Federal Reserve.
The C h a i r m a n . What would b e the volume of open market trans
actions of the Federal Reserve in a year? Let us take 1958 for an
example.
Mr. R o u s e . The volume of open market transactions by the System
Open Market Account during 1958 was about $7.5 billion. Market
transactions by the New York Reserve Bank for others aggregated
about $8.5 billion, for a total of about $16 billion.
The C h a i r m a n . So you place $82 billion through the 17 dealers.
Mr. R o u s e . That would be the sum o f open market purchases and
sales added to the volume sold by the Treasury on subscription or
tender.
The C h a i r m a n . That is right.
Mr. R o u s e . Yes; the purchases and sales in the market are done
through those dealers.
The C h a i r m a n . A s I understand it, the present dealers comprise
five banks, namely, the Chemical Corn Exchange, the Guaranty Trust
& Bankers Trust of New York, and the First National & Continental
Illinois National of Chicago.
Mr. R o u s e , Yes, sir.
The C h a i r m a n . Then there are 12 other dealers, nonbank dealers;
is that correct ?
Mr. R o u s e . That is correct.
The C h a i r m a n . I know some of these, I do not know all. D. W.
Rich, C. F. Childs & Co., the Discount Corp. of New York, C. J.
Devine & Co., the First Boston, Salomon Bros. & Hutzler, Audrey G.
Lanston & Co. Would you supply for the record the other dealers ?
Mr. R o u s e . Bartow Leeds & Co., Briggs Schaedle & Co., Inc., New
York Hanseatic Corp., W. E. Pollock & Co., and Charles E. Quincey
& Co.
The C h a i r m a n . Thank you very much.
How many of these are members of the New York Stock Exchange,
which I believe imposes margin requirements of 5 percent on dealings
with Government brokers?
Mr. R o u s e , Salomon Bros. & Hutzler and C. E. Quincey & Co.
EM PLOYM ENT, GROWTH, AND PRICE LEVELS
1509
The C h a i r m a n . In other words, 2 are members of the stock ex
change; 15 are not members of the stock exchange.
Mr. R o u s e . That is correct.
The C h a i r m a n . So only two would be subject to the margin
requirements of the New York Stock Exchange?
Mr. R o u s e . That is correct.
T h e C h a ir m a n . H o w
m a n y d e a lers d id y o u w o r k w it h p r io r to
1953?
Mr. R o u s e . I would say about the same number.
The C h a i r m a n . In what year was the number increased? I
believe at one time you dealt with 12 or 13 dealers.
Mr. R o u s e . Yes. Some of these are new people in the business.
Bartow Leeds, Briggs Schaedle & Co., Pollock, Lanston, and
Hanseatic.
The C h a i r m a n . The last five names you read are comparatively
recent entrants into the business ?
Mr. R o u s e . Yes, in the sense of becoming primary dealers in making
markets.
The C h a i r m a n . May I ask this: What standards do you require
before you recognize a dealer?
Mr. R o u s e . We will do business with any firm or organization
purporting to be a dealer who can demonstrate that he makes primary
markets regularly in the securities of the United States.
The C h a i r m a n . H o w do you demonstrate? What standards d o
you lay down that he must satisfy in demonstrating?
Mr. R o u s e . A dealer becomes a dealer and he buys and sells on
quotations that he makes. He is willing to take a net position, making
a quotation to you, you accepting one side of it. He would take that
into his own position or sell it to you out of his position. He is a
dealer, not a broker.
The C h a i r m a n . Have you had men apply for recognition as
authorized dealers whose applications you have refused?
Mr. R o u s e . In recent years, no.
The C h a i r m a n . What is your definition of “recent” ? When was
the last time?
Mr. R o u s e . Let us go back to about the time o f the accord, or better,
to the time of the ad hoc subcommittee report.
The C h a i r m a n . Without identifying the firms, because that would
be improper, how many applications did you refuse?
Mr. R o u s e . I recall one in the late 1940’s, but prior to that I have
no recollection that I could rely on.
The C h a i r m a n . Y o u say since 1951 everyone w h o has asked to be
recognized has been recognized?
Mr. R o u s e . Since 1953 a number of firms have come in and talked
with me and my associates with respect to dealing in Government
securities. None has asked.
The C h a i r m a n . It is something like an application for a club.
For membership in a club, feelers are put out whether you will be
admitted, and then when it is found that probably you won’t be
admitted, the application is not made.
How many, after coming and inquiring as to whether they might
be welcome to submit applications, have, upon reflection and as a
1510
EM PLOYMENT,
GROWTH, AND PRICE LEVELS
result of your conversations and other factors, decided that it would
be inadvisable to press the matter?
Mr. R o u s e . I wouldn’t say that anyone had been turned down by
us directly or by implication.
The C h a i r m a n . You know life operates in a very subtle maimer,
Mr. Rouse. Financiers and diplomats have great subtlety in these
matters. Sharp refusals are seldom given. Have you poured cold
water—verbal and emotional cold water—upon some of these
inquiries ?
Mr. R o u s e . I have not.
The C h a i r m a n . Do they come to you or d o they come t o someone
else?
Mr. R o u s e . They come to me. I f I were not present they would
speak with either Mr. Larkin or Mr. Marsh. They can speak for
themselves as to whether they poured cold water on anyone.
The C h a i r m a n . I suppose you put out a fire with lukewarm
water. Have any of you acted the part of fire extinguisher, curbing
the incipient, or do you have a welcome sign out for all to come?
Mr. R ouse. W e would welcome more dealers.
The C h a i r m a n . You would welcome more dealers. Now, may
I ask, why don’t you get them? Here is an enormous volume of
transactions. Direct issue by the Government of $62 billion a year,
Federal Reserve trading of $20 billion a year, private trading in
issues that are already out of certainly well over $120 billion a year.
So that the general volume is somewhat in the magnitude of $200
billion a year and may indeed be over this figure, and yet there are
only 17 dealers.
Why is this? Why do you have such an enormous volume of
transactions funneling through a relatively small number of dealers ?
Don’t you think this is a proper subject for congressional curiosity
and should not be regarded as impertinent by the New York financial
writers ?
Mr. R o u s e . A s to the 17, this business, if I may describe it briefly,
is initiated by investors largely all over the country. Some go to their
brokers. Some go to their banks. Gradually the net of that feeds in
finally to these 17 dealers.
A good bit of it is done locally because there are offsetting trans
actions by brokers and by banks. But in the end, the net of it
all feeds into the 17 dealers. They do this business.
I would say there are two primary reasons for there not being
more dealers. The first is the lack of personnel that is available.
The second is the risk. It is a very risky business. It is a hazardous
business.
The C h a i r m a n . I s it as risky as stock market dealings? The
fluctuations in Government bonds are relatively minor compared
to the fluctuations in stocks.
Mr. R o u s e . The fluctuations generally are minor. But on the
other hand, you are working with a position that is large in relation
to your capital.
The C h a i r m a n . Does this mean that margin requirements a re
either low or nonexistent?
Mr. R o u s e . Yes. That means that a small amount o f capita]
will carry a large amount o f securities.
EM PLOYMENT, GROWTH, AND PRICE LEVELS
151 1
The C h a i r m a n . This raises another matter of great interest to
me.
The New York Clearing House came down before the Banking
and Currency Committee, of which I am also a member, in connection
with the matter of reserves of member banks, and produced figures on
the velocity of turnover of accounts of classified firms doing business
with banks in the New York Clearing House.
On commercial paper, the average rate of turnover was 30 per
year. The volume of checks drawn in a month on firms that did busi
ness in commercial paper was 2% times their average deposit with
a yearly ratio of around 30.
In the case of dealers in Government securities, there were some
fantastic figures. For instance, the testimony before the Banking
and Currency Committee, as I remember it, was approximately this:
In 1 month they did over $18 billion worth of business upon average
deposits to their accounts of $37 million. This was a turnover rate
of approximately 550 to the month, or over 6,600 to the year, which
meant that the average account turned over in 22 trading days 25
times a day.
I understand that in later testimony before a House committee the
clearinghouse revised its figures on average deposits of these firms
downward. They said the average checking account was $20 million.
This produces the fantastic figure of an average turnover of over
11,000 to the year, or about 350 times the turnover of those dealing
with commercial loans, and an average daily turnover—22 days to
the month—of well over 40.
This must indicate they do a terrific volume of business—relatively
few firms do a terrific volume of business—upon a relatively small
amount of capital. Isn’t that true ?
Mr. R o u s e . Yes, in relative terms. As you say, in relative terms.
Of course, this turnover reflects the loans which the dealers have from
their banks.
The C h a i r m a n . The point that I want to make is this: There are
hundreds of firms on the New York Stock Exchange, I suppose. I
have not tabulated the number. There are a large number of firms
on the American Stock Exchange dealing in very hazardous
fluctuations.
They have developed skill. Why can’t you develop a sufficient
number of skilled people to handle the fluctuations in the Government
bond market which would seem to be relatively much more simple
than the fluctuations in the stocks ?
Mr. R o u s e . The fluctuations sometimes are rather sudden.
The C h a i r m a n . Not as sudden as in stocks.
Mr. R o u s e . Excuse me, sir. My actual participation in the busi
ness was a good many years ago as a dealer. At that time we h a d
people like Mr. Mussolini and Mr. Hitler making speeches from time
to time and you had a position that you thought was sound a n d you
had a point loss in no time at all.
The C h a i r m a n . As I say, the fluctuations may be large in com
parison with the margins, and we shall go into this matter later, but
certainly in their absolute magnitude or their relative magnitude, in
comparison with the quoted prices, they are minor compared with the
fluctuations of stocks.
1512
EMPLOYMENT,
GROWTH, AND PRICE LEVELS
Mr. R o u s e . N o , sir. In stocks you are dealing with brokers, not
dealers, by and large. Brokers do not take the same risks that dealers
take in carrying positions.
The C h a i r m a n . I think perhaps we will pass on the questioning.
We alternate the questions between both sides. I think I should call
on my colleague, Senator Javits.
Senator J a v i t s . Can you make your own explanation of how this
dealer operation works and why there are so relatively few dealers £
Mr. R o u s e . It would be a little difficult to put in a few words how
the dealer operation works other than that they are principals. They
buy and sell securities for their own account and risk.
To be a dealer requires the maintenance of a substantial position.
I can’t tell you offhand how many issues of U.S. securities are out
standing, but there is a Treasury bill maturing every week for
6 months, and several other special bills.
In addition, there are probably a dozen notes and 25 or 30 bonds or
more. I don’t know the exact number on any of those items.
A dealer is called upon to bid or offer those securities during the day.
These chaps who go into the business are prepared to do that. There
may be a few very small issues which in the ordinary course they would
feel they would have to operate as a broker. In some there is very
small floating supply. But by and large in the outstanding issues
they are prepared to make markets throughout the list. The total
volume of a position may be a number of times their capital. It is
true in the London market, it is true in the U.S. market. How many
times position may exceed capital, I am not prepared to say, but de
pending on the risks involved, that is related to the average maturity,
it could be from 10 to 30 times, or in those general magnitudes.
That is the problem that the dealer faces.
He must then build up clientele, which requires, if I can use the term,
high-grade personnel, intelligent people who are educated in financial
matters, who understand the workings of a central bank, and under
stand the workings of the Treasury and the banking system as a whole,
and who must have some very general understanding of the workings
of the economic system as a whole, and to a degree be a close follower
of international developments.
So all in all you have a problem of personnel that is very difficult.
Then I might also say that to trade in these securities effectively
requires in addition to these qualities which I have mentioned, what
I call a sixth sense, a sense of markets. It is not given to very many
people. You see people who do a good workmanlike job in this busi
ness, but they don’t last at it. People who do the real job are people5
with all that background of knowledge, that have a sixth sense with
regard to the turn of the market. It is a difficult thing.
I cannot describe it adequately, I am sure.
This, Senator, gives you a thumbnail sketch as I see it.
Senator J a v i t s . I f Senator Douglas did not ask you, will you tell
us when, as far as you know, is the last time any firm entered into this
business of being a dealer, any new firm ?
Mr. R o u s e . I think there was either in the very late forties or 1950
or 1951—I am not sure when it took place—one of the larger dealers
went into the business. I might say it was a branching off of a man
from one firm to form his own firm.
EM PLOYM ENT, GROWTH, AND PRICE LEVELS
1513
Senator J a v i t s . Wliat about prior to that?
Mr. R o u s e . Prior to that these several others, Briggs Schaedle &
Co., where men went from one firm and formed another firm of their
own. C. J. Devine & Co. is another one. Mr. Devine left Childs &
Co. 25 years ago, approximately.
I think the same thing was true of Hanseatic going into the busi
ness ; Mr. Pollock; Mr. Rich was another, an offshoot of one of the
original dealers.
Senator J a v i t s . I have one other question on this and then I would
like to go into another subject briefly.
Do you feel that in order for anybody to go into this business they
have to have such unusual backing by the banks that it is really the
banks that make it possible for anybody to go into this business ?
Mr. R o u s e . Yes; to g o into the business one needs to have the con
fidence of his banker.
Senator J a v i t s . So in a practical way in view of the large amounts
of credit which are involved, the banks can determine how many people
are going to be in this business ?
Mr. R o u s e . Yes; in a sense. The loans that the dealer requires are
all secured. Even the day loans. So it is not as much of a problem as
the way you phrased your question implies. While the banks make the
loans, the competition among banks for these loans is such that the
dealer thinking in terms of going into this business, who has a good
reputation, who has known ability, would not have very much diffi
culty in getting credit.
S e n a t o r J a v i t s . B u t n ev e rth e le ss h e h a s to h a v e v e r y la r g e b a n k
b a c k in g .
Mr. R o u s e . He has to have adequate credit and credit can come from
banks; it can come from business concerns these days, as well as banks.
Senator J a v i t s . I want to take you to another subject because m y
t im e is going fast, and that is the subject of savings bonds.
There is a good deal of discussion in which I have participated about
the extent to which some effort to accelerate very materially the whole
savings bonds sale would have upon the problem of higher interest
rates on our long-term debt.
Do you have any opinion of that ? I am sure you noticed that I have
suggested some patriotic effort connected with $25 billion of peace
bonds.
Senator Williams on the floor the other day urged greater induce
ments to buy savings bonds. We had a group of insurance company
economists before us the other day. They emphasized the anti-infla
tionary aspect of a major effort to sell savings bonds or a bond like a
savings bond to the individual.
Could you give us your views on that from the point of view of the
New York market?
Mr. R o u s e . I think something badly needs to be done about the sav
ings bonds in the way of improved terms. These are the securities for
the little fellow, so-called. Because of the taxes—income taxes—they
are not attractive at high taxable rates to large investors, as you know.
But there should be some further inducements given. The principal
one, of course, is rate. The Treasury presently is having to pay out in
attrition of savings bonds substantial sums every day at the existing
interest rate of approximately 3.26 percent.
1514
EMPLOYMENT,
GROWTH, AND PRICE LEVELS
I think the Treasury would like to have the authority, as it has asked
the Congress for, as a matter of fact, to improve its terms.
Senator J avits. Don’t you think we would be more encouraged to
give it that authority if we had a feeling that they would get on their
horse and do something with it in an effective way instead of being
passive and static about it, which is all they have promised me.
Mr. R o u s e . They have been carrying on a remarkably effective
campaign for years. They have had the support of industry. They
have had the support of many individuals devoting hours and hours of
their time every week to this thing without any remuneration of any
kind, not even public kudos. It is really a shame.
Senator J a v i t s . I am all for their getting public kudos, and that
was the point of my recommendation.
Suppose that you could revivify this whole effort in savings bonds,
whether with a peace-bond idea, what effect would that have in your
opinion upon the market for long-term Government bonds other than
saving bonds ?
Mr. R o u s e . It would have an improving effect on the market for
other Government securities if the attrition on savings bonds was
eliminated. I think there is some question as to the desirability of
increasing the demand liability on the Treasury. Presently you
have outstanding 15 percent of the debt in terms of series E and H
savings bonds. I think the figure is around $42 billion.
In addition, there are another $7 billion or $8 billion of the F and G
and J ;md K bonds which are gradually maturing.
I would think that it w^ould be desirable to maintain that $42 billion
if it is possible. The only way I see it is possible is by improving the
terms and making a continued effort to sell as they have in the past.
Senator J a v i t s . D o you think that in the market estimate of what
U.S. Government bonds ought to sell for a factor exists in the fact
that the individual is or is not willing to invest savings in an active
way ?
Mr. R o u s e . I think the average investor takes relative rates into
consideration. He can put money in one of our local savings banks,
for example, at 3^4 percent and he can get the 3*4 percent immediately.
It begins to work.
He doesn’t have to wait for 8 years to get his 3.26 percent.
Senator J a v i t s . We certainly agree that the attrition of cash
redemptions as against purchases is a depressing effect upon the Gov
ernment bond market and if you eliminated the attrition you would
have, would you say, a material beneficial influence on the Government
bond market?
Mr. R o u s e . It would be a help. I would not say it would be mate
rial because the rate of attrition now is a matter of $200 million a
month, and in relation to the cash borrowings of the Treasury it is
distinctly marginal.
Senator J a v i t s . Psychologically you feel it would help ?
Mr. R o u s e . Psychologically it would help.
Senator J a v i t s . Materially help?
Mr. R o u s e . I am not using that word.
Senator J a v i t s . Y ou feel it would help?
Mr. R o u s e . I feel it would help.
Senator J a v i t s . Have you taken any soundings on that with the
dealers in order to get some slant on market sentiment ?
EM PLOYM ENT, GROWTH, AND PRICE LEVELS
1515
Mr. R o u s e . N o , I h a v e n o t.
Senator J a v i t s . D o you think it would be a good idea to do that?
Mr. R o u s e . I t h in k it would be a good idea for the Treasury to do
it. If they asked us to do it we would be happy to.
Senator J a v i t s . Thank you very m u c h .
The C h a i r m a n . Congressman Fatman.
Representative P a t m a n . I want to agree with what Senator Doug
las said in the beginning except, of course, what he said about the
accord. There is an honest difference of opinion between us on that.
Generally I agree with what he said and endorse what he said.
There are now 17 dealers. In 1952 there were 12 dealers, were
there not ?
Mr. R o u s e . I am not sure of the date, Mr. Patman, but it was
around 1950.
Representative P a t m a n . They had an exclusive franchise, did they
not ?
Mr. R o u s e . I a m a f r a i d I w ill h a v e to m a k e a s ta te m e n t o n th is.
In 1944 or 1945—I forget exactly which year—the Federal Open
Market Committee adopted a basis, or in effect rules, by which we
would determine with whom business was done for the system account.
That held into the spring of 1953.
In the spring of 1953 they withdrew those rules and authorized us
to deal with anyone who made primary markets and with responsible
people who were, in general, making a contribution to the existence
and functioning of a Government securities market.
Representative P a t m a n . That was after a report was m a d e by a
congressional committee criticizing what they called the select 12, or
the exclusive 12.
Mr. R o u s e . I don’t identify it that way. I identify it as the result
of an ad hoc committee study by the Federal Reserve itself.
Representative P a t m a n . All right, sir.
The dealers you state have somewhat of a hazardous business. I
can see where it would be somewhat hazardous.
Have any of the dealers actually gone broke or gone into
bankruptcy or failed ?
Mr. R o u s e . I think I have no record of one having gone into
bankruptcy. Some of them have withdrawn from the business or
changed the character of the business. I recall one having lost his
capital.
Representative P a t m a n . Was that one o f the 12 we were speaking
of a while a g o ?
Mr. R o u s e . O n e t h a t w a s c o n n e cted w it h one o f th e m at one tim e .
Representative P a t m a n . The $200 billion in transactions in Gov
ernment securities a year, I believe you stated that about $8 billion is
done by the Federal.
Mr. R o u s e . I t h in k I sa id 2 0 , b u t I a m n o t sure o f th e fig u re .
Representative P a t m a n . H o w much of the business do the 17
dealers do? They do part of this 20,1 guess, or all of it.
Mr. R o u s e . It would a ll be done through them.
Representative P a t m a n . It would all be done through the dealers ?
Mr. R o u s e . That is right.
Representative P a t m a n . H o w m u c h do they do, in addition to the
business they do with the Fed?
1516
EM PLOYM ENT,
GROWTH, AND PRICE LEVELS
Mr. R o u s e . The business they would do with us would probably
average somewhere between 5 and 10 percent of their business.
Representative P a t m a x . In other words, they do about $150 to $180
billion worth besides that ?
Mr. R o u s e . Y e s .
Representative P a t m a x . That is the 17 dealers.
The 12 Federal Reserve banks on their own in representing their
member banks, do a considerable amount of business, too, do they not,
in Government securities ?
Mr. R o u s e . Yes, they d o.
Representative P a t m a x . What would you say it would aggregate in
the course of a year?
Mr. R o u s e . I don’t know. I wouldn’t make an estimate. I have
not seen any figures for the other Reserve banks.
Representative P a t m a x . Would it be 5 billion o r 50 billion?
Somewhere you would have some idea.
Mr. R o u s e . I would say it would be small, because I assume they do
the business about the way we do. The business we do for member
banks is quite small, relatively.
Representative P a t m a x . D o you actually do-----Mr. R o u s e . I have never seen the figures for the other banks.
Representative P a t m a x . I didn’t think the Fed did business
directly for member banks. Am I mistaken about that ?
Mr. R o u s e . We execute orders for some small member banks who
do not have access to the Government securities market.
Representative P a t m a x . They don’t have access to the Government
securities market. How much would that aggregate in the course of
a year? Just approximately.
Mr. R o u s e . $200 million.
Representative P a t m a x . Y o u are bound to have an estimate o r a
guess on how much the 12 Federal Reserve banks do in the course of a
year, Mr. Rouse.
Mr. R o u s e . No, I haven’t. I don’t know.
Representative P a t m a x . The business that they do is really in com
petition with you, is it not ? In other words, a Dallas, Tex., bank, or
a San Francisco Federal Reserve bank, in seeking an opportunity to
buy Government securities at the same time you are seeking to buy,,
or the other way around, they are in competition, are they not ?
Mr. R o u s e . I f th e y happen to coincide, that would be true.
Representative P a t m a x . That is what I say. It would be very
unusual if they did not coincide if they are all in the market for Gov
ernment bonds.
Mr. R o u s e . Yes, it would be very unlikely that they would coincide
due to the average size of these transactions in terms of a hundred
thousand or something of that sort. You don’t have very many
transactions in a year. We are not in the market very often ourselves..
Representative P a t m a x . H o w would I get this amount of business
I thought you were the outstanding expert in the United States on
this thing and would have these answers on your fingertips about the
Government bond market.
Mr. R o u s e . I am sorry; I don’t.
Representative P a t m a x . I am disappointed you don’t have any
estimate on the amount of business done by the 12 Federal Reserve
EM PLOYMENT,
GROWTH, AND PRICE LEVELS
1517
banks. I assume that the Federal Reserve Board can furnish that
information.
Mr. R o u s e . I believe you already have that information through
the Federal Reserve System.
Representative P a t m a n . We must have. The amount of business
that is done 011 the stock exchange in the year, how much does
it aggregate ?
Mr. R o u s e . I don’t know.
Representative P a t m a n . And the American exchange and the com
modity exchange ?
Mr. R o u s e . Y o u are referring to stock business and bond business?
Representative P a t m a n . That is right.
Mr. R o u s e . I don’t know. I might say with respect to Government
securities-----Representative P a t m a n . I am not confining it to that. What I am
driving at is this: I can’t understand why this market is not regulated.
It is undoubtedly much larger than any other market in America.
It is not regulated. It is not supervised.
I just wonder why there has not been some demand from the Fed to
have a supervised market or a regulated market,
Mr. R o u s e , I was interested in the report which Chairman Martin
and Secretary Anderson made recently, the joint report, summarizing
the result of consultations with respect to the Treasury-Federal
Reserve study.
The interesting part of that to me in this respect was that the people
who were consulted with respect to this market all thought that it was
conducted in a highly ethical way. They thought the market was one
in which they could carry out their transactions at modest cost, and
they found no criticism of the market, which seemed to be uniform.
I think one must be bound to be a little surprised if that was the case.
Representative P a t m a n . They had a lot at stake in this themselves,
did they not? You know if they had found much to criticize they
would really be criticizing themselves.
Mr. R o u s e . I wTasn’t present at most of these conferences so I
wouldn’t know. I have seen a list of the people who were consulted
and I think that would not apply, since a majority were investors,
not dealers.
Representative P a t m a n . I was disappointed that they did not go
further into the matter. I don’t consider the investigation a good
investigation at all. I hope that a good investigation can be made.
I think it was lacking in many respects.
The subscribers you mentioned a while ago, to bonds of the Gov
ernment that the Treasury is selling, they are sold directly through
subscribers. They don’t go through a dealer ?
Mr. R o u s e . No, sir.
Representative P a t m a n . But the other must go through a dealer.
Anything that is sold in the market must go through one of the 17
dealers ?
Mr. R o u s e . As I said earlier, it may go through a bank or a broker,
but ultimately the net of it is liquidated in the dealer market.
Representative P a t m a n . I w^ant to ask you a question about the
savings bonds.
Do you think the interest rate really has much influence over sav
ings bonds? Don’t you think the fact that there is a coordinated
38563-—5^—pt. 6B1------ 2
1518
EM PLOYMENT,
GROWTH, AND PRICE LEVELS
program and a campaign, almost an evangelistic campaign to get
people to subscribe, and payroll deduction, liad more to do with it
than the interest rate.
Mr. R o u s e . That certainly is a substantial factor. On the other
hand, as I said to Senator Javits in this area where we have rates on
savings accounts, of 3% percent compared with 3.26 percent on sav
ings bonds, and you can get your savings deposit interest immediately,
the relative rates come into play. Whether or not—or put it this way:
One can argue that the rate is not an influence in the volume, of sales.
I know people in central banks and academic circles and other circles
as well that argue that rate does not affect savings. Certainly relative
rates do affect the direction of savings. I can see it in my own
family.
Representative P a t m a n . It is m y understanding that the adminis
tration is advocating a rate of 3% percent. That would still be much
less than the savings and loans are paying and much less than the
savers can get from other places.
You w^ould still have the same disadvantage in difference in interest
rate that we have now except that it would not be as much.
Mr. R o u s e . Let me say this: At the present rate, I am sure there
are a good many businessmen who have been recommending savings
bonds to their employees on payroll deduction plans who feel embar
rassed in doing it today, and if something is not done about it, they are
going to stop.
Representative P a t m a n . Would that embarrassment still be there?
Maybe there would not be as much embarrassment, but there would be
some in recommending 3% percent when they can get 4y2 percent Gov
ernment guaranteed.
Mr. R o u s e . Government guarantee ?
Representative P a t m a n . Yes, sir. That is through these savings
and loans. They are guaranteed up to $10,000, at least their invest
ments are.
Mr. R o u s e . Their investments are and y o u have waiting and y o u
have problems.
Representative P a t m a n . They don’t advertise in the newspapers,
but they pass the wrord around that you can get the money when you
want it.
Mr. R o u s e . That is right. I think the Treasury must have taken
some soundings. I cannot speak for them. I think they must have
taken some soundings and believe that the 3% rate will do what they
think it will. I have not participated in that.
Representative P a t m a n . I look upon it as a kind of sweetener,
taking the lid off their 4*4 percent. It is possible they will get that on
the savings, but I predict they will not get it on the 4*4 percent because
I do not believe the Members of Congress are going to vote to raise
that lid.
I know it is a controversial issue right now, but I think too many
Members of Congress look upon a Government rate of 4% percent long
term as a distortion rate and I do not believe the majority of the Mem
bers of Congress will do it.
The portfolio of the Open Market Committee, I wanted to ask you
a question or two about that. You keep that here in the New York
Federal Reserve bank?
EM PLOYM ENT, GROWTH, AND PRICE LEVELS
1519
Mr. R o u s e . We do the bookeeping here.
Representative P a t m a n . Do you keep the bonds here ?
Mr. R o u s e , We keep the securities here.
Representative P a t m a n . Y o u keep the securities here. You d o this
for the other 11 banks and also the Federal Reserve Bank of New
York?
Mr. R o u s e . Yes, sir.
Representative P a t m a n . I s that a separate and distinct operation
from the Federal Reserve Bank of New York or is it connected with it ?
Mr. R o u s e . It is a function which the New York bank carries on, on
behalf of itself and the other 11 banks.
Representative P a t m a n . Y o u have in that portfolio now about $26
billion; is that right ?
Mr. R o u s e . Yes, sir.
Representative P a t m a n . Since 1935, have you had the same dealer
relationship and the same use for the dealers like the 17 dealers that
you had before 1935, or did you have a different setup before 1935 ?
You were operating under a kind of working agreement between the
Governors of the 12 Federal Reserve banks, I believe, then.
Mr. R o u s e . Of course, the history of it goes back to after the First
World War and it worked out first by transactions at individual
Reserve banks, then by an agreement between the Governors of the
banks, and then in 1932 the Open Market Committee was established
and then the final authority given to that Committee in 1935 whereby
no one Reserve bank could decline to go along with an instruction to
buy or sell from the Open Market Committee.
Representative P a t m a n . That is 1935.
Mr. R o u s e . That is when it had the final effect.
Representative P a t m a n . Since that time we have really had a cen
tral bank. Before that time, the way I view it, we did not have a
central bank. Do you view it that way or not?
Mr. R o u s e . I believe the system functioned as a central bank prior
to 1935. I understand your point and I agree with it. I think you
have to admit that the system did function as a central bank prior
to that.
Representative P a t m a n . By agreement of the Governors.
Mr. R o u s e . By agreement, yes.
Representative P a t m a n . Not by law.
Mr. R o u s e . Not by law.
Representative P a t m a n . Any one bank could come out any time
it wanted to.
Mr. R o u s e . They could compete with each other in the market.
Representative P a t m a n . That is right. In other words, each bank
had power. It was a regional system. But since 1935 it is a central
bank and the local banks outside of the Bank of New York, I can’t
find any power that they have. Can you name any important power
that one of the 11 Federal Reserve banks has now ?
Mr. R o u s e . They have a discount function.
Representative P a t m a n . That is minor, isn’t it?
Mr.
R ou se.
N o, sir.
Representative P a t m a n . It is a kind o f slide-rule deal.
M r . R o u s e , I w o u ld not sa y so.
It is a v e r y e ffe c tiv e in str u m e n t.
Representative P a t m a n . I know. But who fixes the discount?
1520
EM PLOYM ENT, GROW TH, AND PRICE LEVELS
The Board of Governors fixes the discount. That is not a function
of the regional bank. They have no power. They exercise it and
advertise it and proclaim and make out that they are doing a lot, but
they do not really have any power, do they ?
Mr. R o u s e . I would admit that the Board of Governors perhaps
has veto power.
Representative P a t m a n . Not veto. I think you are using the
wrong word there, Mr. Rouse. Do they not have the power in the
law? Does the law not say to establish the rate? These banks do
not have any power to establish a rate.
Mr. R o u s e . I am not a lawyer. I will not get into that. But
the directors of the Reserve banks initiate a rate and act on it, which
is passed on to the Board of Governors for their acknowledgment and
they have the privilege of either approving it or disapproving it.
R e p r e s e n ta tiv e
P a t m a n . R e c o m m e n d in g , y e s , sir.
My time has expired. Mr. Chairman, I have a number of questions
I want to ask this witness and I have carefully prepared these ques
tions to cover many points, like making markets and trading with the
dealers, competition among the dealers, expert knowledge of the mar
ket and operation of the Open Market Account, and why so few
dealers and repurchase agreements, and advice to the Treasury and
margin regulations and I think they are of sufficient interest that I
would like to ask these questions publicly and I would like to have a
public reply.
After we go around once, isn’t it the rule then that we have rather
unlimited time ? There is some time in our proceedings when a mem
ber should have plenty of time according to the way we have acted in
the past.
The C h a i r m a n . We have never dealt specifically with this ques
tion. There is no desire on the part of the chairman to muffle Con
gressman Patman or any other member of the committee. He does
have a rather formidable list of questions. I have looked at the first
three pages and I have seen they are extremely good questions. They
pique my curiosity and I would like to see them answered.
The Senator from New York is also a member of the committe, and
while the Senator from Illinois does not wish to dominate the hear
ings, he has some questions he would like to ask, too.
Representative P a t m a n . I do not want to do it now. I am talking
about some time in the proceedings. In other words, after we have
10 or 15 minutes each a time or two, then we could take the bridle off
and let a member ask a lot more questions than he would be priviledged to ask under a limitation of 10 or 15 minutes.
The C h a i r m a n . The chairman has no desire to put the bridle on
anybody.
Representative P a t m a n . I am yielding. I would even be last. I
am not asking to be first. I f it is all right for me to have you and
Senator Javits ask all the questions you want, just so I am privileged
to ask the ones I want.
Senator J a v i t s . Mr. Chairman, I realize what Congressman
Patman says, that there do come times in a hearing of this kind when
members do not have time limitations. I am sure, however, that the
chairman would wish to sort of maintain that position in the proceed
ings which would not result in exhausting the witness, but I am sure
EM PLOYM ENT, GROWTH, AND PRICE LEVELS
1521
that Congressman Patman is a man of great experience in this field
of congressional matters and I am confident that he would exercise
self-discipline in that regard.
I do wish to state, however, because I think that silence should not
give consent, that I do not agree that the Congress will not vote a
lifting of the 4*4 percent ceiling. I think that the situation we face
today is a realistic one.
We have to somehow or other unhitch ourselves from the limitations
of the bills-only market and get into the sale of long-term securities.
I rather think with limitations in time and perhaps in condition—I
am speaking for myself and I believe other members—the adminis
tration’s necessity will be likely to prevail with us.
I do not know whether we will be a majority or not. I do not wish
to stand by and allow the statement to stand that Congress will not do
this. I could not agree more with Congressman Patman and Senator
Douglas that a case must be made out for it. That is why we are
here. That is why we have been having these long hearings
in Washington. That is why I think all these questions are very
pertinent.
If, for example, it should appear that the way in which Govern
ment bond market operations are conducted is inhibiting the sale of
long-term bonds at a rate below the interest rate ceiling, that would
be an extremely material factor in what the Congress would do.
I know Mr. Eouse from my own experience in New York and I
know that he will do all he can to help us in finding a way through
this labryinth, which is the dealer market, and any other questions
which we might ask him. I think in all fairness it was necessary to
state that.
I would like to ask you, and I shall not detain the committee but
a couple of minutes, because I think Congressman Patman has a long
roster of questions that should be asked, in this dealer business, just
to go back for that a minute, do they do well ? Is this a profitable
business ?
Mr. E o u s e . Over time, yes. They have good years and they have
bad years. I might add to that, from my knowledge of it, it is not
an extremely profitable business.
Senator J a v i t s . D o you feel that the number of dealers that are in
business today and the conditions under which they operate give us
fair and open competition insofar as their economic function is con
cerned in respect of the price of Government bonds ?
Mr. R o u s e . I do. The competition between them is intense.
Senator J a v i t s . D o you feel that they have themselves in any way
that you know of, and if so I hope you will tell us, contributed to the
decline and very seriously decline in prices of Federal Government
long-term bonds which have brought on this crisis which requires
the administration to ask Congress to lift the interest ceiling, which
has been with us for years?
Mr. E o u s e . Eeferring to the bond market, the decline is the result
of the supply and demand of savings and capital.
Senator J a v i t s , This brings me back to this question of the impact
upon the market, of a willingness of the individual investor to put
his savings into U.S. Government securities in a way in which he has
not been willing to do in recent years.
1522
EM PLOYMENT,
GROWTH, AND PRICE LEVELS
Isn’t this the real evaluation as to what these people consider to be
the speculative risk in terms of the United States?
Mr. R o u s e . Yes, in part. But you have to consider the tax picture
as far as the individual is concerned and the fact that Government
securities are taxable.
Senator J a v i t s . Would you in any way suggest that we would do
better if we made some amelioration of the tax on interest on Govern
ment securities ?
Mr. R o u s e . No, I think we should stay on the same ground we are
on, namely, full taxability, whether it is savings bonds or marketable
bonds.
Senator J a v i t s . Do I understand you to say, therefore, that the
market operation—that is, the economic function of buying and selling
performed by these dealers—does not in your opinion affect the price
at which these securities are bought or sold ?
Mr. R o u s e . It is possible for dealers to have a temporary effect on
the market, but the net effect over any length of time is the result of
economic factors, not of an observation that somebody might make
1 day and affect the market for 2 minutes.
Senator J a v i t s . Are you satisfied, comparing these prices with the
prices of other securities, and the traditional relationships between
them, that this Government bond market today reflects the situation
of where it ought to stand in the financial world?
Mr. R o u s e . Would you mind rephrasing that, please?
Senator J a v i t s . D o you believe from your study of this situation
that based upon traditional relationships between yields on Federal
Government bonds and yields on other securities, and other factors
which you take into account as the head of a very extensive operation
here, that these Government bonds are about where they ought to be
or is there something extraordinary about their price today in con
nection with the traditional relationships which they bear to other
securities and to financial markets generally?
Mr. R o u s e . I would agree that they fit into the general picture of
where they are.
Senator J a v i t s . A s the matter stands now ?
Mr. R o u s e . A s the matter stands now. There have been exceptions
in individual cases. We had one not long ago in Treasury 4’s of 69
that were selling at 101-plus. When the Treasury offered more at par,
it was quickly realized that the premium that had been on those bonds
was not a realistic one because of a limited market,
Senator J a v i t s . But other than particular instances of that charac
ter, you are satisfied that this thing is standing pretty much as it ought
to be in terms of a great financial market like this?
Mr. R o u s e . In terms of the supply and demand factors, the psycho
logical factors, our fiscal situation, the factors of our balance of pay
ments situation, these are all involved in this. It is an extremely
complicated business.
The reasoning that comes out is never spelled out. It is a feeling
that these factors are all stirred in together and an answer comes out
through market operation. That is the point of a free market that is
so essential.
Senator J a v i t s . Suppose we lift the interest ceiling on these long
term Government bonds even for 2 or 3 years, which is what is being
EM PLOYM ENT, GROWTH, AND PRICE LEVELS
1523
discussed today. Wliat effect do you see on the market if we do that ?
That is, on the existing market for existing long-term Federal bonds,
everything else being equal.
Assuming that the international or national situation does not
otherwise change materially.
Mr. R o u s e . That would involve a continued demand for capital
by States, municipalities and business at the rates we have been having
at the last 2 or 3 years. I would think that in that case the United
States would be forced to finance largely in the short-term market
which would be disturbing to a good many people and I think it
would have an adverse effect on long-term rates.
Senator J a v i t s . Suppose we do allow the long-term rate to be lifted.
Will that have any effect upon the present prices of Federal long
term bonds, which are quite low ?
Mr. R o u s e . I would not think so.
Senator J a v i t s . Y o u would not think so. Except as to the new
issues which we finance at higher rates?
Mr. R o u s e . That is right.
Senator J a v i t s . Finally, as to the savings bond effort, you still are
not ready to say that this would have any material effect upon these
markets, even if we did much better than we are doing now ?
Mr. R o u s e . The fiscal situation, balance of payments, and all that,
I think, is more important.
Senator J a v i t s . Than how many savings bonds you are selling?
M r . R ou se. Y e s .
I t h in k , as I sa y , th e im p r o v e m e n t in th e sa v in g s
b o n d s is h i g h ly d e sira b le.
Senator J a v i t s . Thank you very much, Mr. Chairman.
The C h a i r m a n . Mr. Rouse, I want to ask some questions, i f I may,
about margin requirements.
Mr. R o u s e . Yes, sir.
The C h a i r m a n . Some o f us were startled and disconcerted by the
relatively sharp rise in Government securities last June followed by
the relatively sharp fall in their prices immediately following. Some
of us began to inquire about what margin requirements, if any, were
imposed on dealings in Government securities.
The Chairman of the Federal Reserve Board testified before our
committee in early February, and certainly gave me the impression
that the margin requirements were 5 percent. I have to check the
record, but that was the general impression. Is it true that these
margin requirements of 5 percent are only imposed by the New York
Stock Exchange?
Mr. R o u s e . I am not familiar in detail with the New York Stock
Exchange requirements, but the margin requirements that lenders
impose on borrowers-----The C h a i r m a n . Let us talk about the stock exchange. What a re
the requirements of the stock exchange ?
Mr. R o u s e . I cannot answer authoritatively.
The C h a i r m a n . Mr. Rouse, d o you have any assistants w h o can
answer that?
Mr. R o u s e , Mr. Larkin can answer the question ?
The C h a i r m a n . Mr. Larkin, w o u ld y o u answer that?
M r . L a r k i n . I t h in k th e y h a v e a s t a n d in g ru le w h e re 5 p e rc e n t
a p p lie s a g a in s t b o r r o w in g s .
1524
EM PLOYMENT,
GROWTH, AND PRICE LEVELS
The C h a i r m a n . In other words, the chairman was correct on that.
Mr. L a r k i n . Yes.
The C h a i r m a n . Earlier testimony indicated that only 2 of the
IT dealers are members of the New York Stock Exchange.
Mr. R o u s e . That is right.
The C h a i r m a n . S o this 5 percent requirement would apply to
only two. What were those two again ?
Mr. R o u s e . Salomon Bros. & Hutzler, and C. E. Quincey & Co.
The C h a i r m a n . The first a large dealer and the second a relatively
small dealer ?
Mr. R o u s e . They are b o th dealers.
The C h a i r m a n . The first is much larger than the second ?
Mr. R o u s e . The first is better known perhaps.
The C h a i r m a n . What requirments are imposed on the other deal
ers ? What margin requirements, if any ?
Mr. R o u s e . The margin requirements, as far as other dealers are
concerned, are those that the people from whom they borrow impose,
and that is a matter of negotiation between them.
The C h a i r m a n . That means the banks and insurance companies.
Mr. R o u s e . B a n k s , b u sin e ss c o r p o r a tio n s. I d o n o t th in k in su ra n c e
c o m p a n ie s le n d to d ea lers.
The C h a i r m a n . What is the normal margin requirement?
Mr. R o u s e . With respect to Treasury bills, practically no margin.
The C h a i r m a n . Virtually no margin. When you say “ virtually
no margin,” does that mean no margin or a slight margin?
Mr. R o u s e . I think it varies.
The C h a i r m a n . What proportion would be no margin and slight
margin ?
Mr. R o u s e . In th e case o f p e o p le w it h la r g e c a p ita l f u n d s a n d r e la
t iv e ly s m a ll b o r r o w in g s , n o m a r g in .
The C h a i r m a n . D o you think a proportion
of the dealings with
short-time Governments are carried on with no margin at all?
Mr. R o u s e . I sh o u ld sa y a s u b s ta n tia l p o r tio n o f d e a le r b o r r o w in g
a g a in s t s h o r t-te r m issues w a s w it h o u t m a r g in .
The C h a i r m a n . Would this apply to notes and
certificates, as well
as to bills?
Mr. R o u s e . N o , sir; there would be margin requirements on those.
The C h a i r m a n . What margin requirements are there on notes and
certificates ?
Mr. R o u s e . I should preface anything I say about this with the
fact that it is almost hearsay with me, not being a dealer and I am
not a lender in the sense that banks lend to dealers.
The C h a i r m a n . You deal with the dealers.
Mr. R o u s e . I deal with the dealers. This is their information and
their banks’ information. It is not mine. But in general, from what
they have told me from time to time, I believe that a substantial por
tion of the loans on Treasury bills are not margined.
The C h a i r m a n . Are not margined?
Mr. R o u s e . Are not margined.
The C h a i r m a n . That is on bills. What about notes?
Mr. R o u s e . On certificates and notes and bonds they do get margin.
The C h a i r m a n . H o w much are those margins on notes and how
much on certificates?
EM PLOYM ENT, GROWTH, AND PRICE LEVELS
1525
Mr. R o u s e . They are rather small on certificates.
One percent,
perhaps. Then going out to long bonds, it ranges from 2 to 5 percent.
The C h a i r m a n . What about notes?
Mr. R o u s e . Notes in the sense of being 2 years and out, probably
2 percent.
The C h a i r m a n . Bonds of over 5 years—what would be the margin.
Mr. R o u s e . T w o to three percent to five percent, depending o n
the dealer and his relationship to the lender, and it is understood that
such margins are to be maintained on a daily basis. I particularly
want to make this point clear.
The C h a i r m a n . S o that the 5-percent requirement is th e e x c e p tio n
rather than the rule, taking the Government securities market as a
whole.
Mr. R o u s e . Five percent is the rule on the longer ones.
The C h a i r m a n . That applies only to members of the stock
exchange ?
Mr. R o u s e . N o .
The C h a i r m a n . Y ou mean that the banks require it ?
Mr. R o u s e , Yes.
The C h a i r m a n . D o the banks require 5 percent on the long-time
Governments ?
Mr. R o u s e . Yes.
The C h a i r m a n . But not on the short-time ?
Mr. R o u s e . Not on the short-time. It really depends on th e
liquidity of the instrument.
The C h a i r m a n . In some cases it is 1 and 2 percent and in som e
cases 3 percent.
Mr. R o u s e . The margin requirement is fundamentally based o n
the liquidity of the instrument.
The C h a i r m a n . Did you take part in the study by the Treasury
and the Federal Reserve Board on the debacle in the Government bond
market of last year ? I have the three volumes before me.
Mr. R o u s e . N o , sir.
The C h a i r m a n . Y o u studied it; have y o u ?
Mr. R o u s e . N o , sir.
The C h a i r m a n . Mr. Rouse, I want to deal kindly with you. I d o
not believe in a Senator or Congressman berating a witness. I must
say I am startled by the fact that here was an investigation of the
extraordinary debacle of last June and here you, the great expert o f
the Federal Reserve, have not studied the report and do not appar
ently feel competent to testify about it.
Mr. R o u s e . N o . Mr. Chairman, this report was made available,
you may recall, about 2 weeks ago.
The C h a i r m a n . That is right.
Mr. R ouse. I had been away up to that time for some time. I
also was listed to testify here. I also had a day’s work to do. There
is a limit to what one’s eyes can study. I have read the first chapter
of this report, as I have indicated already in my testimony, but I
have not had an opportunity to study this.
The C h a i r m a n . May
studied this report?
Mr.
The
I
ask if Mr. Larkin or your other expert has
L a r k i n . I have studied it ;
C h a i r m a n . Mr. Marsh ?
yes.
1526
EM PLOYMENT,
GROWTH, AND PRICE LEVELS
M r. M arsh . Yes; most of it.
The C h a i r m a n . Let me address a question to you collectively. It
is based on pages 90 to 91 of the second volume. The Senator from
Illinois does not wish to parade his virtue, but he is rather occupied,
too, and he has a lot of material for his eyes to cover. I felt it was
my obligation to read this report. Page 91 states:
Many who were carrying the issue on credit suddenly came to realize that
the large leverage present in thinly margined purchases of Treasury issues
could work both ways— that is, the same leverage ratio that could lead to such
impressive returns on margin buying in a period of market advance could
also lead to equally dramatic losses in market decline.
Because the narrow margins on some credit financing of the 2 % -percent bonds
were, in fact, quickly wiped out, lenders were forced to make margin calls
almost immediately to keep the value of collateral backing their financing from
falling below loan value. In many instances, borrowers were unprepared to
meet these calls. Although many had the financial resources to meet the calls—
and many did so in the hopes of recouping their potential losses in a subsequent
market rally— others were unwilling to put up more margin and moved quickly
to sell out. Because of their lack of experience in Government securities trad
ing, such sellers tended to adopt distress selling tactics in liquidating positions
and in so doing, exaggerated the pace of the declne. Each significant new
drop in prices elicited new margin calls which, in turn, prompted further
liquidation and led to further decline.
These pages sound as though they might have been addressed in
some measure to the behavior of the stock market in the decline of late
October and November of 1929; namely, relatively low-margin
requirements in comparison with price movements of the securities in
question, wiping out margins, the wave of distress selling which, in
turn, caused prices of securities to go down still further which swept
out further margins, and therefore the low-margin requirements were
at least one factor contributing to a cumulative decline.
The cumulative decline in the prices of stocks in late 1929 and after
the immediate rally in 1930, and so forth, led in part to granting the
Federal Reserve Board the power to fix margin requirements and to
the imposition of higher margins.
ISTow, I would like to ask you these questions. Does not the expe
rience of last year indicate the need for regulation of margin require
ments by an official governmental body, and second, should not the
margin requirements be higher than those now imposed on a very
small fraction—or rather, now imposed by lenders ?
Mr. R o u s e . I s this addressed to me or is it Mr. Larkin ?
The C h a i r m a n . Did you understand the question. Mr. Larkin ?
Mr. L a r k i n . I did not understand that the question was directed
to me.
The C h a i r m a n . I addressed the question to the three of you
collectively. I shall welcome a reply from any one of you wTlio is
authorized by Mr. Rouse to reply.
Mr. R o u s e . I would be glad to have you reply.
Mr. L a r k i n . I understand your question was in two parts.
The C h a i r m a n . That there should be general regulation b y Gov
ernment authority, and whether such margins should not be higher
than those now fixed by voluntary agreement between the lenders to
the 17 dealers and the dealers themselves.
Is the question clear ?
Mr. L a r k i n . Yes; it is, Mr. Chairman.
EM PLOYMENT, GROWTH, AND PRICE LEVELS
1527
First let me say in responding to this question I would have to
respond as an individual. I cannot be responding for the Federal
Reserve System.
In connection with part 1 of your question, the study which was
recently completed by the Treasury-Federal Reserve-----The C h a i r m a n . We are well aware of that. I have copies of it here.
Mr. L a r k i n . The study suggests that margins might be treated
through the supervisory agencies, those having to do with supervision
of the banks in the country. In other words, from the source of
credit, not the use of credit.
The C h a i r m a n . Would it be the State banking authorities in the
various States ?
Mr. L a r k i n . The State banking authorities and the Comptroller’s
Office. In other words, control this through the source of credit.
The C h a i r m a n . Would this not result in a multiplicity of rules?
Would you suggest that this be done in case of transactions in stocks?
Mr. L a r k i n . There was no attempt to draw a parallel bet ween the
administration of margins as they apply to stocks.
The C h a i r m a n . I know there was no intention.
Mr. L a r k i n . A s against Government securities, this was one o f the
alternatives that has been considered in the course o f this study.
Not necessarily with a recommendation.
The C h a i r m a n . D o I understand that you are opposed to any
imposition by a Federal agency of uniform margins on dealings in
Government securities?
Mr. L a r k i n . Not necessarily, Mr. Chairman.
The C h a i r m a n . What is your position on that?
Mr. L a r k i n . This is a rather complex field and complex area.
The C h a i r m a n . Do you think it is a proper area for Congress to
deal with?
Mr. L a r k i n . It is an area that requires much further study and
an answer cannot be given offhandedly to a question o f this
importance.
The C h a i r m a n . Doesn’t the experience of last June and July indi
cate that the lowness of the margins contributed to the sharp rise and
then a sharp fall in the prices of Government securities ?
Mr. L a r k i n . In some areas.
The C h a i r m a n . Didn’t this have an adverse effect upon public
credit ?
Mr. L a r k i n . The paragraphs that you read from volume 2 o f this
study referred to those that lacked experience in Government securi
ties. In other words, aside from the so-called professionals in the
market.
The C h a i r m a n . The professionals were all right?
Mr. L a r k i n . I am not inferring that, Mr. Chairman. At least
professionals have an awareness of the fact that prices could go down
as well as up.
The C h a i r m a n . Would you suggest lower margins for the profes
sionals, higher margins for the amateurs or semipros ?
Mr. L a r k i n . Something like that may be conceivable. That
would have to be studied further, too.
The C h a i r m a n . This is a very important matter. We are trying
to safeguard the credit of the United States and to get a sound fiscal
1528
EM PLOYMENT, GROWTH, AND PRICE LEVELS
policy. We are coming to you gentlemen both for information and
advice. One reason we came to New York was because we were well
aware of the fact that the New York bank was somewhat independent
of the Federal Reserve Board and frankly, on the bills-only policy,
have always agreed with the New York bank rather than with the
Federal Reserve Board.
So we thought that we could get the information and wisdom of
counsel from you. Mr. Rouse, would you like to add anything to
this?
Mr. R o u s e . Yes, I would like to add this: This group studying
this problem have worked on it very actively for the last 4 months
and they have come up with this data. It has just now in effect be
come available for study by other people in the system.
One of the things that has been highly recommended as we went
along, because they thought it would be effective, was this matter that
Mr. Larkin suggested, that is, that a letter on this subject from the
Comptroller of the Currency to national banks would almost auto
matically be concurred in by the system and also by State supervisory
authorities and that banks would be governed by it without the neces
sity for legislation.
The C h a i r m a n . Why don’t you want legislation? Suppose we
pass legislation requiring margins and then allow the margins to be
set at the discretion of some supervisory board ? Why are you afraid
of Congress stepping in to protect you and to give you the authority
to produce fiscal solvency and fiscal soundness in these matters?
Mr. R o u s e . I am sure no one in the group questions the propriety
of Congress dealing with these things. As I have tried to say a
moment ago, this study produced facts. Now it is to be dealt with and
come to you with recommendations.
The C h a i r m a n . We would like to see you deal with it.
Mr. R o u s e . The Treasury and the System would like to study this
further and then come to the Congress with recommendations.
The C h a i r m a n . In the meantime, there might be another debacle
in the Government market. How many debacles such as last June
and July can we afford?
Mr. R o u s e . We haven’t had one for a long time. I think the lesson
that was given to the speculators was a costly one. I think a good
many of them lost a good deal of money. I do not think we are apt
to have one during the period in which study can be completed and
the System and the Treasury come up with recommendations to you.
The C h a i r m a n . What about the decline in the stock market in 1920
and 1921 when people had some of their margins wiped out? That
did not seem to teach the banks or the dealers any lessons, so the
margins continued low and we had the terrific stock market crash of
192*9 which was certainly aggravated by the low margin requirements.
Congress stepped in and saved the dealers and the banks from
themselves.
Mr. R o u s e . May I say that the Treasury and the Federal Reserve
System—I think I can speak for both of them in this matter—take
this matter extremely seriously. That is why they initiated this
study.
The C h a i r m a n . I think they felt the hot breath of Congress upon
their necks and knew if they did not act, we would.
EM PLOYM ENT, GROW TH, AND PRICE LEVELS
1529
Mr. R o u s e . I t h in k i t was v o lu n t a r y on th e ir p a r t. I a m sure
came a lo n g .
The C h a i r m a n . Thus Ajax rather was propelled from behind into
the fray.
Mr. R o u s e . We in New York were seriously aware of this and talked
both to the Open Market Committee and to the Treasury about it.
It is a thing that everyone is seriously interested in.
The C h a i r m a n . Don’t you think the margins should be higher
than they are now?
Mr. R o u s e . This is a relative matter, Senator. It depends on whom
you are dealing with. In some places you do not want any margin
or security. In some you want security.
The C h a i r m a n . What harm could be done by requiring margins?
Mr. R o u s e . The only harm that could be done would be in the case
of—well, there is no harm done in requiring margins. The amount
of the margin in respect to different groups might have to be different.
I think if you want to get a good Government securities market you
have to have ample credit available to the dealers.
The C h a i r m a n . Those who want to prevent speculative increases
and decreases in Government securities; isn’t that true?
Mr. R o u s e . That is true. Some healthy speculation is a good thing.
The C h a i r m a n . Within limits ?
Mr. R o u s e , Yes, I will agree.
The C h a i r m a n . Are you defending the speculative rise and the
speculative fall of last June and July ?
Mr. R o u s e . N o , sir.
The C h a i r m a n . D o you think that was a healthy thing?
Mr. R o u s e . Of course not.
The C h a i r m a n . This might happen again, might it n o t, unless mar
gin requirements were changed and somewhat increased ?
M r . R o u s e , I w o u ld lik e to com e b a c k 2 m o n th s f r o m n o w w it h a n
th at
a n sw er.
The C h a i r m a n . It might reduce the turnover. The New York
Stock Exchange is also opposed to any increase in margin require
ments because it diminishes dealers’ commissions. I think the general
public realizes that the imposition of margin requirements on stocks
has been a very healthy thing and that Congress, over the opposition
of the financial community, safeguarded the interests of this Nation.
Of course, the margin requirements in the case of bonds need not be
anywhere as rigorous as the requirements in the field of stocks, because
the absolute magnitudes and, indeed, the relative magnitudes of the
fluctuations are much less.
But this provision of no margins at all on 90-day bills and 1-percent
margins 011 6-month and 1-year bills and the low requirements on
others certainly contributed to that debacle.
Mr. R o u s e . Would you mind stating that question, again, Senator?
The C h a i r m a n . I am afraid it is somewhat rhetorical. I say,
is it true that the absence of any margin requirements on bills
the provision for only 1-percent margins on short-term notes, are at
most 2 percent, and I am not at all certain that the 5-percent require
ment was uniform even on the long-term bonds, certainly was a
contributing factor, was it not, to the speculative rise and the specula
tive fall in the prices of securities, of Government securities last June
and July?
1530
EM PLOYMENT, GROWTH, AND PRICE LEVELS
Mr. R o u s e . These margins that I mentioned that you referred to
are the margins required of dealers, not of the general public. These
margins are imposed in the light of the financial statements of the
dealers, the capital that is available to them, and their ability over
the years to cope with all these things.
The C h a i r m a n . Are you saying that the present margin require
ments are adequate and do not need be changed ?
Mr. R o u s e . I am raying that the margin requirements of other than
dealers are higher. I think most banks that I am familiar with would
charge from 5 to 10 percent on bonds as a margin.
The C h a i r m a n . Y ou m e a n lo n g -te r m b o n d s?
Mr. R o u s e . Yes, sir.
The C h a i r m a n . What about the notes?
Mr. R o u s e . I mean to individuals who might be buying them. If
I went in to borrow money to carry a Government security—which
I would not do, of course—as an individual, I would be required to
put up larger margins than dealers.
The C h a i r m a n . I am a little confused. I thought you said there
was no requirement on bills and only 1 percent on the shorter time
notes and certificates.
Mr. R o u s e . Y o u were speaking of the 17 dealers, sir, and I referred
to them.
The C h a i r m a n . Yes.
Mr. R o u s e . Mr. Larkin was talking about people other than dealers
who became involved in the market. I think in those cases the mar
gins were larger.
The C h a i r m a n . I think you testified that about $200 billion is
handled by these 17 dealers; $60 billion in initial issue of Governments,
$20 billion in Federal Reserve, and $120 billion dealings in outstand
ing Goverments. Certainly that is the major portion of the market
and it is to that I have been trying to address my attention.
I would like to ask you this direct question: Do you think that the
margin requirements on dealers should be increased?
Mr. R o u s e . Should be increased?
The C h a i r m a n . Yes.
Mr. R o u s e . N o , I don’t think that is necessary.
The C h a i r m a n . Therefore, you see no need for any Federal action.
You are satisfied with the present situation?
Mr. R o u s e . Yes.
The C h a i r m a n . Are you authorized to speak in this matter for the
Federal Reserve Bank of New York?
Mr. R o u s e . N o , sir. I am here as Robert Rouse.
The C h a i r m a n . Has the Federal Reserve Bank of New York taken
any position in this matter ?
Mr. R o u s e . N o , sir; it has not.
The C h a i r m a n . There are some questions which I had wanted to
ask about the auction system as compared to the present system for
floating initial issues of long-term Governments, but perhaps I have
taken up too much time.
Representative P a t m a n . N o , Senator, please go on. It is perfectly
all right with me. I urge you to go ahead.
The C h a i r m a n . I f I may go into the question, at present you auction
bills ?
EM PLOYM ENT, GROWTH, AND PRICE LEVELS
1531
Mr. R o u s e . Yes, sir; th e Treasury auctions bills.
The C h a i r m a n . Yes, but you act as the agent for the Treasury.
Mr. R o u s e . In New York. Each of the Reserve banks receives
tenders.
The C h a i r m a n . Would you describe the auction system?
Mr. R o u s e . The Treasury through its own publicity department
and through the Federal Reserve banks announces, as far as regular
Treasury bills are concerned each Wednesday and Thursday, an
amount of bills to be subject to tenders the following Monday.
The C h a i r m a n . Those do not have to be sold at par ?
Mr. R o u s e . They do not have to be sold at par.
The C h a i r m a n . H o w does the b id d in g take place?
Mr. R o u s e . The bidding takes place by potential bidders being fur
nished with forms.
The C h a i r m a n . Does the Treasury fix the interest rate?
Mr. R o u s e . N o , sir; it has in one instance on a special bill.
The C h a i r m a n . H o w does the bidding take place ?
Mr. R o u s e . The bidding takes place by the submission of sealed ten
ders to the Reserve banks.
The C h a i r m a n . And the amount of the discount determines the rate
of interest ?
Mr. R o u s e . That is correct. It is a price matter. Included in th e
awards may be an amount determined by noncompetitive tenders
agreeing to accept awards which may not exceed $200,000, at the aver
age rate of the competitive tenders.
The C h a i r m a n . Those are the small ones ?
Mr. R o u s e . Yes, sir.
The C h a i r m a n . Suppose dealer X bids for $ 5 0 million at 99*/2,
dealer Y bids for $ 5 0 million—how do you quote y32ds?
Mr. R o u s e . N o ; this is in decimals. In 3 decimals. 99.120.
The C h a i r m a n . Suppose X bids $50 million at 99.50; Y bids at
99.49; and Z bids at 99.48, and so on. At what rate will the bills be
sold to the bidders ? Will it be at a uniform rate or will it be at the
rate which each bidder bid ?
Mr. R o u s e . It will be at the rate at which each bidder bids until th e
aggregate amount is reached.
The C h a i r m a n . Suppose there is an oversubscription, which is
likely to be the case—what happens ?
Mr. R o u s e . I f the bidders not receiving awards really want the bills
they have to buy them in the open market the next day.
The C h a i r m a n . I know.
Mr. R o u s e . They are eliminated. They receive n o award at all.
The C h a i r m a n . Suppose the total issue is $ 2 billion and the total
volume of bids is $8 billion. Then how is the $2 billion apportioned ?
Mr. R o u s e . T o those submitting the tenders at the highest price.
The C h a i r m a n . Or the lowest discount ?
Mr. R o u s e . At the lowest discount. Taking your figures, 99.50
would get everything. Fellows at 0.49 might get everything. The
fellows at 0.48 might only get half. Fellows at 0.47 would not get any.
The C h a i r m a n . In other words, each dealer gets the amount for
which he bid at the price which he bid ?
Mr. R o u s e . Each bidder; yes, sir.
The C h a i r m a n . There is no uniform rate which is applied to all
dealers ?
1532
EM PLOYM ENT, GROWTH, AND PRICE LEVELS
Mr. R o u s e . No.
The C h a i r m a n . In this respect it differs from issuance of under
writing issues or issue of long-term bonds ?
Mr. R o u s e . The Treasury announces an average price, but that is
not related to the individual awards at different prices.
The C h a i r m a n . It doesn’t apply to each individual?
Mr. R o u s e . It doesn’t apply to individual tenders except up to
$200,000 on a noncompetitive tender basis.
The C h a i r m a n . In the case of long-term bonds of over 5 years,
the procedure is somewhat different, is it not?
Mr. R o u s e . Yes.
The C h a i r m a n . Let me see if I understand the answer. The
bonds are issued at par?
Mr. R o u s e . At par or at a price. Usually at par. Sometimes
at a price.
The C h a i r m a n . The interest rate is fixed by the Government?
Mr. R o u s e . Yes.
The C h a i r m a n . The bidding takes the form of how much they
will take at the fixed price.
Mr. R o u s e . Yes ; that is correct.
The C h a i r m a n . I f the issue is oversubscribed, as it generally is,
how is it apportioned, how is the apportionment made between
individuals ?
Mr. R o u s e . Between individual subscribers?
The C h a i r m a n . Yes.
Mr. R o u s e . In the case of bonds the Treasury usually nowadays
gives a preferential allotment to a group known as savings institutions,
if you will. We w^ill call them savers. And a lesser percentage is
allotted perhaps, to commercial banks in terms of ratio, and to others
perhaps a still smaller ratio.
The C h a i r m a n . What proportion is taken by the 17 dealers?
Mr. R o u s e . They would come in after the savers’ group and the
banks.
The C h a i r m a n . D o you know what proportion of the long-term
issues have been subscribed for by the 17 dealers ?
Mr. R o u s e . No ; I don’t believe I have it.
The C h a i r m a n . Could you furnish those figures for the record ?
Mr. R o u s e . We will endeavor to, with the Treasury approval. This
is Treasury data.
The C h a i r m a n . Y o u do not handle it f o r them?
Mr. R o u s e , N o ; we handle it only for New York. Perhaps the
request might be made to Secretary Anderson.
The C h a i r m a n . We would appreciate it if you would give the
figures for New York at least.
Mr. R o u s e . I would be glad to, with their approval. We will
clear with them because we are their agent. (See part 6A of hearings,
pp. 1105-1131.)
The C h a i r m a n . The question I would like to raise is this: Could
not the auction method be used for the issuance of long-term securi
ties in excess of 5 years?
I f I may explain this—I think the record will be clear. Let it stand
just as it is.
Mr. R o u s e . The Treasury could experiment with this. It would
not be encouraged by the record in this respect. As I recall in the
EM PLOYMENT, GROW TH, AND PRICE LEVELS
1533
middle 1930’s Secretary Morgenthau undertook to do this, and he
offered small amounts of both U.S. guaranteed securities and also
direct obligations at auction, and the results were not satisfactory,
but they were not conclusive possibly.
The C h a i r m a n . That was 2 9 years ago.
Mr. R o u s e . This wTas the middle 1930’s.
The C h a i r m a n . Twenty-five years ago.
Mr. R o u s e . Twenty-five years ago. As I recall, it was either Fed
eral Farm Mortgage or HOLC in the first instance, but then he offered
some 3’s of 46-48 and 2% of 55-60. It seemed to freeze out or
frighten away the small investor. The dealers and the large banking
institutions seemed to get the principal awards at the start. This
is going back a long time. I am dredging this up.
Really they were doing it as underwriters. It had an adverse mar
ket effect and was finally given up.
But I don’t think that is necessarily conclusive, and should not be
reexamined.
The C h a i r m a n . Let the chairman make it clear, first, that he is not
proposing a stock exchange system for outstanding issues as the Federal Reserve Board and Treasury seem to indicate in their study.
He is proposing it simply on new long-time issues. It should be
used for the long-term issues as it is now used for the short term.
It seems to me this would have certain advantages.
First it would make it clear that the rate was a competitive rate
and not a negotiated or collectively bargained rate.
Second, it would skim off the investors’ surplus because lots would
be sold to each bidder at the price that the bidder himself made
instead of all being sold at the lowest price.
I think it would be more flexible and would not embarrass the
Federal Reserve as much as the present practice.
The chairman recognizes, of course, that any such transition could
not be effected immediately or overnight and should be carefully pre
pared for and every effort should be made to get new participants in
the purchase of Government securities.
But I wonder if this would not be a very valuable innovation.
Mr. R o u s e . I am sure that any Secretary of the Treasury would be
delighted to be relieved of the responsibility of determining the price.
The C h a i r m a n . The extraordinary thing is that they don’t seem
to be. They resist all these ideas with great obstinacy.
Mr. R o u s e . There are perhaps times when there is a greater respon
sibility in trying to get a better price through setting a price, and a
better distribution through setting a price than doing it through
auction.
The Secretary takes on a responsibility in doing it.
The C h a i r m a n . What could be better than auctions, broadly pre
pared for, announced in advance, and periodically occurring ? Why
this would be the competitive system which presumably this admin
istration believes in, carried to perfection.
Mr. R o u s e . I see no problem in experimenting, but I would be
fearful of the results. I think it would end up with primarily your
professionals underwriting the issue. I don’t think you would get
the broad distribution.
The C h a i r m a n . Y o u would get the professionals anyway. But
beyond the professionals you could get the banks, insurance companies,
385631—5&—pt. 6B------*3
1534
EM PLOYM ENT, GROWTH, AND PRICE LEVELS
savings and loan institutions, mutual savings banks, and the individ
ual investors. They could get investment counsellors, who could help
them. It would create a new profession, so to speak, and break down
this little tightly knit group which operates here.
Mr. R o u s e . It might be that it would work out that way. Some of
the samples that we have had have not worked that way. In selling a
Treasury bill at a fixed price, which was done once—in other words,
the Secretary determined the price—I believe he got much wider dis
tribution than he would through a regular Treasury bill auction in
which the number of participants are comparatively small.
The C h a i r m a n . I have taken u p more time than I should.
Congressman Patman.
Representative P a t m a n . That is all right, Senator. That was very
interesting and helpful.
Mr. Rouse, am I correct in assuming that you wrere not consulted
about this report that was made by the Federal Reserve and the
Treasury ?
Mr. R o u s e . This study was carried on by a study group o f which I
was not a member.
Representative P a t m a n . And you were not consulted about it?
Mr. R o u s e . I participated in listening to two or three, as I recall,
of the consultants’ comments, I listened as one of the senior people
in the System, but I was not consulted.
Representative P a t m a n . Y ou were not consulted about what went
into the report ?
Mr. R o u s e . JSTo 5 t h a t is correct.
Representative P a t m a n . I am in accord with your views o f not hav
ing tax exemptions on bonds. There is some sentiment in the country
that the way to do this thing is to have some tax exemption or wholly
tax-exempt bonds. I agree with what you say that we should not
start that.
I know one time an effort was made to get rid of all tax exempt
bonds, and we succeeded in getting rid of the ones in the Federal Gov
ernment only. I think that was very helpful. Instead of having
more tax exemption I would love to see the others gotten rid of, too,
like we did on the Federal Government bonds.
The questions I shall ask you, Mr. Rouse, if you cannot answer
them without an extension of time, without expanding upon your
remarks, I suggest that you answer them as much as you can and then
when you get the transcript feel free to elaborate on what you have
said, if you desire to do so. In that way we can shorten it some, I
assume.
I don’t want you to withhold any answer that should be given here,
if you please.
Mr. R o u s e . I will try not to, sir. I would think that the chances
would be that I am not as articulate as I would like to be, so I would
like to have a little time with the transcript.
Representative P a t m a n . Certainly you will have that privilege.
I hope you will not be as articulate as some people are in the Federal
Reserve, because I would not get to ask you very many of these ques
tions today. I say that with all due respect to the gentlemen. They
have so much knowledge and information that they have to have a lot
of time to elaborate on their answers.
EM PLOYM ENT, GROWTH, AND PRICE LEVELS
1535
The first question is about making markets.
The Government securities dealers are said to perform a good
service in that they make markets. Precisely what is meant by the
term “making markets” ?
Mr. R o u s e . A dealer makes a market when he quotes a price to a
customer on which he will either buy or sell a given amount.
Representative P a t m a n . I s it your belief that the 17 dealers with
whom the open market trades bring about the sales of a great deal
more Government securities than would otherwise be sold?
I f so, do you have any rough estimate as to the percentage of the
securities which these dealers place in the hands of investors that
would not otherwise be placed with the investors ?
Mr. R o u s e . I can only answer that in general terms, Mr. Patman.
I think they perform a very real service as to the amount of Govern
ment securities that are held by investors in the sense that investors
would not buy them unless there had been established an active and
broad market in these securities and it is that which the dealers
provide.
Representative P a t m a n . Y ou would not be able to make an estimate
of what the difference would be?
Mr. R o u s e . I would not attempt it, sir; no, sir.
Representative P a t m a n . D o you have any knowledge or any
estimate as to the number of cities in the country where the dealers
regularly make purchases and sales?
Mr. R o u s e . I would think it was unlimited. You tell me the
number of cities, I would say that they function in every one of them.
It is an active telephone market. The dealers are in touch with the
principal investors in each city, and I think almost every day.
Representative P a t m a n . That is the 17 dealers. Would you say
that would be in all the Reserve cities in the System or many more
than the Reserve cities?
Mr. R o u s e . Many more than the Reserve cities.
Representative P a t m a n . Including most of the country bank cities ?
Mr. R o u s e . That is right.
Representative P a t m a n . Do you have any knowledge of the num
ber of member banks that trade directly with the 17 dealers?
Mr. R o u s e . N o , sir. I assume that most of them would do so.
Representative P a t m a n . Another function which we have heard
that dealers perform is that of adjusting bank reserves so that the
loanable funds are balanced with loan demands in the various local
ities of the country. In other words, you add reserves to the banking
system or take them out at New York, and the reserves added in New
York are supposed to flow out across the country to places where
they are needed.
Have you had occasion to make any study of this question of how
fully and how promptly changes in bank reserves in New York are
carried out over the country?
Mr. R o u s e . I believe we have not any recent study on that subject.
I have assumed myself that people who need reserves and wish to ac
quire them through the disposition of securities are in touch with
the dealers and that the dealer—if we were buying security—would
be soliciting the potential sellers in order to effect a sale.
1536
EM PLOYM ENT, GROWTH, AND PRICE LEVELS
Representative P a t m a n . The Federal funds market is used now
more than in the past, Mr. Rouse ?
Mr. R o u s e . Yes, sir.
Representative P a t m a n . I will ask you about trading with the
dealers. Some of the Federal Reserve reports state that the open
market accounts transactions with the dealers are made mostly on
the basis of best price, When transactions have been made with the
dealers not on the basis of best price, on what basis have they been
made ?
Mr. R o u s e . It is on the basis of best price in this sense. I and my
associates when we are active on the desk know the markets, and we
have gotten competitive markets from several dealers as far as any
one transaction is concerned. It is on the basis of best price.
So the inference conveyed in what you have just said is incorrect.
It is always best price.
Representative P a t m a n . Does it happen that you are quoted iden
tical prices by the six largest dealers ?
Mr. R o u s e . I think that would happen very rarely.
Representative P a t m a n . Infrequently?
Mr. R o u s e . I th in k it would be very rare. Infrequently is correct,
Representative P a t m a n . When several of the dealers quote iden
tical prices and you felt on the basis of best price you cannot buy or
sell the full amount you wish to buy or sell, how have you deter
mined how to divide the business among the dealers ?
Mr. R ouse. Mr. Larkin will answer that.
Mr. L a r k i n . Divide b y 6, or distribute it as evenly as possible.
Representative P a t m a n . Does that often occur?
Mr. L a r k i n . ISTo. Rarely, as Mr. Rouse suggested.
Representative P a t m a n . The answer Mr. Rouse made a while a g o ,
infrequently ?
Mr. L a r k i n . That is right.
Representative P a t m a n . Whenever y o u get it that way y o u divide
by 6?
Mr. L a r k i n . That is right. It might be two or three. We divide
by that number. The point is that we try to divide the total business
as evenly as the best price requirement permits.
Representative P a t m a n . Could you supply for the record the data
showing the volume of purchases and also the volume of sales with
the dealers which were made on the basis of something other than
best price. It would be well if you could supply such data on a
monthly basis for 1958 and the 4 previous years. But I believe your
answer is the best price prevails. So that would be your answer to
this one?
Mr. R o u s e . Yes.
Representative P a t m a n . About the competition among the dealers,
do you feel you always have complete and perfect competition among
the dealers, or have you felt that at times some of the dealers were
putting up a kind of united front in their bid and offer prices?
Mr. R o u s e . I have never felt the latter. I would like to consult
my associates.
Representative P a t m a n . The same answer ?
Mr. R o u s e . The same answer.
EM PLOYMENT, GROWTH, AND PRICE LEVELS
1537
R e p r e s e n ta tiv e P a t m a n . D o y o u k n o w w h e th e r o r n o t i t is tru e
as I h a v e so m e tim e s h e a rd , t h a t m a n y o f th e d e a le r s h a v e d ir e c t
t e le p h o n e lin e s in a n d a m o n g th e m se lv e s ?
Mr. R o u s e . I assume that they would.
Representative P a t m a n . With reference to the dealer bidding o n
the Treasury bill auction, do they give you just before the bids close
pretty good estimates as to what the average bid price will be or what
the to-be-sure price will be ?
Mr. R o u s e . Each of them that talked with us about it, and a good
many of them do, give us an estimate of sorts, and there is a great
deal of variety in what they think will come out, I might say.
Representative P a t m a n . After the bids close, do some of the dealers
pretty regularly inform you what the composite bids of all the dealers
or a substantial number of dealers are? In other words, can one
dealer tell you what prices all the other dealers have bid and the
quantity at each price ?
Mr. R o u s e . Yes.
Mr. L a r k i n . That information would be available at any rate from
the actual tenders. It just happens that it comes through this way
more quickly.
Representative P a t m a n . H o w many minutes after bidding closed
have you received such information by telephone?
Mr. R o u s e . I would think about 20 minutes.
Mr. L a r k i n . Maybe shorter.
Mr. R o u s e . Fifteen or twenty minutes.
Representative P a t m a n . Have you had an opportunity to compare
these reports on composite bids of the dealers with the actual bids?
Mr. L a r k i n . Yes, I have.
Representative P a t m a n . They c o n fo r m pretty well to the actual
bids?
Mr. L a r k i n . Yes.
Mr. R o u s e . Not always. I have seen some reports that did not
conform with the total of dealer bids.
Mr. L a r k i n . The question was directed toward price. Amount
and price; not toward the aggregate.
Representative P a t m a n . Could you supply for the record the
composite of the dealer bids which have been furnished you by the
dealers and also show what the actual composite bids of these dealers
were?
Mr. R o u s e . Would you be good enough, sir, to address that question
to Secretary Anderson ?
Representative P a t m a n . He would be the one. You are acting as
an agent in that respect ?
Mr. R o u s e . That is correct.
Representative P a t m a n . I f he is willing for you to answer you
wTould be very glad to answer ?
Mr. R o u s e . We are just his agents, sir.
Representative P a t m a n . With reference to the Treasury auction,
when you have bills maturing and you know that you want to main
tain your portfolio at a certain level you exchange the maturing bills
for new bills directly with the Treasury, or do you sometimes purchase
part of your needs from the open market ?
Mr. R o u s e . Generally speaking we exchange our bills directly with
the Treasury. However, to do so we have to enter a competitive ten
1538
EM PLOYMENT,
GROWTH, AND PRICE LEVELS
der and sometimes we have not been successful when we meant to be
and have had to buy some bills in the market in order to replace them
fully.
Representative P a t m a n . On this question, if you could suppfy for
the record the composite of the dealer bids which have been furnished
you by the dealers and also show what the actual composite bids of
these dealers were, and you asked me to refer that to Secretary Ander
son, Secretary Anderson doesn’t actually have this information him
self. I assume that is correct. You are the only one who has the
information.
Mr. R o u s e . Unless dealer bids were submitted elsewhere in the
country.
They might be submitted in Chicago. By and large I
think most of them are submitted in New York. I might also say
that I would question whether we would have in our files any record
as far as these composite reports the desk gets from one or two or
three of the dealers concerned.
Representative P a t m a n . Your point is that you are reluctant to
give it out since you are in that respect acting as an agent of the
Treasury ?
Mr. R o u s e . Yes as to the actual bids. This is confidential informa
tion of the Treasury. It belongs to it,
Representative P a t m a n . I f Secretary Anderson so instructs, you
will be glad to give the information and put it in the record in
connection with extension of remarks ?
When you exchange bills for maturing bills, how do you make your
bid? Do you bid average of the market, or do you bid several dif
ferent prices or a noncompetitive bid, or what ?
Mr. R o u s e . It varies. There are times when we want to be abso
lutely sure of having a successful tender in toto. In that event we
quote a price that we judge will do it, based on our general knowledge
of the market, the demands, current Treasury bill prices, and so forth.
There are times when we don’t want any bills. We feel a certain
obligation, if you will, to the Treasury to enter a tender at some
reasonable price which we don’t expect to be successful, and we do put
in the tender.
Then again there are times when it is marginal from a Reserve
standpoint as to whether we wish to replace or not replace. In that
event we might put in a price on a series and lose some and not others.
Representative P a t m a n . Do you receive reports from the dealers
on their profits ?
Mr. R o u s e . N o , sir. Not as a general thing. We get no income
statements from dealers. The only ones that we get are those that
are published.
Representative P a t m a n . I s there a recognized fee or commission
that is customarily charged in the handling of Government securities
by dealers like brokerage fees ?
Mr. R o u s e . By and large they are acting as principals, so that they
buy and sell at a quoted price and they are not acting as a broker.
Representative P a t m a n . Could you give us an estimate based on
your experience as to what percentage of the dealers’ profits they make
from their price spreads and what percentage they make by
speculation for their own account?
Mr. R o u s e . N o , sir.
EM PLOYMENT, GROWTH, AND PRICE LEVELS
1539
Representative P a t m a n . Y ou would have no information on that?
Mr. R o u s e . N o , sir.
Representative P a t m a n . With reference to short sales, does it some
times happen that an individual dealers’ net position is on the short
side rather than on the long side ?
Mr. R o u s e . Rarely.
Representative P a t m a n . The report on the Treasury-Federal re
serve investigation indicates that as a group the dealers did not make
a large amount of short sales during 1958. Would it be your judg
ment that the report on this question is substantially accurate, or that
the dealers actually make much larger amounts of short sales than
their report would indicate?
Mr. R o u s e . I think it would be substantially accurate.
Representative P a t m a n . Substantially as reported?
Mr. R o u s e . Yes,
Representative P a t m a n . Substantially as reported by them in their
report ?
Mr. R o u s e . Yes. You know the report.
Mr. L a r k i n . I would have no reason to doubt the accuracy of their
figures.
Representative P a t m a n . What methods do the dealers use in
making short sales; do you know?
Mr. R o u s e . In quoting the market they sometimes are quoting a
market with respect to securities they don’t own. They may have
3’s of 46 or 48, but not 2%’s of 48, and they sell 2%’s of 48.
So they are short and they must borrow in order to make delivery.
Borrowing is difficult, I might add.
Representative P a t m a n . In a case like that.
Mr. R o u s e . It is difficult and expensive.
Representative P a t m a n . What about other large operators in the
market? Do they also make short sales of Government securities?
I f so, could you give us a picture o f this ?
Mr. R o u s e . This I have no information on.
Representative P a t m a n . I want to ask you about your expert
knowledge of the market. I wonder if you have felt that the dealers
have ever picked up inside information somehow concerning changes
in Federal Reserve’s credit policy.
Mr. R o u s e . Authoritative information you are speaking of?
Representative P a t m a n . Information upon which they rely.
Mr. R o u s e . I f the implication is that there is an official leak, no.
Representative P a t m a n . I beg your pardon ?
Mr. R o u s e . I f the implication is that there is an official leak, the
answer is “ No.” On the other hand, you have situations where they
might think that a report or some story published in the press or
weekly magazine or monthly magazine might be authoritative, but
I would not think they would rely on it myself.
I know as a dealer I would not.
R e p r e s e n ta tiv e P a t m a n . Y ou h a v e n ev er k n o w n a case w h e re y o u
f e l t th a t th e d e a le rs h a v e p ic k e d u p a cc u ra te i n fo r m a t io n o n th e
in s id e ?
Mr. R o u s e . N o , sir.
Representative P a t m a n . Y ou have never known a case.
1540
EM PLOYM ENT, GROWTH, AND PRICE LEVELS
Do you find that the dealers with whom you trade are usually
better able to sense or dope the direction of the Fed’s credit policy
before the market generally becomes aware of a change in policy?
Mr. R o u s e . They make a business of it, and sometimes they are
successful, just as some of the more shrewd newspaper people are.
Representative P a t m a n . Of guessing what is going to happen?
Mr. R o u s e . Yes. As I said earlier in response to one of Senator
Douglas’s questions, as to personnel—perhaps it was you.
Representative P a t m a n . That sixth sense you are talking about?
Mr. R o u s e . Yes. The people who do this business are extremely
well informed, and shrewd, and you would expect that they would
be able to do the type of thing you suggest. Perhaps they have to
do it more often than not, to be successful.
You have me in an intangible area, and I cannot go beyond that.
Representative P a t m a n . Some of them are not so good and they
take losses accordingly ?
Mr. R o u s e . Yes. That is right.
Representative P a t m a n . Y o u are probably the best expert in all
phases of the money market. On the basis of your experience, what
is the most usual origin of a reduction in interest rates? In other
words, does a reduction usually come first from commercial banks,
the insurance companies, the savings banks, or what? Can you
describe how a reduction in interest rates most usually arises ?
Mr. R o u s e . I would say fundamentally it would arise out of a
slackening in the economy.
Representative P a t m a n . Slackening of the economy ?
Mr. R o u s e . Yes, sir.
Representative P a t m a n . Have you found that some of the dealers
are frequently in the position of opposing an increase in interest
rates? In other wTords, doesn’t it sometimes happen that a dealer
has a large inventory of bonds, perhaps municipal bonds, which he
wants to unload prior to reduction of bond prices ?
Mr. R o u s e . Y ou mean he would be resistant in his market opera
tions ? I don’t think I follow that question, sir.
Representative P a t m a n . In other words, are they in a position fre
quently of opposing an increase in interest rates because they have an
inventory ?
Mr. R o u s e . No one dealer is in a position to do that.
Representative P a t m a n . H o w much of the dealer’s trading is
among and between themselves ? Do you have any idea of that ?
Mr. R o u s e . I don’t really have an idea, except going back to my own
experience in the late thirties, and I would say it is quite small.
Representative P a t m a n . It is quite small ?
Mr. R o u s e . I would say something under 10 percent.
Representative P a t m a n . Under 10 percent?
Mr. R o u s e . Yes. Probably smaller than that.
Representative P a t m a n . It has been said that at one time the Gov
ernment securities dealers had a custom whereby one could call another
and ask his quotation on a particular security and the dealer who made
the call could then force the giver of the quotation to either buy or
sell a certain quantity at that quotation.
Do you know about that custom and how it worked, what its pur
poses were and when or why it was abandoned, if it had been
abandoned ?
EM PLOYMENT, GROWTH, AND PRICE LEVELS
1541
Mr. R o u s e . Yes. I don’t remember when it was abandoned but it
was in effect during the late 1930’s. It was abandoned partially after
the war. There may still be some bilateral agreements in effect. Of
that I am not sure.
The purpose of it in theory was that by swapping of quotations and
the dealing that would result, you would have an evening out of the
market so you might have a situation come out of it that everybody
who was working was making the same quotation. It didn’t really
work very well.
Representative P a t m a n . There is no requirement like that of a
recognized security dealer?
Mr. R o u s e . N o , there is no requirement of that sort. In fact,
most of the dealers have abandoned it.
Representative P a t m a n . After the first action was taken to ease
credit early in 1958, some time passed before the banks reduced the
prime rate and some of the newspaper statements were to the effect
that the bankers were holding out for another reduction in required
reserves.
I wonder if you would give us your expert appraisal of that situ
ation and indicate how the banks were prevailed upon to reduce the
prime rate ?
Mr. R o u s e . I don’t think I can answer that question.
Representative P a t m a n . All right, sir.
You obtain daily reports from the dealers, do you not, showing the
position of each dealer ? That is, the amount of their inventories, the
amount of their long sales, and the amount of their short sales; is that
correct ?
Mr. R o u s e . We receive that information from some of the dealers.
I might add from most of the dealers, but not all of the dealers.
Representative P a t m a n . Of the 17 dealers why would you require
it of some and not require it of the others ?
Mr. R o u s e , We don’t require it at all.
Representative P a t m a n . They voluntarily submit it ?
Mr. R o u s e . Yes.
Representative P a t m a n . H o w many do you get it from, approxi
mately ? Two-thirds of them; half of them %
Mr. R o u s e . Three-quarters, at least.
Representative P a t m a n . In other words, they consider it to their
advantage, I assume, to do it or they would not do it ?
Mr. R o u s e . I don’t think they consider it to their advantage, sir.
I think they feel it is the kind of information that the Treasury and
the Open Market Committee should have if they are to carry out
their responsibilities.
Representative P a t m a n . I can’t understand why three-quarters of
them would feel that way about it and the other quarter would not.
It occurs to me that it should be a recognized policy of requiring or
not requiring. I f it is good it should be required.
Mr. R o u s e . We think it is helpful.
Representative P a t m a n . Why don’t you require it of the other
quarter?
Mr. R o u s e . Some of the dealers feel that it is private business and
it is their business and part of their trade secrets.
Representative P a t m a n . They don’t want to furnish it to you.
1542
EM PLOYM ENT, GROW TH, AND PRICE LEVELS
In your experience, have you found over the past 5 years that the
dealers substantially all increase their inventories of long positions
in a rising market and do the opposite in a declining market?
Mr. R o u s e . Increase their position in a rising market and decrease
in a declining market, yes.
Representative P a t m a n . Has the New York bank made any tabu
lation of dealer positions by week? In other words, it would be very
helpful if you would submit for the record any tabulations or charts
you may have which would show what the dealer positions have been
week by week over the past 5 years. In addition it would be helpful
to have an analysis as to what extent all of the dealers have behaved
in the same way. That is, going long on a rising market and reducing
their long position in a declining market.
I am not suggesting that you reveal individual dealer data, but if
you can supply an analysis it would be helpful to know how the
different groups of dealers behaved on these quotations.
Mr. R o u s e . We receive this information, as you know, on a volun
tary and confidential basis. We have not made any such charts as
you suggest. On the other hand, I am quite willing to ask those who
furnished the information if they would mind if we attempted to do
that and provide it at least on a confidential basis to you.
Representative P a t m a x . For the committee.
Mr. R o u s e . Not for publication. That I will do.
Representative P a t m a x . We will accept it that way, I assume, Mr.
Chairman, and not make it a part of the record, but subject to inspec
tion by the chairman and members of the committee.
The C h a i r m a n . I don’t quite see why you don’t want to have i t
published if they are totals and do not identify individual firms.
Mr. R o u s e . It is their information, and I will put it up to them.
It is not ours.
Representative P a t m a n . I would appreciate it if you would. Of
course, we should not identify individual firms but the census has the
same problem.
Mr. R o u s e . Sure. Mr. Larkin may want to comment.
Mr. L a r k i n . Congressman, this information is available in th e
joint Treasury-Federal Reserve study covering a shorter period of
time. It covers part of 1957 and 1958.
The C h a i r m a n . Could you indicate the pages in this study ?
Mr. L a r k i n . It is in the appendix of part 2.
Mr. R o u s e , I f t h a t is th e case, w e w ill s k ip th is.
Representative P a t m a n . Thank y o u .
I f we need additional information we will request it on the basis
you suggested.
Mr. L a r k i n . Y ou w ill fin d t h a t a lso cov ers 17 d ealers.
The C h a i r m a n . I think one defect in this particular material is
that it does not cover a sufficiently longer period.
Representative P a t m a n . I f you could expand on that under the
same conditions, it would be appreciated, Mr. Rouse.
Mr. R o u s e . Very well, Mr. Patman.
Representative P a t m a n . At the conferences you have with th e
dealers, will you tell us about those? Who participates in these
conferences, what is discussed, what the main items of interest a re
to the dealers, and the Reserve banks, and so on ?
EM PLOYM ENT, GROWTH, AND PRICE LEVELS
1543
Mr. R o u s e . The interviews with the dealers which occur each
morning-----Representative P a t m a n . Each morning before the market opens?
Mr. R o u s e . Each morning before the market opens. Two dealers.
One comes at 9 :30 and the other comes at 9 :45. Each remain approxi
mately 15 minutes. They comment on the market. The officers of
the bank who participate are we three and two junior officers in the
same function. Not all of us are there at one time. Sometimes one;
sometimes two. Rarely more than that.
Sometimes a representative from the Board staff, or perhaps the
president of another Reserve bank who might happen to be in New
York, or senior officer of such a bank, or a Treasury representative
might be present.
The dealer usually would be commenting on the type of business
that was going on in the market since he had been there the preceding
week.
Representative P a t m a n . You alternate each day?
Mr. R o u s e . A different dealer each day. Some come every week.
We have not space enough for all of them, so some are on a biweekly
basis. I think two or three are on a biweekly basis. It is generally
a review of the market that they give us as they see it. There is
frequently quite a difference in their point of view one as against
the other.
It affords us as observers to the market and operating as far as the
System open market is concerned and as advisors to the Treasury with,
I think, a very helpful cross index, if you will, of opinion as to what
is going on in the market; for example, whether the type of buyers,
as we heard recently, are a great number of small investors buying
these 4% percent notes. This has been a rather unusual situation.
That is the type of information we get. We usually ask questions
along that line.
As you can imagine, we have no information to volunteer unless it
should be a technical question in response to Treasury finance or the
like.
Representative P a t m a n . Y o u state you don’t have room for any
more. That is the part I couldn’t answer. I thought you had all the
buildings in the country that you wanted.
Mr. R o u s e . There are only five of u s, and we are not all there all
the time. I f there were more dealers we would find a way, you can
be sure of that.
Representative P a t m a n . Y ou have 17 dealers and two a day—that
would take about 8 or 9 days.
Mr. R o u s e . A s I say, there are two or three who come biweekly.
Representative P a t m a n . One of the business magazines, Business
Week, on July 12 last year, reports that during these conferences the
New York Reserve bank avoids telling a dealer when his estimate of
your policy is correct, but that you do give him a tip when he is way
off target.
Would you agree that report is correct, and, if so, could you give us
illustrations of the kinds of situations that have existed where you
have given a dealer a hint that he is off target ?
Mr. R o u s e . I think I will just laugh that one off, sir. It is on the
ridiculous side.
1544
EM PLOYM ENT, GROWTH, AND PRICE LEVELS
Representative P a t m a n . Y ou don’t want to seriously regard that
one because you think it is ridiculous ?
Mr. R o u s e . Obviously I don’t take it seriously.
The C h a i r m a n . Then do I understand the witness to say that the
article in Business Week was incorrect?
Mr. R o u s e . Yes, sir.
Representative P a t m a n . And ridiculous, you said?
Mr. R o u s e . Yes, we just don’t do that.
The C h a i r m a n . I s there a reporter from Business Week here?
F r o m t h e F l o o r . Yes, sir.
(Subsequently the following statement was received for the record:)
B u s in e s s
W eek,
New York, N.Y., August 18,1959.
The Honorable W r i g h t P a t m a n ,
House of Representatives
Washington, D.C.
My D e a r Mr. P a t m a n : In response to your kind invitation, I am enclosing
a statement that I would like included in the record of the hearings of the Joint
Economic Committee in New York.
The statement has been approved by Business Week.
Sincerely yours,
M. J. Ross a n t .
,
“The dealers feel that they get some guidance from the discussion. ‘They
never tell you if you are on the right track/ says a weekly visitor, ‘but they some
times drop a hint that you’re way off target. * *
”
The quotation above, cited by Representative Patman and referred to by Mr.
Rouse appeared in an article reported and written by me in the July 12, 1958,
issue of Business Week. In the course of preparing the story, I interviewed
many dealers, and the precise quotation was given to me by one of them, with,
the understanding that I could use it if I did not identify my source by name.
I did not in fact consider using the quotation until I had checked with other
dealers who confirmed it; I might add, moreover, that its substance was also
supported by officials of the New York Federal Reserve Bank with whom I
talked.
May I add, however, that the quotation is best read and understood in context.
I trust that the committee will see fit to publish the article in full, or at least
those portions that bear on the question raised by Representative Patman.
I consider that the following passages are particularly relevant:
“There’s a shroud of secrecy over the Fed’s operations. It never reveals the
reasons for its operations, lest it tip off the dealers on its intentions. The dealers
are free to interpret whether any sale or purchase is defensive or dynamic, but
they do so on their own. Like a good poker player, the New York Fed— which
dealers call ‘the big house’— always conceals its hand.
“This discretion has sometimes been misinterpreted. Patman has pointed
an accusing finger at what he calls ‘the under-the-counter kind of trading’ con
ducted in the Government market. Patman’s main enemy is the Fed itself, but he
has also attacked the dealers as accomplices. In his eyes, ‘the biggest money
market in the world’ is ‘the most closed market that was ever invented.’
“The dealers dispute the notion that there is anything secret or underhanded
in their trading. They accept the Fed’s close-mouthed attitude but they make
clear that their own operations depend on their ability to do business with a
great variety of accounts.
“The dealers operate in a market so competitive that R. S. Sayers, the British
monetary authority, describes it as ‘near perfect competition.’ Whenever a
dealer’s prices are out of line, he is sure to be ‘hit’— either by another dealer or
an acute customer. If his price is too high, everyone will sell to him ; if it is
too low, they will all buy from him. * * *
“In some firms, policymaking is a one-man affair. In others, small committees
make most of the major decisions. Childs, for instance, has a three-man
group— Murray F. Borwn, manager of its New York branch, Robert Van Cleave,
the firm’s research chief, and Cantwell— which operates in New York but checks
its decisions with Childs in Chicago.
EM PLOYM ENT, GROWTH, AND PRICE LEVELS
1545
“Most dealers acknowledge the importance of making policy decisions on a
basis of economic analysis, but Lanston is the only one boasting a staff of trained
economists. It is probable that he has set a trend.
“In taking positions, most dealers say that they don’t ‘go against the policy of
the big house.’ As one explained, ‘You’re just asking for losses if you load up
on bonds when the Fed is tightening credit.’
“The heads of most firms meet with senior Fed officials, usually weekly.
From the Fed’s viewpoint these meetings, which last no longer than 15 minutes,
are a way to find out what dealers are thinking and to check the market.
“The dealers feel that they get some guidance from the discussion. ‘They
never tell you if you are on the right track,’ says a weekly visitor, ‘but they
sometimes drop a hint that you’re way off target. * * *’
“The Fed’s own traders follow a ‘nonfraternization’ policy. Recently, a Fed
trader was given a retirement party attended by outside traders who had been
in almost daily telephone contact with him for over 20 years but were meeting
him face to face for the first time.
“Some dealers feel that the Fed occasionally makes mistakes. In those situa
tions, if a dealer is willing to take a risk and buck the Fed, he stands a chance of
coming out way ahead.”
Representative P a t m a n . What is your experience as to what the
main advantages are that the dealers have gained, or have not gained,
from your conference, and what are the main benefits that the Open
Market Account has gained from the conference with the dealers ?
M r . R o u s e . I th in k I h a v e a lre a d y a n sw e re d th a t.
Representative P a t m a n . Yes.
Do you feel that the benefits which the Open Market Account
gains from the conferences with the dealers outweigh the risks, if
there are risks, that the dealers can read your minds to an extent and
gain an undue advantage ?
Mr. R o u s e . Of course, there may be mindreaders among the deal
ers, sir.
Representative P a t m a n . Y ou don’t deliberately or on purpose do it ?
Mr. R o u s e . I would say this; I would say that the officers in this
function certainly lean backwards in trying to avoid giving any hint
of system policy.
Representative P a t m a n . What effect have changes in a discount
rate have on bill prices? In other words, is the effect immediate, if
there is any effect, and do bill prices increase or decrease so as to
change the yield in proportion to the change in the discount rate?
Mr. R o u s e . I think there is a tendency for bill prices to adjust to
the discount rate in time. Actually you have a situation currently
where the Treasury bill prices after tending to adjust to the discount
rate have now declined so that they are at 3 percent instead of 3.30
percent with a discount rate of 3y2 percent, representing to a large
degree the investment of liquidity, I believe, of business corporations.
There is also a certain amount of storm cellar financing, interest in
a short Treasury bill.
Representative P a t m a n . Some of the directors of the Reserve
banks are also directors or officers of private banks as well as some
of the other financial institutions. Do you know if that is correct?
Mr. R o u s e . Some of the directors ?
Representative P a t m a n . Yes, sir. Directors of the Reserve banks
are also directors and officers of private banks ?
Mr. R o u s e . Yes. We have three directors that may be a n d w e
have three other directors that are elected, one by large banks, one by
medium size banks, and one by small banks, as you know.
1546
EM PLOYM ENT, GROWTH, AND PRICE LEVELS
Representative P a t m a n . Although they cannot be officers, they can
be stockholders in banks ?
Mr. R o u s e . They can be, but the stockholdings of the directors—
the bank stockholdings of the directors of tlie Federal Reserve
banks—I think you will find are negligible.
Representative P a t m a n . Are what ?
Mr. R o u s e . Are negligible.
Representative P a t m a n . We went into that one time. Mr. Martin
made the statement before a congressional committee when I was
interrogating him that they did not own stock. I challenged that
statement. I asked him to interrogate each one and ask certain
questions, which was done, and the information disclosed that a
majority of them were stockholders in banks. So that is a matter
of public record.
Mr. R o u s e . I have not seen the figures, but I think I stick to my
story that I think they are negligible.
Representative P a t m a n . I think if you will examine that infor
mation you will find that the majority of them are owners of stock.
Mr. R o u s e . That may be true, but the holdings would be negligible.
Representative P a t m a n . We did not interrogate them as to the
extent of their holdings.
Mr. R o u s e . I see.
Representative P a t m a n . The directors of the Federal Reserve bank
know, of course, when they have recommended a change in the dis
count rate. Have you ever learned that word of a recommended
change in the discount rate has reached any of the dealers before
the change in the rate was announced ?
M r. R
o u se. N o ,
sir.
Representative P a t m a n . Never have.
When you buy or sell a large quantity of bills, do the dealers know
within a matter of minutes or an hour or so what the total amount
of your purchase or sale has been ?
Mr. R o u s e . This I can’t answer with any authority.
Representative P a t m a n . In the joint report of the Treasury and
Federal Reserve Board on the investigation of the market, much is
said about improving the flow of information to the market and
providing better statistical data. I wonder why when you make a sale
or purchase you do not announce it immediately and state what
quantity you have traded and at what price. What would be the
effect of such a practice?
Mr. R o u s e . I don’t know. It might have some effect. It would
seem to me that the information that is released weekly as to the net
of our transactions is adequate, and I judge from market people that
they feel so, too.
Representative P a t m a n . Since this was brought up and since you
have not considered it, would you mind bringing it up with the people
who are concerned with this work?
Mr. R o u s e . I think this may have come up in the consultations
and they were to consider and prepare paper on the need for statis
tical information, and that is to be a subject of active study in the
near future.
Representative P a t m a n . Some of the newspapers, the New York
Times and perhaps the Wall Street Journal, carry quotations on the
EMPLOYMENT, GROW TH, AND PRICE LEVELS
1547
market price of Treasury bills. Do you find these a pretty reliable
source of information about these prices?
Mr. R o u s e . Yes.
Representative P a t m a n . I s it true that you obtain quotations from
a number of dealers and make up an average of the market price
each day?
Mr. R o u s e . Excuse me, may I revert to the preceding question?
Representative P a t m a n . Yes, sir.
Mr. R o u s e . Mr. Larkin points out that these quotations that are
published vary. I think it is logical that they would, because they are
obtained from different sources and there are apt to be minor changes.
I would be glad to show you this if you come down to our trading
room.
Representative P a t m a n . That is the average of the market. You
think it is a good thing the way it is done ?
Mr. R o u s e . I think the market should be published so that people
have points of reference.
Representative P a t m a n . Why do you not make this average o f th e
market price public each day so that the general public has access to
the information ? Why don’t you do it ?
Mr. R o u s e . We do. We make it available.
Representative P a t m a n . Each day?
Mr. R o u s e . Each day.
Representative P a t m a n . And it is published in the New York
Times and the Wall Street Journal, and what other papers?
Mr. R o u s e . W e m a k e it a v a ila b le . T o w h a t e x te n t it is u sed , I d o n ’t
know .
Representative P a t m a n . Y ou make it available to all papers?
Mr. R o u s e . If they wish it. It is there for them to get.
Representative P a t m a n . Has anyone in the New York Reserve
Bank ever informed any of the dealers what its average on a market
quotation was on a current basis?
Mr. R o u s e . Y o u mean the composite for any one particular issue?
Representative P a t m a n . What the average market quotations on a
current basis is.
M r . M a r s h . I d o n ’t t h in k w e h a v e ev e r t o ld th e m th e c o m p o site .
W e m a y g iv e th e m an id e a in g e n e r a l h o w w e see m a r k e t p r ic e s.
Representative P a t m a n . What would be the effect on the
dealers
and also the effect on the market if, when the Open Market Com
mittee makes a change in its credit policy, it announced that policy
to the public immediately ?
There is lots of talk about that, Mr. Rouse, and I wish you would
answer that as fully as you can, if you please.
Mr. R o u s e . I find that difficult to deal with, sir. I can conceive of
times when it might be done. There are times when it would be
unwise to do it. I think the present method of letting it work out
from the facts is the most effective method.
Representative P a t m a n . What is the purpose of the open market
operation? Is it merely to maintain a certain degree of ease or
stringency on bank reserves, or is your ultimate purpose to bring
about a certain level of interest rates?
Mr. R ouse. The primary purpose, as you know, is to deal with
reserves.
1548
EM PLOYM ENT, GROWTH, AND PRICE LEVELS
Eepresentative P a t m a n . That is the primary purpose. What per
cent of that, if you can break it down percentagewise, would you
consider was intended to have a certain level of interest rates?
Mr. R o u s e . I would say that the normal operation dealt only with
reserves.
Representative P a t m a n . Beg pardon ?
Mr. R o u s e . One hundred percent normally.
Representative P a t m a n . One hundred percent dealing with re
serves ?
Mr. R o u s e . Yes, sir.
Representative P a t m a n . Without consideration of the level of in
terest rates?
Mr. R o u s e . That is right.
Representative P a t m a n . What is the main thrust of the Federal
Reserve monetary policies? Is it the amount of credit available or
the interest rate at which the credit is available ?
Mr. R o u s e . The preceding answer takes care o f that.
Representative P a t m a n . The reserves. Have you found that in
terest rates vary to a significant extent without respect to changes
in the amount of bank reserves available or that the amount of bank
reserves can be changed to a large extent without affecting interest
rates ?
Mr. R o u s e . We have found that in the money market rates can
move without a movement in reserves.
Representative P a t m a n . Interest rates can move without a move
ment in reserves?
Mr. R o u s e . Yes. We have the situation which I described a few
minutes ago of movement of bill prices away from the discount rate.
Representative P a t m a n . Beg pardon?
Mr. R o u s e . I described the movement of bill prices a few minutes
ago, and I think that is an actual instance of that.
Representative P a t m a n . In other words, would that be the general
rule or would that be exceptional ?
Mr. R o u s e . I think it would be exceptional based on a long period
of time.
Representative P a t m a n . In other words, it could move up and down
without reference to reserves?
Mr. R o u s e . We see that it does.
Representative P a t m a n . But it is an exceptional case?
Mr. R o u s e . It is exceptional, yes, I should say. It does not happen
frequently.
Representative P a t m a n . Do you find that you have a rather wide
latitude for interpreting the Open Market Committee’s directives?
In other words, these directives as they are published seem to me to
be extremely general. Do you have any trouble in interpreting these
directives, Mr. Rouse ?
Mr. R o u s e . I have the privilege and the duty, I might add, of
sitting with the Open Market Committee at each meeting and I hear
the whole discussion. I have opportunities of asking questions, if
necessary, so that I don’t have the difficulty that a casual reading of
these directives might suggest.
Representative P a t m a n . Won’t you admit, Mr. Rouse, that if you
just took these directives as they appear in the annual report of the
EM PLOYMENT, GROWTH, AND PRICE LEVELS
1549
Board of Governors that it would be impossible for you to intelli
gently interpret them?
Mr. R o u s e . I found out some years ago—I wanted to make a talk to
some of the officers in the bank about Federal Reserve policy, and
I went back and studied these directives over a long period of years,
and I found you could darn near chart a line and determine what
the policy was going to be.
Representative P a t m a n . But you had to become an expert to do
that. You had to go back over a period of years.
Mr. R o u s e . I got interested in public finance a good many years
ago and perhaps I was better qualified than some.
The C h a i r m a n . It so happens I was adjutant of a combat division
in the field, and we wmild get directives from our headquarters in
Washington so ambiguous in nature that you could not make out what
they wanted you to do.
I finally concluded that they operated on the basis that they would
give ambiguous directives and then if you did something that turned
out wrong they could court-martial you. If it turned out right, they
could take the credit.
This is the eternal struggle between the linemen out in the field
who have to do the dirty hard work and the deep thinkers or, as Hymie
Kaplan would say, the “ dip thinkers,” who sit in isolation either in
an ivory tower or an architecturally beautiful building and hand out
directives.
On this point I have a great deal of sympathy with the New York
Federal Reserve Bank.
Mr. R o u s e . Perhaps I can say that there is a trace of what you are
suggesting in my area of responsibility.
On the other hand, we have worked out a basis of communication
with the members of the Open Market Committee which is effective.
We provide them with current information steadily. We talk with
them on the telephone. I f there is any suggestion of our varying
from even one member’s concept of what the current policy is, he
has the opportunity of calling one of the three of us and saying,
“ Rouse, you are getting out of line here.” It doesn’t happen very
often.
Representative P a t m a n . My next question bears on that.
Have disagreements between you and the staff in Washington
sometimes arisen as to how to apply the Open Market Committee’s
policy at a particular time?
Mr. R o u s e . N o , sir.
Representative P a t m a n . Y ou have the benefit of information that
we as Members of Congress do not have. You sit on the conference
where the policy is agreed upon, and then you have the privilege of
calling over the telephone to make sure you are in accord, and
everything.
That is not a comparable situation to Senator Douglas’ position in
the field of battle. He did not have the privilege of sitting in with
these masterminds in Washington and the Chief of Staff and the
rest of them, and knowing what they had in mind when they issued
this directive. He did not have the privilege every time of calling
them up and finding out what they meant. You do have that
privilege.
38563— ‘59—pt. 6B------ 4
1550
EM PLOYM ENT, GROW TH, AND PRICE LEVELS
Mr. R o u s e . Yes. I said I had an advantage over him.
The C h a i r m a n . That suggests a policy that these directives are
used for public consumption, not for internal direction.
Mr. R o u s e . It necessarily must be couched in general terms, I
think, Senator. As I said earlier, I have found in going back over
the period I could plot it.
Representative P a t m a n . The Open Market Account does a sub
stantial volume of trading as an agent for foreign central banks
and also for agencies of the Federal Government; is that correct?
Mr. R o u s e . Yes, sir.
Representative P a t m a n . Do you have an estimate of the amount
of trading you did for foreign central banks last year and also
amounts you did for agencies of the Federal Government?
Mr. R o u s e . I believe so. Mr. Larkin, I think can provide it.
Representative P a t m a n . Mr. Larkin, would you furnish that
information, please ?
Mr. L a r k i n . The total was around $ 8 billion.
Representative P a t m a n . H o w m u c h ?
Mr. L a r k i n . Roughly $8 billion.
Representative P a t m a n . Foreign governments?
Mr. L a r k i n . Foreign central banks and international organiza
tions.
Representative P a t m a n . And the other w a s about agencies o f
the Federal Government.
Mr. L a r k i n . Slightly less than $2 billion.
Representative P a t m a n . Some of the foreign central banks g iv e
you purchase or sales orders for $10 million of Treasury bills, o r
$25 million or so on, without specifying the minimum or maximum
price; is that correct, Mr. Rouse ?
Mr. R o u s e . I think most orders would be at the market.
Representative P a t m a n . And leave i t u p t o y o u ?
Mr. R ouse. Yes, sir.
They are too far away.
Representative P a t m a n . When you are trading for a foreign
central bank or for a foreign agency you could, if you cared to do
so, give the dealer a break pricewise or you could also beat the dealer’s
price down somewhat, could you not ?
Mr. R o u s e . We do such transactions, as well as transactions for the
System Account, on a competitive basis.
Representative P a t m a n . What have you done in such situations?
Have you sometimes given the dealers a break and at other times given
the foreign central bank a break ?
Mr. R o u s e . We do it on a competitive basis, sir, completely, I
think. Would you agree with that ?
Mr. L a r k i n . Yes.
Mr. R o u s e . Best price.
Representative P a t m a n . Why do foreign central banks trade with
the open market rather than the dealers ? Why is it that they trade
with your Open Market Committee rather than trading with the
dealers ?
Mr. R o u s e . I f we were buying Treasury bills in the market we
would not want to execute contrary orders of the foreign account.
Representative P a t m a n . In other words, it is more to their
advantage.
EM PLOYMENT, GROWTH, AND PRICE LEVELS
1551
Mr. R o u s e . Let me see just how to word this. I f we are buying
bills from the market for System Account we would not want to sell
bills to the market for a foreign account and nullify what we were
doing. We would be buying in order to put reserves into the market.
I f the foreign account operation was to take them out, we would be
nullifying what we would be doing.
Representative P a t m a n . I know, but I am asking you about why
the foreign central banks prefer to deal with you, the Open Market
Committtee, rather than dealing with these 17 dealers.
Mr. R o u s e . They have their principal accounts with us. It is a
central bank to central bank proposition.
Representative P a t m a n . That is not anything against the private
enterprise system, is it ?
Mr. R o u s e . Not a thing. It is our general policy where it doesn’t
conflict with System policy, to execute these orders on the market at
the competitive basis.
Representative P a t m a n . Why is it that none of the member banks
trade with the Open Market Account ?
Mr. R o u s e . We want to deal only through the market. The mem
ber banks, aside from these five who have become dealers and actually
make markets, do not make markets. That is the reason.
Representative P a t m a n . Who pays your expenses for handling
the trading in Government securities of the foreign central banks?
Do you charge any fee or commission ?
Mr. R o u s e . No.
Representative P a t m a n . The Federal pays that?
Mr. R o u s e . The Federal would pay that, I assume.
Representative P a t m a n . Does that amount to much money?
Mr.RousE. No, sir.
Representative P a t m a n . Whatever it is, the Fed pays it?
Mr. R o u s e . There are no commissions involved.
Representative P a t m a n . We have been told that the Open Market
Account is dealing presently with only 17 dealers. You state that
is correct. All these 17 dealers are active in trade with you all times
you are trading, or are some of them just in-and-outers?
Mr. R o u s e . For the most part I would say we are trading with all
of them. When we do other than these go-arounds that you spoke of,
we keep track in a general sort of way of the group from whom com
petitive prices are gotten on a given transaction, and we use a dif
ferent group or a mixed group on the next transaction, So every
effort is made to treat the dealers fairly.
Representative P a t m a n . Is your trading all by telephone or do
you also do trading in person ?
Mr. R o u s e . All b y telephone.
Representative P a t m a n . Do all the dealers have direct telephone
lines to the Open Market Account ? I f so, how many, if any, do or
do not?
Mr. R o u s e . All but one. That is the Continental in Chicago.
Represenative P a t m a n . Who pays the expenses of the telephone
calls to and from the dealers?
Mr. R o u s e . We do.
Representative P a t m a n . The Federal?
Mr. R o u s e . Yes, sir.
1552
EM PLOYM ENT, GROW TH, AND PRICE LEVELS
Representative P a t m a n . What does a securities dealer or a bank
have to do in order to be able to trade with the Open Market Account ?
You have explained that a while ago in answer to Senator Douglas.
Mr. R o u s e . Yes.
Representative P a t m a n . What has been done to publicize the
existence of the Open Market Account and the methods of trading
with the account ?
Mr. R o u s e . I meant to bring—I am sorry—a copy of Mr. Roosa’s
book so you would all have copies. That is a publication of the Fed
eral Reserve Bank of New York and is completely descriptive of the
U.S. Government securities market, I should say.
Representative P a t m a n . I think I read that book. Is that the book
where he said that these dealers, being professionals, and doing what
you have done, reading back in the past on all these directives and
analyzing them, that they can pretty well tell what is going to happen ?
Mr. R o u s e . Maybe you got that from me.
Representative P a t m a n . I think it is in this book somewhere.
Mr. R o u s e . Y ou have a copy. Good. There are some 65,000
copies of that which have been printed, and I think almost entirely
distributed.
Representative P a t m a n . I think he in effect says that the dealers
pretty well know what is going to happen if I interpret his language.
His language seems rather plain.
Mr. R o u s e . This has been pretty well publicized, I should say.
Representative P a t m a n . What is the Open Market Account’s policy
with respect to this quesion? Is it to try to make the most profit
you can to the extent that making a profit does not conflict with your
monetary objectives, or do you have profit in mind at all?
Mr. R o u s e . A s the chairman said the other day, we are not con
cerned with profit.
Representative P a t m a n . The chairman tried to pin him down on
that, and I am mighty glad he did, that all things being equal he
should favor bringing the most money to the Treasury. I share the
chairman’s view.
Would it be incorrect to say that the Open Market Account operates
to a certain extent, at least on occasion, as a support market to the
dealers? Have you ever lost any dealers, have any dropped out or
gone broke?
Mr. R o u s e . I a n sw e re d t h a t as b e st I c o u ld .
Representative P a t m a n . I don’t believe you said he was a dealer.
I think you said he was connected with a dealer; is that correct ?
Mr. R o u s e . As a dealer he lost his capital.
Representative P a t m a n . He lost his capital?
Mr. R o u s e . Substantially all o f his capital.
Representative P a t m a n . Was it by reason of any rulings of the
Fed?
Mr. R o u s e . N o , sir.
Representative P a t m a n . It was not by reason of the Fed ?
Mr. R o u s e . I t h in k y o u w o u ld h a v e to sa y p o o r ju d g e m e n t.
Representative P a t m a n . Who decides whether and to what extent
you will enter into repurchase agreements with dealers ?
Mr. R o u s e . That is decided b y the management of the account in
accordance with the instructions of the Open Market Committee.
EM PLOYMENT, GROWTH, AND PRICE LEVELS
1553
Representative P a t m a n . There is no law permitting that, is there ?
Mr. R o u s e . There is section 14 of the Federal Reserve Act, with
which you are familiar, subsection 3(b).
Representative P a t m a n . What part of 14 that you are talking about
would give you permission to engage in the repurchase agreements ?
Mr. R o u s e . T o purchase securities.
Representative P a t m a n . Purchase securities. You are talking
about buying. This is a loan. This is a repurchase.
Mr. R o u s e . This is a purchase of securities, in my judgment.
Representative P a t m a n . I know, but it is tied with an agreement
to reverse the transaction, is it not ?
Mr. R o u s e . We agree to resell them.
Representative P a t m a n . It seems to me that is essentially a loan.
Mr. R o u s e . It is a purchase of Treasury bills or other short-term
issues.
Representative P a t m a n . I am not arguing with you on the
•definition.
Mr. R o u s e . The Comptroller of the Currency rules that some of
these repurchase agreements are loans.
The C h a i r m a n . What is the difference between that and a buy
back ?
M r . R o u s e . T h e s e ta k e a ll so rts o f fo r m s , a n d w e w i l l h a v e to g iv e
y o u a p a p e r o n t h a t su b jec t.
(The material referred to was not received at the time the hearings
were printed.)
Representative P a t m a n . In my limited experience and knowledge,
I would say that repurchase agreement is not buying securities. It
is a loan. That is the way it looks to me, Mr. Rouse. I don’t have
the power of decision on this.
Mr. R ouse. I would say that from the standpoint of the seller of the
securities he probably regards it as a loan. From the standpoint of
an investor or a particular type of investor which the system of Open
Market Account is, it is an investment and a very useful way of insert
ing and withdrawing reserves from the market which facilitates our
operations very materially.
Representative P a t m a n . Of course, there is no meeting of the minds
if it is like you say. One has one thing in mind and another has
another thing.
Mr. R o u s e . Yes.
R e p r e s e n ta tiv e P a t m a n . U n d e r w h a t c irc u m sta n c es d o y o u en ter
in to r ep u rc h a se a g r e e m e n ts w ith d ealers ?
Mr. R o u s e . Usually in a period when we wish to insert reserves for
a temporary period.
Representative P a t m a n . Temporary period, just like the banks?
Mr. R o u s e . At a time when we are impressed with the needs from a
reserve standpoint for funds in the market.
Representative P a t m a n . Y ou know the Federals brag about it being
a banker’s bank. Here is a case where you are dealing with dealers
without authority of law. You are going out of your way to accom
modate these dealers and they are not banks. There is nothing in the
law that provides that you can do it. I am just offering that for your
consideration.
Who decides what interest rate will be charged the dealers on repur
chase agreements, and how is this determined ?
1554
EM PLOYM ENT, GROW TH, AND PRICE LEVELS
Mr. R o u s e . The basis of the decision is that the Open Market Com
mittee has given us authority to charge a rate which shall be no lower
than the discount rate or the latest average issuing rate on 91-day bills,
whichever is lower.
Representative P a t m a n . You have a definite policy on that?
Mr. R o u s e . By and large it is the discount rate.
Representative P a t m a n . Have you entered into repurchase agree
ments with any of the bank dealers or have the repurchase agreements
been only with nonbank dealers?
Mr. R o u s e , They have been only with nonbank dealers.
Representative P a t m a n . Has any one of the New York banks made
any studies or any estimates as to the amount of profits which the
dealers have made on their carry ? I f so, I ask that it be submitted
for the record.
Will you submit the data on a monthly basis over the past 5 years,
showing first, the volume of repurchase agreements outstanding, next
the average interest rate charged, and the average interest yield of the
market price of the securities and bonds involved in the agreement?
Did I lose you in reading that ?
Mr. R o u s e . Yes, y o u d id .
Representative P a t m a n . Has anyone in the New York bank made
any studies or any estimates as to the amount of profits which the
dealers have made on their carry?
Mr. R o u s e . No.
Representative P a t m a n . They have not?
Mr. R o u s e . W e h a v e no b asis for th a t.
Representative P a t m a n . The information is not furnished to you?
Mr. R o u s e . No.
Representative P a t m a n . It is sometimes said you enter into repur
chase agreements with the dealers only on your own initiative. Is
that correct, or have you also responded to the dealers’ request for
repurchase agreements ?
Mr. R o u s e . It is only on our own initiative.
Representative P a t m a n . On your initiative?
Mr. R o u s e . Yes, sir.
Representative P a t m a n . On these occasions when you have ta k e n
the initiative to make repurchase agreements with the dealers, what
has been your purpose in initiating the repurchase agreements ?
Mr. R o u s e , To insert reserves into the market.
Representative P a t m a n . Affecting the reserves o f the market?
Mr. R o u s e . Yes.
R e p r e s e n ta tiv e P a t m a n . It is a lw a y s m o r e reserv es?
Mr. R o u s e . I f we are making them, yes, sir.
Representative P a t m a n . It would have to be that way.
Mr. R o u s e . It would have to be that way.
Representative P a t m a n . We have been told that when the Treasury
offers a new issue the Government securities dealers can make the best
estimate as to what the total subscription will be. Has it been your
experience that these dealers can offer about the best advice available
on this subject?
Mr. R o u s e . I put it this way: They offer as good advice as any
body. Sometimes they are about as far off as the next fellow.
EM PLOYM ENT, GROW TH, AND PRICE LEVELS
1555
Representative P a t m a n . D o you know whether or not the advice
of the Government securities dealers is pretty widely sought by inves
tors on the question of what the subscription to an issue will be?
Mr. R o u s e . I believe it is.
Representative P a t m a n . Has the Treasury frequently sought your
advice concerning rates and terms of proposed Treasury issues ?
Mr. R o u s e . It usually consults the New York Reserve bank.
Representative P a t m a n . Have you maintained a record as to th e
advice you gave ?
Mr. R o u s e . N o , sir.
Representative P a t m a n . With reference to the bills-only policy,
what has your experience been?
First, the advantages; second, the disadvantages.
The next question will be, Do you think the advantages outweigh
the disadvantages, or the reverse?
Mr. R ouse. I am debating with myself whether this question would
not be better addressed to the Open Market Committee rather than
to me.
Representative P a t m a n . Y ou are an agent of the Open Market
Committee. You are doing the work. You are in a position to know
more about it than they are. That is the reason we would like to have
your opinion.
Mr. R o u s e . I would say this, sir: Generally speaking I think our
operations ought to be carried on in short-term securities, and it would
be the very occasional situation when there would be a reason for
going into securities other than short-term securities.
I myself—I will answer this question—would prefer that the record
indicate that we could execute or that there was current authority,
to execute transactions in other than short-term securities. There
would not be any occasion ordinarily for doing it.
I think a public prohibition against doing it is inadvisable. That is
my personal opinion.
Representative P a t m a n . I will not press you any further.
Do you think that the market for Government securities would be
improved by public regulation of margin requirements? You dis
cussed that in part in answer to the Senator’s question, I know.
Mr. R o u s e . I do not think it would be necessary.
Representative P a t m a n . Y ou do not think it would b e necessary?
Mr. R o u s e . I would reserve the right to study this study that has
been made by the Federal Reserve, where data has been assembled
for our discussion in the determination of a conclusion.
Representative P a t m a n . Mr. Rouse, you have been very nice to
answer the questions. I appreciate them very much. Many inter
esting questions remain however, and I would like to reserve the right,
if it is satisfactory with you, to submit any of these questions or any
other that I would like to, for you to answer for the record in writing.
Mr. R o u s e , I will do my best.
Representative P a t m a n . Thank you very much, sir.
The C h a i r m a n . I want to thank the witness. I notice that there is
one very important point covered by one of the last questions of
Congressman Patman which I know raises a very delicate matter in
relationships between the New York bank and the Federal Reserve
Board.
1556
EM PLOYM ENT, GROW TH, AND PRICE LEVELS
But after the Senator from Illinois succeeded in forcing the publi
cation of the 1952 report of the ad hoc committee, it then became
public knowledge what was already known to some of us, that there
was a difference of opinion between the New York Federal Reserve
Bank and Chairman Martin on the so-called bills-only policy.
The Chairman of the Federal Reserve Board adhered very strictly
to the doctrine that open market operations should only be in bills or
short-time certificates. The New York bank first under Mr. Sprowl
and others taking the position that this should not be an inflexible rule.
Has the New York bank changed its position in this matter?
Mr. R o u s e . The New York bank is represented on the Open Market
Committee by its president, and the president at the annual meeting,
as we call it, in March of this year, affirmed his preference for the
insertion in the operating resolution of the term, “ as a general rule.”
The C h a i r m a n . Therefore, did not favor the bills-only policy?
Mr. R o u s e . I have gone as far as I can, sir. He is not here.
The C h a i r m a n . I believe words should mean something, and that
they should not be used to conceal thought. If the president of the
New York bank merely wants this as a general rule, then he does not
want it as an invariable rule. Is that not true?
Mr. R o u s e . I t w o u ld seem to m e to be so.
The C h a i r m a n . Yes. It would seem so to me. Therefore, the
New York bank has not changed its position. I want to congratulate
the New York bank, and will you convey my appreciation to Mr.
Hayes ?
Mr. R o u s e . I shall do so.
The C h a i r m a n . Parenthetically the New York bank is opposed
to inflation, is it not ?
Mr. R o u s e . Yes, sir.
The C h a i r m a n . It has been charged that anyone who is opposed
to the bills-only policy is an inflationist. Don’t you regard this as
an unfair charge when leveled against the New York Federal Reserve
Bank, of Mr. Hayes ?
Mr. R o u s e . I don’t know about this charge.
The C h a i r m a n . The charge has been made that anyone who is
opposed to the bills-only policy is an inflationist, Let me say I want
to defend Mr. Hayes. I don’t think he is an inflationist at all. I
think he believes in the soundness of the American dollar. I would
defend him against any attacks coming either from the Secretary
of the Treasury, the Chairman of the Federal Reserve Board, or
financial pundits.
Mr. R o u s e . Good.
The C h a ir m x \n . Don’t you think a similar tolerance should be
extended to those Members of Congress who do not subscribe to the
bills-only policy?
Representative P a t m a n . I share your views on this.
The C h a i r m a n . Since we come to the aid of the Federal Reserve
Bank in New York, will not the Federal Reserve Bank of New York
come to the aid of the beleaguered Members of Congress who against
the heavy fires of opposition are trying to point out some of the
absurdities in the bills-only policy?
Aristotle said that reciprocity should be one of the fundamental
bases of life.
EMPLOYMENT, GROWTH, AND PRICE LEVELS
1557
Representative P a t m a n . Senator, this book has been pictured as
an outstanding publication, and I agree with everything that has
been said about it, by Mr. Robert V. Roosa, on Federal Reserve oper
ation in the Government security market, and I want to read one
paragraph here that I mentioned a while ago. It is on page 104 :
The student interested in knowing what policy is and prepared to analyze
the complex of all daily and weekly published data can generally come fairly
close to knowing in a short time, close enough to justify the well-imbedded
maxim of all central banks, that detailed explanation of each policy steps as
taken are unnecessary and create rigidities that may handicap the full flexibility
needed for close adaptation of action to quickly changing money market
conditions.
Characteristically, a detailed annual review of the record published by the
Board of Governors and most Federal Reserve banks and monthly Federal
Reserve Bulletin and New York Reserve Bank’s monthly review provide enough
analyses of what was done and why soon enough after the events to permit the
specialist to acquire a body of knowledge which can equip him to make informed
judgments of later data and developments.
This does not mean, however, that the inerpretation of central bank action
and the evaluation of its influence has become like many other things in the
modern day, a zone reserved for the specialist. That need not be harmful so
long as those who try to interpret and evaluate can appreciate the full nature
of their task, and so long as there are enough who will make the effort to give
assurance that the mistakes of some will be corrected by others.
The C h a i r m a n . But not for the general public.
Thank you very much, Mr. Rouse. May I say that I have tried
to study the subject for a good many years and I think that the inquiry
this morning has thrown light on many issues which were completely
unknown to the general public.
I want to thank you for your cooperation and coming to us. We
appreciate your testimony very much.
I know that a congressional committee is frequently an awesome
body to the layman, but we have only kindness in our hearts even
though our questions at times may seem pointed.
I thank you very much for coming.
This afternoon we meet at 2 :30, in this room, and the witness will
bo Mr. Girard L. Spencer, partner of Salomon Brothers & Hutzler.
(Whereupon, at 1 :15 p.m., the hearing recessed, to reconvene at
2:30 p.m., the same day.)
AFTER RECESS
The committee reconvened at 2 :30 p.m., Senator Paul H. Douglas
(chairman of the committee) presiding.
The C h a i r m a n . The hour of 2 :30 having arrived, the committee
will come to order.
We appreciate very much the willingness of Mr. Spencer to take
time out from his busy life to testify. As we all know, Mr. Spencer
is a partner in the firm of Salomon Bros. & Hutzler, with a lot of
experience in the Government securities market.
I believe you were here this morning, Mr. Spencer, and listened
to the questions which were addressed to Mr. Rouse, and his replies.
I understand you do not wTish to submit a preliminary statement, but
proceed directly to questions and answers.
1558
EM PLOYM ENT, GROW TH, AND PRICE LEVELS
STATEMENT OF GIRARD L. SPENCER, PARTNER, SALOMON BROS. &
HUTZLER, NEW YORK, N.Y.; ACCOMPANIED BY JOHN BROWN,
OFFICE MANAGER AND SENIOR CASHIER
Mr. S p e n c e r . If you will, sir.
The C h a i r m a n . Thank you very much.
You heard the questions which I addressed to Mr. Rouse on the
subject of margins on Government securities. Is it your under
standing that on bills, the margin is nonexistent ?
Mr. S p e n c e r . The margin is practically nonexistent, it might be 5 o r
10 basic points on a short bill which amounts to nothing.
The C h a i r m a n . Y ou m e a n 5 p o in ts o f 1 p e rc e n t ?
Mr. S p e n c e r . Yes. It is practically nothing. I would say, for all
intents and purposes, it is nonexistent.
The C h a i r m a n . That would apply to the 182-day bill as well as to
the 91-day bills?
Mr. S p e n c e r . Actually, it applies to all of the Treasury bills.
The
C h a ir m a n .
To a year ?
Mr. S p e n c e r . To a limited extent to all securities which mature
within a year. The margin on the securities that mature within a
year except for bills is really the accrued interest. In other words,
we borrow flat, and do not include accrued interest, which can amount
to anything from half a point to perhaps a point and a quarter. The
accrued interest is the protection of the lender.
The C h a i r m a n . When you say “ half a point,” what do you mean ?
Mr. S p e n c e r . Five dollars a thousand. One-half of 1 percent is
probably a better way to put it.
The C h a i r m a n . S o you discount the Government issue
the amount that you would have to pay in interest ?
by
at least
Mr. S p e n c e r . Yes, sir. That is on certificates a n d notes. A d is
count bill carries no interest, as you know.
The C h a i r m a n . The discount is the interest ?
Mr. S p e n c e r . The discount is the interest; yes.
The C h a i r m a n . Plus the profit to the dealer ?
Mr. S p e n c e r . Yes, sir.
The C h a i r m a n . This applies on the 182-day bills, too ?
Mr. S p e n c e r . As far as I k n o w , it d oes.
The C h a i r m a n . On all under a year ?
Mr. S p e n c e r . On all o f the bills under a year.
The C h a i r m a n . On the 2-year bills, what would it be ?
Mr. S p e n c e r . Two-year securities would be notes, not bills.
The C h a i r m a n . No m a r g in ?
Mr. Spencer. N o. They would be notes, as I say. The margin
there is 2 percent, isn’t it Mr. Brown ?
Mr. B r o w n . That is correct.
The C h a i r m a n . A margin of 2 percent ?
Mr. S p e n c e r . Yes, sir; really 2 points.
The C h a i r m a n . Do you have any notes on which you pay only 1
percent ?
Mr. S p e n c e r . No, sir. You go from 1 year, which is no margin
except the accrued interest, right into 2 percent or 2 points, really
In other words, $20 per thousand.
EM PLOYMENT, GROW TH, AND PRICE LEVELS
1559
The C h a i r m a n . On the 3-year ?
Mr. S p e n c e r . The same thing.
The C h a i r m a n . Four-year?
Mr. S p e n c e r . Same.
The C h a i r m a n . Five?
Mr. S p e n c e r . Same.
The C h a i r m a n . Ten?
Mr. S p e n c e r . Same.
The C h a i r m a n . Only 2 percent on 2 - to 10-year?
Mr. S p e n c e r . Yes, sir.
The C h a i r m a n . Then the witness was wrong when he said it was 5
percent.
Mr. S p e n c e r . He was not talking about dealers. At least he was
not talking about, shall I say, the major dealers. I do not know about
the others. He was not talking about us. I believe he was talking
about the individual who purchased securities on margin and pur
chased Government securities.
The C h a i r m a n . Not the dealers?
Mr. S p e n c e r . Not the dealers.
The C h a i r m a n . This requirement is imposed upon you by the stock
exchange ?
Mr. S p e n c e r . Yes, sir.
The C h a i r m a n . I thought the stock exchange required a 5-percent
margin.
Mr. S p e n c e r . I wanted to correct that, too. That was an impres
sion you got from Mr. Rouse this morning which was not correct.
As members of the stock exchange, we have, rather than margin
requirements, what they term capital charges. In other words, we
are charged on our position a certain percentage of the value of the
security. That is against our capital. While that has nothing to do
with our borrowings at the bank at all, we must maintain our capital
at a point which fully covers all of our capital charges.
That applies to the corporate bonds that we deal in, to the municipal
bonds we deal in, and to preferred stocks in varying amounts. On
Government bonds the capital charge is nothing for 1 year; 1 percent
from 1 to 2 years; 1y2 from 2 to 3; 2 from 3 to 4; 2% from 4 to 5; and
3 percent on anything longer than that.
In corporates, it is 5 percent on AA A and 10 percent on AA, and
so forth. They go from that point up. In other words, against our
capital we have to maintain at all times these charges not only on
our Government securities which we have in our account, but on all
other securities that we are long, and in addition to that, on all future
commitments which we have in the way of bidding for new issues of
utilities or municipals or whatever they are.
That is the way the stock exchange regulates our business rather
than margin.
The C h a i r m a n . Let me come back to governments. Even the
stock exchange does not require you as a dealer to have a 5 percent
margin in governments which you hold ?
Mr. S p e n c e r . No, sir. But we do have to allocate capital to it
which is for all intents and purposes the same thing.
The C h a i r m a n . I f you allocate capital to it, what would be the
combined margin in allocation of capital ?
1560
EM PLOYM ENT, GROWTH, AND PRICE LEVELS
Mr. S p e n c e r . The allocation of capital would be just as I gave it
to you a moment ago. That is, running up to 3 percent. When we
go to the banks, that has nothing to do with our allocation of capital
at all. At the banks we borrow in the way I explained to you a
moment ago, from zero up to 2 percent.
The C h a i r m a n . I think you heard my questioning of Mr. Rouse
in which I raised the query as to what arguments, if any, were there
against (a) Federal regulation of margin requirements; and (&)
higher margin requirements.
What are the arguments against that ?
Mr. S p e n c e r . I would like to differentiate there between dealers,
wThether there are more than 17 dealers or less, and the speculator or
the nondealer purchaser of Government securities.
In order to maintain a market of the size and breadth that is impor
tant and necessary in Government securities business, if we had to
put up 5-percent margin on our entire portfolio at all times, it would
very definitely limit our ability to serve our customers.
After all, our position squares off pretty much. We may be long
on one security, which we have purchased from one customer. With
in 10 minutes we are not necessarily going to find a buyer on the other
side. We would like to match them off. That is the ideal.
But we will find a buyer of a different issue perhaps somewhere
in the same maturity category. In our opinion, that evens out our
position to a certain extent. For that reason, we really are not nearly
as extended at any time as you would get from the figures of the volume
that were published in section 2 of the report this morning.
We also move in and out of our securities with great regularity.
Of course, the major part of our portfolio anyway, or inventory, if
you will, is in extremely short issues because that is where the greatest
part of the activity is.
If you will glance again at that second part of the study in which
for about a year and a half the volume of trade, day by day or week
by week, rather, was given, you will find that somewhere between 50
and 75 percent as a minimum, and sometimes more than that, is ac
tivity in securities under 1 year. Our percentage of the business is
exactly that way.
The C h a i r m a n . I s this really an argument against requiring of
margins ?
Mr. S p e n c e r . It is an argument against requiring of margin for
people in our industry; yes, sir.
The C h a i r m a n . Let me ask you this: Would you be opposed to
the requirement of higher margins for nonprofessionals?
Mr. S p e n c e r . N o , sir; I would not.
The C h a i r m a n . Y ou would not be?
Mr. S p e n c e r . I would not be opposed to it.
The C h a i r m a n . At present there are no such requirements?
Mr. S p e n c e r . The only requirement is that which is set either by
the stock exchange for customers of stock exchange members, or
whatever the banks themselves decide is adequate protection for them.
The C h a i r m a n . Am I right in thinking that the specialists on the
New York Stock Exchange do not have margins required of them?
Mr. S p e n c e r . They have certain exemption, I believe. We do so
little in stocks that I am really not particularly familiar with it, but
my understanding is that they do have an exemption; yes, sir.
EM PLOYMENT, GROWTH, AND PRICE LEVELS
1561
The C h a i r m a n . Are you saying that a similar exemption should
be granted to you since you are in a sense specialist traders in
Governments ?
Mr. S p e n c e r . We are the market, sir. Without us I do not think
there would be a market. We are a necessity to the distribution and
the redistribution of Government securities.
The C h a i r m a n . But so far as the outsiders are concerned, you think
it would be proper for them to have margins ?
Mr. S p e n c e r . Let me qualify that a little bit. A very small per
centage of the Government security business in normal times is done by
people of the type of whom you are thinking, who borrow money to
carry these securities.
The C h a i r m a n . I admit that I have not analyzed each and every
sentence in these three volumes, but certainly the implication is that
the trouble was caused by the outsiders.
Mr. S p e n c e r . As I recall it, $ 1 .2 billion out of the total of the 2 %
went into the hands of the type of speculator you are talking about.
An additional $2 billion went into the hands of people perhaps who
should not have owned them.
The C h a i r m a n . What do you mean by that ?
Mr. S p e n c e r . Here is what happened in this particular instance.
You had two issues in that refunding. You had a 1-year 1% percent
maturity, and you had this 6-year-odd-month, 2%. The 1% percent
rate was fairly unattractive at the time. S o a number of corporations
and a great many banks, too, that eventually wanted to move into the
1^4, and wanted to stay in the short-term area, decided that because of
this great spread in yield and because of the outlook for the market as
they saw it at that time, they could afford take the longer issue and
retrade it in the market later to get into the position they wanted to
get into.
This had nothing to do with margin requirements. It had nothing
to do with borrowings. It simply had to do with a market judgment
that turned out to be incorrect. That was a great part of the liquida
tion and speculation.
The C h a i r m a n . Were these nonfinancial corporations?
Mr. S p e n c e r . Some of them, sir; and a good many of them were the
commercial banks.
The C h a i r m a n . D o I understand that what they did was not to
invest their idle cash, but to use a portion of that idle cash as a thin
margin upon which they bought many multiples of Government
securities ?
Mr. S p e n c e r . No, sir; that is not quite correct.
The C h a i r m a n . Is it approximately correct ?
Mr. S p e n c e r . This was a refunding.
So the only way you get
these securities was in exchange for the maturing securities. There
were two issues. There was a 2% percent and a 2%. I have forgot
ten the exact dating. They were due June 15 of that year.
These banks held the maturing security. They wanted to keep in
short- term securities, but they felt they could make a profit by turning
in their maturing rights. There was no cash involved in this in any
way and no margin. They just felt they could take in the exchange
the longer of these two securities and, in turn, trade it in the market
at a profit to themselves to buy in their place the short-run securities.
1562
EM PLOYM ENT, GROW TH, AND PRICE LEVELS
The C h a i r m a n . I know there is frequently approbrium attached to
the word “ speculation” which is undeserved and about which specu
lators are properly skittish. These transactions were speculative,
rather than investing.
Mr. S p e n c e r . Yes, they were. The eventual idea was to keep their
investment portfolio in shorter maturities than the one which they
exchanged their maturing obligations for.
The C h a i r m a n . This study says that the narrow margins led to
overpurchase.
Mr. S p e n c e r . That is true.
The C h a i r m a n . Then when the hopes began to collapse, the de
clines which swept away the margins led to distress selling causing
prices to fall still more, and therefore, the narrow margins accelerated
both the upswing and the downswing.
Mr. S p e n c e r . I do not think it accelerated the upswing as much
as it did the downswing.
The C h a i r m a n . It did accelerate the downswing ?
Mr. S p e n c e r . Yes. That $1,200 million was on comparatively
thin margins.
The C h a i r m a n . Didn’t this on the whole hurt the reputation o f
the United States to have these securities fall to the degree to which,
they did? The foreign banks followed this closely and shortly
after this in September Chairman Martin made a trip to New Delhi
and came back and reported that the heads of the central banks o f
the various countries were very distressed about the American finan
cial position—that we had not balanced our budget, that the balance
of trade was turning against us, and the price of Government
securities was going down.
Didn’t this hurt the United States in the eyes of the world ?
Mr. S p e n c e r . I did not recall he said anything about Government
securities, sir.
The C h a i r m a n . Wasn’t that part of the general picture?
Mr. S p e n c e r . I wouldn’t think so. After all, I can’t conceive
of—and I have never heard anybody even give a second thought to the
basic quality of U.S. Treasury issues.
What it is worth between the date it is offered and the date that it
matures is simply a question of the going interest rates at the time.
I do not believe anybody, domestic or foreign, ever questioned thebasic soundness of any issue.
The C h a i r m a n . I should have kept the clippings. Perhaps my
memory is at fault. I felt that some of the foreign journals
commented on this.
Mr. S p e n c e r . They may have withdrawn their money because
they felt that for the time being perhaps we were going to have a
chaotic condition. I am just guessing now, very frankly. They
may have felt the situation was going to become even more chaotic.
The C h a i r m a n . I s it good for the Government to have a sharp
fall in the prices of bonds? Does this encourage future purchases
of bonds ?
Mr. S p e n c e r . I would say it would be preferrable not to have them.
The C h a i r m a n . Doesn’t it discourage them, as a matter of fact?
People see values in Government bonds melting away before their
eyes. Doesn’t this discourage their purchasing these bonds in the
future ?
EM PLOYMENT, GROWTH, AND PRICE LEVELS
1563
Mr. S p e n c e r . It would as far as individuals are concerned; yes, sir.
The C h a i r m a n . Isn’t the whole made up of individuals? You are
not going to give me the platonic abstraction that the whole is dif
ferent from and greater than the sum of its parts ?
Mr. S p e n c e r . No, sir. I want to say that savings in this country
become more and more institutionalized. Certainly since my early
days in the business, when I went around peddling bonds from door
to door they have. As a result of that, it is the professional investor
today who is the main purchaser of high-grade securities in this
country.
I cannot be convinced that the manager of a portfolio of a life
insurance company or a savings bank or a savings and loan association,
or what you will of that kind, is at all concerned as to his portfolio
in the long run because of fluctuations in the market in Government
securities.
The C h a i r m a n . Y ou wTould not oppose the imposition of trading
margins in trading of Government securities other than professionals ?
Mr. S p e n c e r . That is correct.
The C h a i r m a n . Y ou see some advantages to it?
Mr. S p e n c e r . I think it might have a very definite advantage. I f
I may say something else for the moment, I think the Treasury has
realized that.
The C h a i r m a n . I cannot get them to adopt it. I cannot even get
them to consider it. I f you have inside information, will you be
willing to give it to me?
Mr. S p e n c e r . They certainly must have some thoughts along those
lines when, as they do now, they require different downpayments
from the different types of subscribers to their new cash securities.
That certainly is in a sense requiring margins on subscription.
The C h a i r m a n . Y ou say that this opposition may be melting
slowly ?
Mr. S p e n c e r . I can only tell you what I see. I cannot promise you
any more than that.
The C h a i r m a n . Would you explain the so-called repurchase agree
ments to me, because these are connected with the question of margins.
Mr. S p e n c e r . A repurchase agreement from the point of view of
the dealer is a means of borrowing money. From the point of view of
the grantor of the repurchase it may be considered a short-term
investment.
The C h a i r m a n . Let us take your firm, which is one of the largest
and most respected firms in the business.
Mr. S p e n c e r . Thank y o u .
The C h a i r m a n . Describe how the repurchase agreement works in
connection with your firm.
Mr. S p e n c e r . All right, sir. We have, we will say at this particular
moment, a block of $10 million bills.
The C h a i r m a n . Which you have purchased from the Treasury.
Mr. S p e n c e r . We may have purchased them from a commercial
bank. They are in our inventory. We have to finance that inventory
as long as it is in our possession. A nonfinancial corporation has $10
million that he will use to pay the taxes or his current expenses or
something similar we will say some 4 days from now.
He cannot find an exact investment security due in 4 days so he is
perfectly willing to make a repurchase agreement with us which means
1564
EM PLOYM ENT, GROW TH, AND PRICE LEVELS
that he takes our securities at a rate of interest and returns them to
us at the end of 4 days. He has earned interest on his money for those
4 days.
The C h a i r m a n . What do you agree to repurchase?
Mr. S p e n c e r . We agree to repurchase the securities at a fixed rate
of return to him. In other words, we grant him X percent rate of
return on the investment, from his point of view, or on the loan we
make from our point of view.
The C h a i r m a n . Y ou agree with Congressman Patman that is a
loan from your point of view.
Mr. S p e n c e r . From our point of view it is a loan, definitely. We
carry it on our books as such and when we make our annual statement,
that is shown as a loan.
The C h a i r m a n . Does this mean, in effect, that the so-called nonfinancial corporation is able to purchase these securities without risk
to itself?
Mr. S p e n c e r . There is a minimum of risk, I suppose. I f he makes a
repurchase with a dealer whose capital was not adequate or whose
financial condition w^as not.
The C h a i r m a n . Does this do away with the need for margin
requirements ?
Mr. S p e n c e r . Actually, there is a small amount of margin in these
transactions.
The C h a i r m a n . Does the existence of the repurchase agreement
reduce the margin which would otherwise be required?
Mr. S p e n c e r . N o , sir. As a matter of fact, in many instances it
increases it a little bit beyond what we would have to pay at
commercial banks.
The C h a i r m a n . H o w s o ? The margin requirement is supposed
to be a hedge against the risk of a decrease in the value of the
principal.
Mr. S p e n c e r . The reason we make repurchases is because it is a
cheaper way to borrow. From that point of view this is what happens
in many instances. Let us say that we have a security due in 8 months
which is selling at par or 100. We will make a repurchase agreement
and we will price them in the repurchase agreement, we will say, 99%.
Therefore, there is a quarter of 1 percent margin against the market
at that time for a period of 4 days, which is certainly more than
adequate, and which many corporate treasurers now request,
They did not request it last year. They learned their lesson. Be
cause of last year’s experience they now request it, and we are very
glad to grant it. The same thing is true with repurchases with the
Federal. If a bill is selling in the market bid at 3 percent, they
will value it at a 3.10 or 3.15 discount in the repurchase that we make
with them.
I am trying not to be technical here, sir. I hope I am not being too
technical.
The C h a i r m a n . Do you think the repurchase agreement is a sound
method of financing?
Mr. S p e n c e r . I think it is an excellent method. I think it is an
excellent method both from our point of view and from the point of
view of the corporation or the out-of-town bank.
The C h a i r m a n . Of course, in all this there is a conflict of interest
that is involved. Members of the New York Stock Exchange were
EM PLOYM ENT, GROWTH, AND PRICE LEVELS
1585
bitterly opposed to the imposition of margins and have been opposed
to any increase in margins because they said it would reduce turn
over, which probably is true.
But isn’t there a good deal of turnover, speculative in nature, which
does not represent real savings or real investment ? Isn’t it desirable
to squeeze as much of this out of the market as you can, so that the
market will be confined primarily to investment of surplus funds,
together with such hedging operations as may be necessary ?
Mr. S p e n c e r . I think that the repurchase agreement is exactly
that. It is the investment of surplus funds for temporary periods.
Eventually, of course, we as dealers hope to dispose of those securities.
We are not investors. We do not want to hold them until they mature.
We are not particularly interested in holding them.
We want to make a little profit out of them if we can. If we have
to take a loss, we want to get out as fast as we can. I think you have
to differentiate between the sort of thing we are talking about and
stock exchange margin requirements.
The members of the New York Stock Exchange, after all, are
brokers. They are not dealers in the sense we are. They make their
living by commissions. I do not want to seem unfair here; but as
is perfectly human, they want to see as much activity as they possibly
can.
I do not see how that sort of thing applies in the dealer arrange
ment of which we are talking where it is necessary, in order to main
tain this market, for us to finance our position. The stock exchange
broker is not financing his position. He is financing his customer’s
position.
The C h a i r m a n . Y ou led up to a point that I have been very reluc
tant to ask because I like to respect the privacy of witnesses and do not
believe in Members of Congress probing too deeply into the personal
affairs of those who appear before them. But since you have led with
your chin, I think perhaps you will not resent it if I ask this question:
What proportion of your gross income comes from your commissions
as a broker, so to speak, and what proportion of your profits as a
dealer?
Mr. S p e n c e r . I wouldn’t have the faintest idea, sir, but I will say
there again, where we trade securities between two investing institu
tions, we frequently trade them for a commission. I wouldn’t have
any idea how we can break that down.
The C h a i r m a n . What is your normal margin when you a ct as a
broker ?
Mr. S p e n c e r . Are you talking about Governments?
The C h a i r m a n . Yes.
Mr. S p e n c e r . We never act as a broker in Governments. We
.always act as a principal. We trade on spreads. Our commission
business is in corporate securities primarily, and to some small extent
in municipal securities. But in Governments we act as a dealer.
The C h a i r m a n . That is a sideline with you?
Mr. S p e n c e r . N o , sir. It is a major part of our business.
The C h a i r m a n . That is what I thought. You always deal for
yourself.
Mr. S p e n c e r . In Governments we always act as principal, yes, sir;
never on commission.
38563— 59— pt. 6B-------5
1566
EM PLOYM ENT, GROW TH, AND PRICE LEVELS
The C h a i r m a n . This is a relatively small society to which you
belong. Would you be able to state on the basis of your general knowl
edge whether most of your 16 associates deal for themselves or not?
Mr. S p e n c e r . I can only answer to Salomon Bros., sir. I do not
know anything about any of the others.
The C h a i r m a n . It is never mentioned in the club ?
Mr. S p e n c e r . There is n o clu b .
The C h a i r m a n . There is no club. You never meet?
Mr. S p e n c e r . We m a y meet a t lunch with a couple of gentlemen.
The C h a i r m a n . Y ou never meet together ?
Mr. S p e n c e r . N o, sir. I would say very rarely. Possibly at the
convention, but that is about all.
The C h a i r m a n . Conventions are an important part. You remem
ber Adam Smith, who said gentleman of the same trade never met for
merriment or otherwise, but the meeting results against the public
good. You are not going to be against free enterprise, are you?
Mr.
Spencer.
N o, sir.
The C h a i r m a n . Let me shift the questioning to another point.
You heard me question the witness this morning on the manner of
using the auction system as a means of floating the initial issues of
longtime Governments. In other words, applying the same method
to Government securities of over 5 years’ duration that is now applied
in the case of bills, notes, certificates, and so on.
What is your judgment? I think this is very important.
Mr. S p e n c e r . Let me state my position, sir. In the first place,
Mr. Rouse did mention this morning that this had been attempted in
the middle 1930’s. It was actually in the summer of 1935.
At that time, forgetting guaranteed issues, there were five offerings
made by Secretary Morgenthau of direct Government obligations.
Two of them were in the 3’s of 46/48, and two of them in 2% of
55/60.
The auctions of the 2% which are the last three give some insight
into the problems. In each case $100 million was offered. In the first
of the auctions they received overall subscriptions for $530-odd mil
lion, I believe. In the second, which came some 2 weeks later, they
got subscriptions for $320 million.
In each of these cases they allotted $100 million. In the third in
stance they got subscriptions for only $148 million, or just barely
covered the offering of $100 million. In addition to that, in the third
one the average price that the Treasury received was almost a full
point under the then going market for the 2% of 55/60. I do not
know whether that is indicative of anything or not, to be perfectly
honest with you.
The C h a i r m a n . The market was not prepared by the Treasury f o r
what was coming.
Mr. S p e n c e r . The thing that bothers me is not whether it is good
for the market, because I think the market might very well like it.
When I say the market, I am talking about the professionals, but it
is still a question whether it is good for the Treasury. There a re
two sides to this thing. In a market such as we have had since the
end of June of last year, we have had, I think, the investor shying
away from making a full bid.
EM PLOYMENT, GROWTH, AND PRICE LEVELS
1567
In other words, he would be rather concerned that he was overbid
ding for the security. I think there is this possibility—and this is
all subject to trial and error and I think perhaps it should be tried; I
am not saying it should not, but this is what we have to think about.
The C h a i r m a n . Y ou mean we should be thoroughly prepared ?
Mr. S p e n c e r . These are the things we have to think about. Under
those circumstances, whether it would react to the benefit of the Treas
ury or not, I do not know. I f the bidders were very cautious, you
might find that the Treasury would wind up paying an interest rate
higher than they do with their current methods.
I can see the possibility of it. Another possibility bothers me
particularly. I think we have to think of this in a rising market.
In a rising market, how you can keep the securities out of the hands
of the type of speculator that went into the 2% I do not know. They
would take the initiative away from the true investor and run bids
up to a point where you have a very large percentage of them in the
hands of the kind of people you do not want.
The C h a i r m a n . If you required margins-----Mr. S p e n c e r . There is an awful lot of money that will be willing
to speculate at full margins. These are the questions I have been
thinking about. Very honestly, I am not at all sure it might not be a
good idea to give it a try. But these are some of the things that have
to be thought through before we go too far.
The C h a i r m a n . Thank you. I have taken more than a half hour.
Congressman Patman?
Representative P a t m a n . Mr. Spencer, it was testified here this
morning that we have an aggregate transaction of about $200 billion
of Government securities a year. How does that compare with the
amount of business dollarwise done on the New York Stock Exchange?
Mr. S p e n c e r . I cannot answer that any more than Mr. Rouse could
this morning. I would guess—and I think there is a figure in the
report if I remember correctly, because I glanced through it very
hurriedly over the weekend—that said this is either three or four
times the amount of business that is done on the stock exchange, but
I am just guessing from memory. I believe it is in there somewhere.
Representative P a t m a n . I have an estimate here from one of the
members of the staff that it is $10 to $20 million in the stock markets.
That means that the Government securities would be about 10 times
as much.
Mr. S p e n c e r . Yes.
Representative P a t m a n . Isn’t it rather unusual in our country
where we believe in some golden rule of business or some standard
whereby you have some limitations and restrictions upon people in
order to give everybody a fair and equal chance and opportunity
and prevent injustices, that this market which is several times as big
as all markets for all purposes—New York Stock Exchange, Ameri
can Exchange, the commodity markets and all the rest—has no reg
ulation of any kind whatsoever? No supervision, no guidelines, no
guideposts, no margin requirements, no nothing.
Doesn’t it seem kind of unusual to you that the Congress would
let that go by unnoticed for such a long time ?
Mr. S p e n c e r . Sir, in talking about a $200 billion market, as I men
tioned before, about $150 billion of that, and possibly a little bit
more, is in such very short securities that you would not regulate it
1568
EM PLOYM ENT, GROW TH, AND PRICE LEVELS
any way. Secondly, this is a market which I think we who are in it
can say very proudly has never been questioned as far as ethics are
concerned. It is the most highly competitive business of any I know ;
certainly much more competitive than anything else in the financial
field, and one in which most, in fact all but a very minor percentage
of the business, is done by professional investors.
I think that they in themselves are enough of a brake on the par
ticipants in this business to keep it on at least as high a level as any
o(her financial business in the world.
Representative P a t m a n . That is the operators themselves. I am
not questioning them. How can you say that there is never any
question raised about it wThen there was no investigation of it? I do
not know any investigation of the market on Government securities.
I f there has been one, I do not know when it has been done. I do not
tlimk that an investigation by the Treasury and the Federal repre
sents a real investigation. They would be investigating themselves
I do not think that is the kind of investigation you want any more
than you would want an audit of your own people doing the auditing.
I( is not that kind of investigation that we need. It occurs to me
that facts themselves disclose a need for some regulation.
Last June, I believe it was, when we had such an awful situation
develop in the market, that is liable to happen any time. That is a
warning that we should do something about it. I think something
should be done about regulating the Government securities market.
I f you deduct the securities that are not in the marketable class like
savings bonds and public trust funds, special issues, they aggregate
about $90 billion. If you deduct that from the amount of the
national debt, you have less than $200 billion trade today that could
possibly be traded. That means the entire national debt turns over
at least once each year.
Mr. S p e n c e r . Yes.
Representative P a t m a n . In truth and in fact, certain parts turn
over several times a year, and some of it does not turn over at all.
But the average would be that the entire national debt would turn
over at least once.
Mr. S p e n c e r . Some $25 billion of it turns over automatically every
90 days.
Representative P a t m a n . That is on account of the bills. I would
not want to ask for any trade secrets, but do you have any particular
way that dealers can figure out what the Fed is going to do in the
market ?
Mr. S p e n c e r . Nothing more than the published statements of the
Fed which come every Thursday afternoon, and what we can judge
of the basic economic picture at the time. We have no information
and we have no access to any information that is not available to
anybody who wants to be a student of the market.
Representative P a t m a n . The statement has been made that reserves
cannot be increased very rapidly through dealers. It takes time to
get the reserves out over the country. About how many towns and
cities in the country do you deal with as a firm ?
Mr. S p e n c e r . I would say there is not a city in the country with
inhabitants of 100,000 or more, and it may be 50,000, that we do not
do business with.
EM PLOYM ENT, GROWTH, AND PRICE LEVELS
1569
Representative P a t m a n . Most o f that business is very f a s t , d o n e
by telephone?
Mr. Sp e n c e r . It is all done by telephone with either the main offi
ces or the branch offices we have throughout the country.
Representative P atman. That means that if the Fed is buying
securities that the reserves would be pretty well evened out over the
country very rapidly.
Mr. S p e n c e r . I cannot answer that. sir. I do not know. In the
first instance I would say it would go either to the central reserve
cities or to the major reserve cities, because we would be paying off
loans which are generally made with the larger banks or paying off
repurchase agreements with major corporations who, in turn, would
put their funds principally in the major banks.
I cannot answer how quickly it would spread out through the finan
cial community. I do not know. I have a suspicion it would not get
out as immediately as perhaps you infer.
Representative P a t m a n . Any questions that I would like to ask
you before you correct your testimony, I assume it will be all right
to ask you in writing and you will answer them for me.
Mr. S p e n c e r . I w ill try to do so, sir.
Representative P a t m a n . Roughly what percentage of your b u sin ess
is done in notes and long-term governments ?
Mr. S p e n c e r . I can only guess on this again because we do not break
it down. I would say that between 60 and 70 percent of the various
securities that mature within 1 year. It decreases very rapidly as
we go out.
Representative P a t m a n . What percentage of your business is
done with customers who are located in New York City?
Mr. S p e n c e r . That I haven’t the vaguest idea of. I am sorry,
I would like to answer if I could.
Representative P a t m a n . Y ou have b een with this fir m a lo n g
tim e , I a ssu m e.
Mr. S p e n c e r .
Since 1921, sir.
Representative P a t m a n . D o you have many of your officials or
employees who formerly worked in the Federal Reserve Bank of
New York?
Mr. S p e n c e r . I do not b elie v e w e h a v e any. No, sir.
Representative P a t m a n . None of them from the Open Market
Account ?
Mr. S p e n c e r . No, sir.
Representative P a t m a n . D o you have any from the Treasury o f
the United States ?
Mr. S p e n c e r . No, sir.
Representative P a t m a n . D o the dealers generally hire people who
have had experience in the Treasury and with the Fed?
Mr. S p e n c e r . Again, sir, I cannot answer that. I can only answer
as to our own firm.
Representative P a t m a n . Y ou have not hired any?
Mr.
Spencer.
N o, sir.
Representative P a t m a n . What do y o u consider the advantages and
disadvantages of the bills-only policy, Mr. Spencer ?
Mr. S p e n c e r . I have to talk about this from my own point of view.
Representative P a t m a n . Yes, sir.
1570
EM PLOYM ENT, GROWTH, AND PRICE LEVELS
Mr. S pencer . From my own point of view, we feel that the billsonly policy is a considerable assistance to the market. We would be
very concerned as dealers, or fearful perhaps is a better word, of
having the largest portfolio and the only organization in the country
that has perhaps unlimited funds moving in and out of all of the
maturity categories of the market at any time.
It would tend in our case, and I will not talk for anyone else, to
limit our willingness to take the positions which we now do in order
to service our customers. That does not mean, of course, that there
are not times when the Federal Reserve should move into the other
markets, but as a basic general policy, I think that the market benefits
from a bills-only policy.
As far as the bills-only policy as differentiating from a short-term
policy, I would like to make one little point which I think is of some
value. That is, that in the Federal Reserve portfolio, if they hold
bills they can, as Mr. Rouse explained this morning, permit them to
mature, roll them over or roll them over partially.
I f they have certificates and notes, even very short ones, and they
mature, I cannot conceive of any situation in which the Federal
would under any circumstance let them run off instead of accepting
the refunding from the Treasury. That would to a certain extent
interfere with the monetary objectives of the Open Market Committee.
This does not mean that a bills-only policy is something that is
sacred and we must live with forever. I do think that a bills-only
policy as a basic concept is helpful to the market in general and if
it is helpful to the market, I think it is helpful to the Treasury, and
to the entire financial community, except under only extraordinary
circumstances.
Representative P a t m a n . D o you believe support should be given
at some point to the long-term Government obligations by the Fed?
Mr. S pencer . Only under the most unusual circumstances.
Representative P a t m a n . Do you know of any country in the world
having a central bank where the central bank does not help its parent
in its financing ?
Mr. S pencer . I am not sufficiently familiar to answer that, sir.
The two or three instances, I can think of, I know there is some
assistance rendered, but I cannot answer beyond that.
Representative P a t m a n . Do you know of any country that fails
to render assistance except our own ?
Mr. S pencer . No, I do not, sir. There again it is a question of
what you mean by “ assistance.”
Representative P a t m a n . I understand. Does the Fed ever ask
you to engage in repurchase agreements ?
Mr. S pencer . With them ?
Representative P a t m a n . Yes.
Mr. S pencer . Yes, sir.
Representative P a t m a n . What is the reason for it ?
Mr. S pencer . The reason for it is that they wish at that particular
time to put temporary reserves into the market. I f they buy for a
portfolio account, those reserves remain in the market for an unlimited
period of time, that is, until such time as they decide to dispose of
them by sale.
On the other hand, if they give us repurchase agreements for
a fixed number of days and their projection—indicates that in that
EM PLOYM ENT, GROW TH, AND PRICE LEVELS
1571
period of time additional reserves are required in the banking system,
this method gives them the means of pinpointing the period of time
that those reserves stay on the market.
Representative P a t m a n . Do they make the offer attractive some
times by letting you have an interest rate that is below a discount rate ?
Mr. S pencer . I remember exactly twice in all the years since I
have run our Government bond department, which is since 1941, that
that happened.
Representative P a t m a n . D o you actually deliver the bonds to the
Federal Reserve ?
Mr. S pencer . Yes, sir. I f we do not, they raise the dickens. I can
tell you that. They are after you at 3 o’clock that afternoon. The
actual securities are delivered.
Representative P a t m a n . Y ou actually deliver the bonds themselves
to the Federal Reserve?
Mr. S p e n c e r . Yes, sir.
Representative P a t m a n . And you enter into this repurchase agree
ment which you consider to be a loan ?
Mr. S p e n c e r . Which we consider to be a loan, and which we, in
turn, in the case of the Federal, have the privilege of terminating
at any time, although they do not. That is not the case with other
types of repurchase agreements. In other words, we may make a
repurchase agreement for a period of 4 days with the Federal. I f
we have sold some of the securities involved on the following day,
we are permitted to pull them down and pay off that part of the
repurchase agreement.
Representative P a t m a n . That is all. Thank you, Mr. Chairman.
The C h a ir m a n . Senator Javits?
Senator J avits . In terms of the idea of regulation of these markets,
I assume that the reason for regulation would be to keep these markets
honest. Is there any problem about these securities and the represent
ations with respect to them?
Mr. S pencer . No, sir; this is quite different from uranium stocks.
Senator J avits . Or to avoid manipulation?
Mr. S pencer . That is correct.
Senator J avits . What is your own view as to the insurance which
perhaps ought to be considered against manipulation ? Do you think
there is any particular need for that ?
Mr. S p e n c e r . I do not see how an industry which I described a
minute ago as the most highly competitive of any I know, that there
could be any manipulation that could be successful.
Senator J avits . At the same time, you do agree and it is manifest
that this involves an enormous amount of the economic interest of
the United States?
Mr. S p e n c e r . Yes
Senator J avits . Would you say that any regulation would be
required on that ground alone, because there is so much tied up here ?
Mr. S pencer . I do not think so. I feel that the industry has
demonstrated its ability to conduct itself on the highest possible level.
I think it has demonstrated—and this applies to the debacle of last
summer, too—its ability to service the financial community under
the most trying of conditions.
1572
EM PLOYM ENT, GROWTH, AND PRICE LEVELS
The only thing that I do believe, as far as information or anything
else concerning the Government security industry, is that it should
be available, to both the Federal Reserve and the Treasury, because
I feel it is vital for them to know the picture in the market, and the
amount of activity in the various maturity categories. This is some
thing which we furnish to them and have furnished, as long as I can
remember, every single day of the week.
Senator J a v i t s . I s there some index or some clue that we could find
if there were manipulation other than regulation ?
Mr. S p e n c e r . I would say that the Federal Reserve could spot it
in a minute.
Senator J a v i t s . The Federal Reserve itself?
Mr. S p e n c e r . Yes.
Senator J a v i t s . What do you say to Congressman Patmairs point,
however, that if they did they would he spotting something on
themselves ?
Mr. S p e n c e r . No. “ Manipulation,'’ as I am interpreting the word
here today, means that some group in the market is manipulating a
security or a group of securities for their own benefit and not in ac
cordance with the market dictates at the moment.
Senator J a v i t s . In other words, a false version of the market would
be created ?
Mr. S p e n c e r . Yes.
Senator J a v i t s . You say the Federal Reserve could spot that ?
Mr. S p e n c e r . I do not see how they could avoid finding it in a
moment. As a matter of fact, I do not see how the rest of the dealers
could miss it for very long.
Senator J a v i t s . Would you say the alternative to regulation because
of the enormous economic interest involved is some way to he sure
that the Federal Reserve would be our policeman? Would that be
an alternative to regulation ? Perhaps we are now.
Mr. S p e n c e r . I think if they were willing to do it and I think to a
certain extent they are now, I would say that might be a solution.
It certainly should be pursued a little further.
Senator J a v i t s . Picking up from what you said about your ascer
taining for the governmental authorities the market situation, I
would like to ask you the same questions I asked Mr. Rouse this morn
ing about the impact of a more lively absorption of savings bonds.
I call them peace bonds for obvious reasons.
I am looking for a way in which to promote their sale and looking
for somewhat higher interest rates and perhaps some other more
advantageous conditions, but the essence is the same.
Could you see, as a person who is engaged in judging markets, any
impact upon the long-term Federal bond market if, for a change, the
sales of this type of bond to the individual saver was exceeding ma
terially the redemptions? Suppose it went the other wTay. Suppose
instead of $200 million or $300 million a month excess redemptions,
you had savings.
Mr. S p e n c e r . I think it could only help it. It would not harm it
in any way. It would not absorb money that would go into the long
term Government market whether the sale of savings bonds was
increased that much or not.
EM PLOYM ENT, GROWTH, AND PRICE LEVELS
1573
I go back to the same thing I said before. The Government security
market for marketable issues is so largely institutionalized that the
individual is not in the market under normal circumstances for invest
ment at all. I think that anything that could be done to stimulate
the sale of savings bonds would be an excellent thing for the com
munity as a whole and, if anything, would be helpful rather than
harmful to the long-term Government bonds.
Senator J a v i t s . What about the factor, if there be a factor—and
we are here to find out, however provocative our questioning may
be—is the sheer psychology of the individual investor being willing
to risk more of his money in savings bonds than he is now ? What
effect wTill that have on the institutional buying ?
Mr. S p e n c e r . I would simply say it would increase the overall
amount of savings without decreasing in any sense and to a very
slight extent the amount of savings that are now institutionalized.
Senator J a v i t s . It would be good?
Mr. S p e n c e r . Yes, sir.
Senator J a v i t s . And would be helpful to the general appraisal of
what these bonds are really worth and what interest rate they ought
to really pay?
Mr. S p e n c e r . I think there is a very interesting thing that hap
pened here in this list issue of 4% percent notes. I do not know
whether Mr. Rouse remarked this morning about it or not, but I
believe he did. We have found an amazing number—these come
through banks to us or possibly stock exchange houses or others—of
buyers of $2,000, $3,000, $4,000, $5,000 worth of these 4%’s because
they have found a rate of interest that will pull their money into
this form of capital savings.
For the uninitiated, if the rate on savings bonds could be made
adequate, and that does not mean it has to be the full market rate, I
think it would be a great thing.
Senator J a v i t s . Thank you very much, Mr. Spencer.
The C h a i r m a n . Congressman Patman?
Representative P a t m a n . It has been suggested that there was no
evidence of manipulation in the Government bond market.
Mr. S p e n c e r . Yes, sir.
Representative P a t m a n . I want to invite your attention to the
fact that in 1953 when bonds went down for some reason or no reason,
and the banks purchased the bonds, in 1954 when they went up in
price they sold the bonds at the right time and they earned $424 mil
lion during that year which was several times as much they had ever
made before on transactions of that type; 10 to 15 times as much,
depending upon the year you pick out.
That was rather shocking at the time. I remember that 2 percent
of the banks made 66% percent of those profits.That was not under
stood. We had a repetition of that performance inl957 when bonds
again for no reason or some reason went down and the banks bought
them up again. In 1958, when they went up , and here is only a short
period there, they could sell them and make big profits. They hap
pened to sell them exactly at the right time. They made $681 million
profit in the early part of 1958. Two percent of the banks made
two-thirds of those profits, $681 million.
To some banks that meant $12 million or $1 million a month on an
annual basis, but obviously it could not be on an annual basis because
1574
EM PLOYM ENT, GROWTH, AND PRICE LEVELS
there was a short period of time when they had to be sold. It hap
pened that they sold them at exactly the right time.
Don’t you think that is a little evidence of some manipulation of
some kind when enormous amounts like that can be made in a short
period of time in Government operations?
Mr. S pencer . I do not call that manipulation
Representative P a t m a n . What is it?
Mr. S pencer. I f I may say so, I would say that is very astute port
folio management.
Representative P a t m a n . Just being very astute with the money?
Mr. S pencer . Yes, sir. The 2 percent were unquestionably the
larger banks who had the personnel best equipped to take advantage
of the instability in the Government security market which I think
we will always have.
Representative P a t m a n . Senator Javits suggested that the Fed
eral Reserve could probably be a good policeman. I want to invite
your attention to the fact that the Federal Reserve is not in a position
to be the kind of policeman, I believe, that we should have.
Senator J avits . I f the Congressman will yield, I want to be clear
that I was not suggesting that they would be a good policeman. I
was trying to ascertain from the witness what were our alternatives.
Representative P a t m a n . I accept the gentleman’s explanation o f
it. The Federal Reserve, to my way of thinking, has gotten off into
almost a fourth branch of Government. Instead of having a back
door approach to the Treasury, it has both front and back door ap
proaches to the Treasury. They consider themselves off to themselves
somewhat.
I think they are clearly wrong, and I think the Executive is wrong
when he says the Federal Reserve is an independent branch of the
Government, because the law imposes upon the Executive the duty
to see that the laws are faithfully executed and the Federal Reserve
Act is a law just like any other law.
I think it is clearly wrong, but that is the way it is. There is no
control over the Federal Reserve as far as public control is concerned.
The Federal Reserve doesn’t go to Congress for appropriations like
all other agencies go to Congress for appropriations. The Federal
Reserve is given the privilege of just issuing money, creating money,
on the credit of the Nation, to buy Government bonds which they have
done to the extent of about $25 billion. They collect the interest on
the bonds from the taxpayers every year, at least the Treasury does,
and turns it over to the Federal Reserve and they use that for any
expenses they want to use it for and turn 90 percent back to the
Treasury.
It happens it is a pretty good source of revenue to the Treasury
right now, about $500 million a year. But the Federal Reserve is
even objecting to that. Chairman Douglas has been trying to impress
Mr. Martin, the Chairman of the Federal Reserve Board, how desir
able it is for the Fed to buy bonds instead of lowering reserves, but
he does not seem to be getting anywhere with it.
I do not think the Federal Reserve is the right kind of policeman
I would want to have in this matter. I would like to make that ob
servation and tell my reasons why I did not think so.
Mr. S pencer . I followed the reasoning of Senator Javits a moment
ago and said this was possibly one.
EM PLOYM ENT, GROW TH, AND PRICE LEVELS
1575
Representative P a t m a n . Yes, sir; I got his explanation.
Mr. S p e n c e r . I fo llo w e d i t in th e sa m e sense.
The C h a i r m a n . There are one or two final questions I should like
to ask.
In connection with the bills-only policy, the majority of the ad hoc
committee in their 1952 report advocated the bills-only policy because
it would in their words “ result in an increase in the depth, breadth,
and resiliency of the Government securities market,55 and presumably
they meant the long-term maturity sector of that market.
As a dealer and as one of the great authorities on this subject in the
country, do you think the bills-only policy has resulted in an increase
in the depth, breadth, and resiliency of the long-term Government
securities market?
Mr. S p e n c e r . I have to answer that in reverse. I think it has pre
vented the market from contracting even further than it might have.
That is, if we had not had the bills-only policy.
I do not think it has added anything to it.
The C h a i r m a n . Y o u don5t think the bills-only policy has added
any depth, breadth, or resiliency?
Mr. S p e n c e r . No, sir; I do not.
The C h a i r m a n . This is a very interesting statement, because that
is the direct opposite of the chief argument used for the adoption of
the bills-only policy by Chairman Martin.
Mr. S p e n c e r . The only thing I would like to add to that, sir, is that
I do think any other policy might have even decreased the breadth
and resiliency of the market as I said earlier. As a help to the mar
ket I think there are many other factors which affect the Government
security market much more than the bills-only policy.
The C h a i r m a n . In other words, it has not been of any benefit ?
Mr. S p e n c e r . That is right in a negative way only.
The C h a i r m a n . I think you probably answered this question.
For the sake of the record I will put it in a different way.
Do dealers such as yourself now typically carrying larger inven
tories of longrun bonds under present conditions of the bills-only
than they did prior to the adoption of this policy ? That is, do you
carry a larger proportion of longrun bonds now than you did prior
to 1952?
Mr. S p e n c e r . Since we have had a considerable expansion of debt
in the intermediate field, I feel that we do carry a larger proportion
of issues maturing over 1 year under the bills-only policy. And, yet,
as somebody said, “ I can go home and sleep at night.55
The C h a i r m a n . Y o u don5t worry about shortrun fluctuations?
Mr. S p e n c e r . That is correct, sir.
The C h a i r m a n . This has not been the result of reserve policy ?
Mr. S p e n c e r . N o , sir.
The C h a i r m a n . All New Yorkers know Gilbert and Sullivan. You
know the lines from The Mikado, “ The flowers that bloom in the
spring,55 have nothing to do with the case. In other words, the billsonly policy has nothing whatsoever to do with this matter.
Mr. S p e n c e r . I had a little thought myself a moment ago while I
have been talking here. It reminded me of Candide.
The C h a i r m a n . Y ou read Voltaire.
1576
EM PLOYM ENT, GROW TH, AND PRICE LEVELS
Mr. S p e n c e r . T o Candide’s tutor, Pangloss, his was “the best of
all possible worlds.” I do not want you to think I believe the Govern
ment security market is just that. But, it is nevertheless a pretty
good one.
The C h a i r m a n . But not the best of all the world.
Mr. S p e n c e r . There is alw'ays room for improvement.
The C h a i r m a n . And it is the duty of Government to try to improve
things.
Mr. S p e n c e r . Yes.
The C h a i r m a n . Including the Federal Reserve Board, don’t you
think?
Mr. S p e n c e r . I think that applies to probably every phase of life.
Representative P a t m a n . I have just one other question.
The dealers do business among themselves, too, do they not ?
Mr. S p e n c e r . Yes, sir, we do. It is a very small percentage of our
business.
Representative P a t m a n . I believe Mr. Rouse testified this morning
that you have telephone connections between the dealers.
Mr. S p e n c e r . We have direct wires with all of the major dealers.
We also have direct wires with most of the major banks in New York,
whether or not they are in the Government security business.
The C h a i r m a n . But you do very little business with one another?
Mr. S p e n c e r . It is comparatively small.
The C h a i r m a n . Thank y o u , Mr. Spencer.
We meet tomorrow at 10 a.m.
(Whereupon, at 3 :40 p.m., the committee recessed, to reconvene at
10 a.m., the next day, Thursday, August 6, 1959.)
EMPLOYMENT, GROWTH, AND PRICE LEVELS
TH U R SD AY, AUGUST 6, 1959
U.S.
J o in t E
C ongress,
c o n o m ic
,
C o m m it t e e ,
New York N.Y.
The committee met at 10 a.m., pursuant to recess, in room 110,
U.S. Courthouse, Foley Square, New York, N.Y., Senator Paul H.
Douglas (chairman of the committee) presiding.
Present: Senators Douglas and Bush; and Representatives Patman,
Reuss, and Widnall.
The C h a i r m a n . The hour of 10 o’clock having arrived, the com
mittee will come to order.
The witness this morning is the executive vice president of C. F.
Childs & Co., of New York, Mr. Murray F. Brown. We are very
glad to welcome you, Mr. Brown. The home office of your company
is, I believe, in Chicago.
STATEMENT OF MURRAY F. BROWN, EXECUTIVE VICE PRESIDENT,
C. F. CHILDS & CO., NEW YORK; ACCOMPANIED BY TIMOTHY
CANTWELL, VICE PRESIDENT, TRADING OPERATIONS; ROBERT
VAN CLEAVE, VICE PRESIDENT FOR RESEARCH; AND CHARLES
GIAMONDI, ASSISTANT TREASURER AND CASHIER
Mr. B r o w n . That is correct.
The C h a i r m a n . New York is a branch office?
Mr. B r o w n . That is what they like to call it.
The C h a i r m a n . The home office is in Chicago ?
Mr. B r o w n . That is correct, sir.
The C h a i r m a n . Your company has a very excellent reputation in
Chicago, and we are very glad to welcome the New York branch here
this morning. I wonder if you would be willing to identify your
associates for the record.
Mr. B r o w n . Yes, sir. On my extreme right is Mr. Charles Giamondi, assistant treasurer and cashier of our organization. Then Mr.
Robert Van Cleave, vice president for research in the company, and
Mr. Timothy Cantwell, vice president in charge of trading operations.
The C h a i r m a n . Mr. Brown, do you have a prepared statement or
do you wish to proceed by question and answer ?
Mr. B r o w n . I have no statement to make, Senator.
First, I would like to present the committee with some books that
are regarded in our business as the bible of our business.
The C h a ir m a n . Thank you very much. I f the understanding is
that this is a donation to the Government and not to the chairman, I
1577
1578
EM PLOYM ENT, GROWTH, AND PRICE LEVELS
will accept it, because I make it a rule never to accept any gift worth
more than $2.50. When my term of service is up, it will be returned
to the library of the Joint Economic Committee.
Mr. B r o w n . There is no market for those books now.
The C h a i r m a n . They are very valuable. You hajve presented
us with this book. May I ask if you have had time in your busy life to
look over this three-volume report of the Federal Reserve and
Treasury ?
Mr. B r o w n . We received those volumes only last week.
The C h a i r m a n . But you read them ?
Mr. B r o w n . I have read a good part of them; not all of them.
The C h a i r m a n . Unlike the vice president of the Federal Reserve
bank, you found time to read these volumes ?
Mr. B r o w n . I did not read all of them, sir.
The C h a i r m a n . N o , but you did read some of them ?
Mr. B r o w n . I read some of them.
The C h a i r m a n . Y ou are familiar with the general nature of the
contents ?
Mr. B r o w n . I have a general idea.
The C h a i r m a n . Thank you very much.
How many branch offices besides the New York office do you have?
Mr. B r o w n . Including the home office, we have six altogether.
The C h a i r m a n . Six?
Mr. B r o w n . Yes, sir.
The C h a i r m a n . In what cities are those located ?
Mr. B r o w n . Chicago, New York, Boston, Cleveland, Pittsburgh,
and St. Louis.
The C h a i r m a n . That is, generally east of the Mississippi, with the
exception of St. Louis?
Mr. B r o w n . That is correct.
The C h a i r m a n . With how many banks do you do business?
Mr. B r o w n . I cannot give you the exact number, but it runs into
many thousands.
The C h a i r m a n . Many thousands of banks ?
Mr. B r o w n . Yes, sir.
The C h a i r m a n . And a great number of insurance companies?
Mr. B r o w n . Yes, sir.
The C h a i r m a n . Is your business exclusively in Government
securities ?
Mr. B r o w n . N o . We also deal in municipals, corporates, and agency
issues.
The C h a i r m a n . Y o u are a bond house, not a stock house?
Mr. B r o w n . We are a bond house.
The C h a i r m a n . What proportion would you say of your business
is in Federal securities?
Mr. B r o w n . Y o u mean U.S. Government securities?
The C h a i r m a n . Yes.
Mr. B r o w n . I would say 90 percent.
The C h a i r m a n . H o w m u c h 5
Mr. B r o w n . Ninety percent.
The C h a i r m a n . In other words, the vast preponderance of your
dealings ?
Mr. B r o w n . That is the principal value.
EM PLOYM ENT, GROWTH, AND PRICE LEVELS
1579
The C h a i r m a n . D o you have any estimate of the total value o f
Government securities in which you traded for the year 1958 ?
Mr. B r o w n . That is regarded as a trade secret. I know what i t
is, yes. I would prefer not to give that information to the committee
except in full confidence and in private.
The C h a i r m a n . Very well. I may say we are handicapped by the
fact that we are trying to get at the totals of dealings in Federal
securities and yesterday the representative of the Federal Reserve
bank said that the totals could only be obtained with the permission
of the Secretary of the Treasury.
We are not interested in figures of individual companies except
insofar as they throw light upon the question of the total. In re
sponse to questioning yesterday, the vice president of the Federal
Reserve bank of New York, I think the record will show, replied
affirmatively to my question as to whether the total figure of $200
billion in dealings in Government securities was approximately cor
rect, and I understood his answer to be “yes.” You understood the
answer to be “yes” ?
Mr. B r o w n . Yes. That is what I read in those reports. Our guess
is that it might even be larger than that.
The C h a i r m a n . The chairman o f this committee likes to b e c o n se rv
ative in any figures he gives. You think this is an approximately
correct conservative estimate?
Mr. B r o w n . I do.
The C h a i r m a n . It might be more?
Mr. B r o w n . It might be more.
The C h a i r m a n . This only takes in to account the tradings which
finally come into the market. It does not take into account the local
balancing of sales and purchases.
Mr. B r o w n . It takes into consideration-----The C h a i r m a n . This is what comes to the New York market.
Mr. B r o w n . It does not include any new emissions by the Federal
Government.
The C h a i r m a n . It does n o t in c lu d e th e $60 b illio n o f n ew s tu ff?
Mr. B r o w n . No, it does not. Not in my opinion.
The C h a i r m a n . S o that when that is added it would be a t least
$260 billion. Does it include the quarterly turnover of the $25 billion
in 91-day sales?
Mr. B r o w n . N o , I do not think it would. We are counting the
sales and purchases that we make directly with the street, so-called,
with other dealers, and with our customers.
The C h a i r m a n . I respect your feeling that the figures about your
individual company are confidential. 1 am not pushing you on that
point. I am trying to get at the total figures which have been given
as $200 billion.
You make the point that this does not include the new issues and
refundings which amounted last year to approximately $62 billion
of Governments. You say this $200 billion figures does not include
that. I f included that would make $260 billion.
As I understand it, about $25 billion of 91-day notes are almost
perpetually in the market which are turned over four times during the
year. These are not included in the $62 billion figure.
The next question is whether your estimate of $200 billion includes
these bills?
1580
EM PLOYM ENT, GROWTH, AND PRICE LEVELS
Mr. B r o w n . I would say it does not include them.
The C h a i r m a n . S o adding in the 91-day notes which are turned
over about four times per year would bring the total figure to about
$350 billion.
Mr. B r o w n . I want to make a slight correction. When we purchase
new issues of bills directly from the Federal or directly from the
Treasury through the Federal, we include those in our volume.
The C h a i r m a n . So the $60 billion would be included in the $200
billion ?
Mr. B r o w n . Not the entire $60 billion. Only that proportion of
the dealers.
The C h a i r m a n . Which last year amounted to about $ 1 2 billion.
About $50 billion consisted of refundings. I think that is approxi
mately correct.
I want to ask a general question. This is obviously an enormous
market, much larger in volume than people believe. I would like to
correct one of the morning papers in the city which said that the vol
ume of transactions amounted to $200 million. This was either the
typewriter which made a slip, the author made a slip, or the type
setter made a slip. It is at least $200 billion, and in your judgment
appreciably more.
Do you not think it would be well if we had figures indicating the
the total volume of transactions ?
Mr. B r o w n . I d o.
The C h a i r m a n . Yet you heard the Federal Reserve Bank of New
York yesterday declare that they saw no need for a publication of
total figures?
Mr. B r o w n . I do not recall it just that way.
The C h a i r m a n . It was about that way. Congressman Patman
has to leave. If he has any questions, I would like to have him inquire
now.
Representative P a t m a n , I would like to say that for a long time
Childs was the only dealer I ever heard about. I received your
publications.
I still have them in my files for 30 years back. I
looked upon you as the original dealer in Government securities and
for a long time I did not know there was any other dealer in Govern
ment securities.
I am sorry I cannot stay here. I feel we are fortunate in having
you as a witness. I know the testimony you will give will be helpful
to us.
The C h a i r m a n . I may say that your company and you, yourself,
and your associates, have been most cooperative and courteous with
our staff in the preliminary arrangements for this hearing. We ap
preciate it very much.
Mr. B r o w n . Thank you, Mr. Patman.
The C h a i r m a n . You believe that total statistics without identifying
individual firms would be very valuable ?
Mr. B r o w n . I do.
The C h a i r m a n . I felt that, and I have been puzzled at the reluc
tance of the Reserve System to issue such figures to the general public.
In other words, you do not want these figures merely for yourself.
You believe the general public is entitled to them; is that not true?
Mr. B r o w n . Yes, sir.
EM PLOYM ENT, GROWTH, AND PRICE LEVELS
1581
The C h a i r m a n . Y ou know pretty well by the fraternization in
the trade what the total volume is; is that not true ?
Mr. B r o w n . We can guess at it.
The C h a i r m a n . You do not want these figures for yourself. You
do not believe that this is the exclusive province of a limited group
of traders. You want this information to be available to the public?
Mr. B r o w n . We h a v e n o o b je c tio n .
The C h a i r m a n . That is right. Because you believe that the
Government security market is charged with the public interest. It
is not purely a private affair.
Mr. B r o w n . That is correct.
The C h a i r m a n . I want to congratulate Mr. Brown and the company
which he represents for this very public-spirited attitude. It is
extraordinary to see a member of the industry taking the position
that this information should be published and to find a governmental
agency holding back on the idea.
Senator B u s h . The figures you are talking about are the total
volume of transactions in Government securities annually or monthly
or whatever.
The C h a i r m a n . Annually; that is right.
Senator B u s h . Does anybodj^ have those figures?
The C h a i r m a n . They are n o t published.
Senator B u s h . I s there any accumulation of such figures?
The C h a i r m a n . I imagine they are in the files o f the Federal
Reserve.
Senator B u s h . How would the Federal Reserve Board have such
figures ? I am asking for information. I do not know that they have
them.
The C h a i r m a n . I f the Senator from Connecticut had been here
yesterday or had been able to read the transcript for yesterday he
would have found that the witness for the Federal Reserve Bank
said they got returns from all except a few of the smaller dealers.
You furnish figures to the Federal Reserve Bank in New York,
do you not?
Mr. B r o w n . Yes, we do, daily.
Senator B u s h . Do all of the 17 dealers ?
Mr. B r o w n , I understand that not all of them do it.
The C h a i r m a n . The bigger firms do, I think,
Mr. B r o w n . I cannot answer that question.
The C h a i r m a n . In any event, it would be possible for the Federal
Reserve to require the dealers to submit totals with the understanding
that no dealer would be identified, just as is the case on census figures.
The identity of the individual manufacturing concerns or commercial
concerns is not betrayed, but the global totals are given.
I agree with you that this is very important information and I
think the Federal Reserve has been negligent in not requiring this
from all dealers and not publishing totals and still more negligent
in resisting the efforts which we made yesterday.
Senator B u s h . Did the Federal Reserve indicate a reluctance to
publish figures ? Did they think it was a bad idea ?
The C h a i r m a n . I think the testimony was to that effect.
Mr. B r o w n . We give these figures to the Federal Reserve System
on a confidential basis and that is the way we have always submitted
38563— 59— pt. 6B------ 6
1582
EM PLOYM ENT, GROWTH, AND PRICE LEVELS
them. They have no right to give out these figures, according to my
way of thinking, unless they consult us and other dealers and get
their consent.
The C h a ir m a n . I tried to make it clear to Mr. Rouse that we do
not believe that the confidence of individual concerns should be be
trayed unless the individual concern is willing, but we do think the
global totals are important.
Now, if wre may turn to another subject, do you have a keen memory
of the events in the Government bond market of June, July and
August of last year ?
Mr. B r o w n . Fairly good.
The C h a ir m a n . I refer to that period as the debacle in the Govern
ment securities market. Someone overnight approached me with
using an excessively strong term. Would you agree that I had put
too much strain on the English language in referring to it as a
debacle ?
Mr. B r o w n . That term has been used many times.
The C h a ir m a n . So that the Senator from Illinois was merely
following well established usage in this respect ?
Mr. B r o w n . I believe so.
The C h a i r m a n . I a m glad to have this confirmation because I have
been subjected to a very severe tongue lashing by certain people for
referring to it as a debacle.
I wonder if, for the sake of the record, you would briefly review
the history of the upswing in the price of Government securities and
then the downswing.
I take it that we are referring to the refunding issues by the Treas
ury of bonds, not of notes or certificates. Is that not true ?
Mr. B r o w n . Y ou want me to review the history of the market
from the beginning of the rise to the beginning of the decline ?
The C h a ir m a n . Yes, in your own words, and then I will
interpolate as you go along.
Mr. B r o w n . Toward the end of 1957, it became fairly evident to
observers that business conditions were beginning to deteriorate.
Accordingly, those who were professionals in the business began to
clean the decks for the next move by the Federal Reserve System.
The C h a ir m a n . You anticipated that the Reserve would move?
Mr. B r o w n . Yes. The business statistics so indicated.
The C h a ir m a n . By creating member bank reserves ?
Mr. B r o w n . That is correct.
The C h a ir m a n . Either by reducing reserve requirements or by
open market operations ?
Mr. B r o w n . Or changing the discount rate which they did. It is
our business to try to discern what the signposts say, and, interpreting
it in that manner, we naturally get ourselves on the right side of the
fence, or try to.
Those things did happen and the public, having become much more
sophisticated relative to the use of monetary means for accomplishing
objectives toward easing money or aiding the economy, started to
purchase Government securities.
At that time the Treasury made several refundings and admissions
of securities which these so-called speculators that finally wound up
as the sellers in the June debacle, plus banks, insurance companies,
EM PLOYM ENT, GROWTH, AND PRICE LEVELS
1583
dealers, and anybody that had commonsense and good judgement to
know what the Federal was going to do.
The C h a i r m a n . Y ou are now describing events in June 1958.
Mr. B r o w n . N o . I am describing the late 1957, the approach to
the 1958 situation.
During that period the Federal Reserve did alter its policy to help
the economy, creating more bank reserves and the market continued
upward until approximately April 1958, when it started to recede
somewhat. I do not think the ordinary investor, speculator, profes
sional had yet decided that-----The C h a i r m a n . The April dip was a slight dip, was it not?
Mr. B r o w n . There was a change in the price of securities during
that period or around that period.
The C h a i r m a n . I wonder if you would now concentrate your
discussion upon the refundings of the Treasury in June and what
happened to their price.
Mr. B r o w n . During the period just prior to the June refunding,
there had been no short-term issue made available for the use of cor
porations for the payment of their income tax. Consequently, they
took on two maturing issues, 2% and 2% coming due June 15, 1958,
and these were used by corporations and others.
At the same time there was a tax gimmick situation for wealthy
investors who had losses that they could take. I cannot go into the
intricate details. I can get it for you.
The C h a i r m a n . Y ou mean the carry-losses-back provision?
Mr. B r o w n . N o . It is a question of buying bonds at a premium.
If they purchased bonds at a premium, they could take the loss from
the time they purchased to the maturity date. There was a great
deal of that. It started out in that manner. Mostly stock exchange
houses sold that idea to their clients. They began to get other ideas,
that is they could exchange these securities for a new issue and in an
easing monetary market they could make further profits.
This built up pretty rapidly. We did not have any idea of the
amounts. We could account for around $500 million at the time
which we reported in our discussions with the Federal Reserve
System—weekly discussions, I mean. We, too, participated in the
purchase of those securities because we had not yet come upon the
idea that the economy was in an upswing until statistics began to
indicate that something was afoot.
Some newspaper articles appeared at the time threw a scare into
those speculative holders that were in on small margins and we
began to wonder where we were going to sell the securities.
The C h a i r m a n . May I ask this question: When the Government
refunded their bonds, they were issued at par; is that not true ?
Mr. B r o w n . The exchange took place at par.
The C h a i r m a n . At par ?
Mr. B r o w n . Yes, sir.
The C h a i r m a n . The bidding was in terms of amounts rather than
in terms of price.
Mr. B r o w n . It is not a question of bidding. It is a question of
exchanging.
The C h a i r m a n . The subscribing was in terms of amounts rather
than in terms of price ?
Mr. B r o w n . Just an exchange of par for par.
1584
EM PLOYM ENT, GROWTH, AND PRICE LEVELS
The C h a i r m a n . After the issue, to what point did these bonds rise ?
Mr. B r o w n . Roughly around par and 15/32 or 1%2, my memory
tells me.
The C h a i r m a n . That is, half a point?
Mr. B r o w n . Half a point and slightly more. Right in that area.
The C h a i r m a n . It did not rise above this ?
Mr. B r o w n . N o , sir. Not that I recall. That is about right.
The C i i a i r m a x . Then what?
Mr. B r o w n . When it was realized that there were so many specu
lators in the market, both speculators of the type that go in on a shoe
string, plus those banks and others who had extended maturities when
they should not have done so, and other corporations who took the new
longer term securities because the Treasury put out a low-rate short
term obligation and they felt there was a possibility of a profit, when
it became realized that there were so many in that fix, and the busi
ness statistics began to give some indication of an improvement in the
economy, and these newspaper articles came along which indicated
that the Federal might change its policy, that scared some people.
It did not scare everybody. There were a great many people, banks
and others, who did not believe that the turn had come.
It disturbed enough of the holders of the securities so that there
was a tremendous number of offerings coming into the market.
The C h a i r m a n . Y ou mean sales.
Mr. B r o w n . Yes, sales. Offering's b y the holder.
The C h a i r m a n . What effect did this have 011 price?
Mr. B r o w n . The price immediately started to decline, gradually.
The C h a i r m a n . As the price declined, what about the margins on
the basis of which purchases had been made?
Mr. B r o w n . We do not know very much about margins. We do
not have very much to do with margin buyers. We sometimes sell
securities to stock exchange houses and others. We do not generally
come much into contact with individual speculators in Government
securities.
The C h a i r m a n . Would you agree with the statement in the study
bv the Federal Reserve and the Treasury, pages 37 and 38 of the
second volume, the paragraph at the bottom of the page:
Most borrowers, however, were asked to put up 3 points or less of collateral
and many of those were not required to commit any of their own funds. Even
under the maxium margin which was most characteristic of loans to stock
exchange firms—
I believe only two dealers, the Salomon Bros, and Quincey Bros, are
members of the stock exchange—
because of the 5 percent minimum margin required, each change of 1 percent in
the price of securities results in a 20 percent gain or loss in terms of the
borrower’s original equity. The extent to which this high leverage combined
with overly optimistic price expectations attracted participants into the June
refunding cannot be determined, but it is clear that the relatively low initial
margins increased the buying potential of those who did participate.
And then there was the passage which I quoted yesterday from
pages 90 and 91 of the same volume:
Because the narrow margins on some credit financing of the 2% percent bonds
were, in fact, quickly wiped out, lenders were forced to make margin calls
almost immediately to keep the value of collateral backing their financing from
falling below loan value. In many instances, borrowers were unprepared to
EM PLOYM ENT, GROWTH, AND PRICE LEVELS
1585
meet these calls. Although many had the financial resources to meet the
calls— and many did so in the hopes of recouping their potential losses in a
subsequent market rally— others were unwilling to put more margin and moved
quickly to sell out. Because of their lack of experience in Government secu
rities trading, such sellers tended to adopt distress selling tactics in liquidat
ing positions and in so doing, exaggerated the pace of the decline. Each sig
nificant new drop in prices elicited new margin calls which, in turn, prompted
further liquidation and led to further decline.
Would you agree with that statement?
Mr. B r o w n . I do.
The C h a i r m a n . In other words, the narrowness of margin led to a
cumulative decline in the prices of Government securities; is that
not true?
Mr. B r o w n . I think so.
The C h a i r m a n . H o w far did that decline go ?
Mr. B r o w n . The decline continued until very recently.
The C h a i r m a n . Lets us take the period to late August.
Mr. B r o w n . My colleagues say it was approximately 97y% at that
time.
The C h a i r m a n . I thought I noticed in the report of the Federal
Reserve that the decline had been 6 percent or 6 points. May I ask
the staff if they have examined the Federal Reserve report?
The report of the Board and the Treasury is not indexed so it is
somewhat hard to find the desired information. This record can be
corrected, but it is my impression, as I remembered the study, it
shows a 6-point decrease by the last week in August or the first week
in September.
On a 3 percent margin, that would be more than twice the margin;
is that not true?
Mr. B r o w n . Yes, sir
The C h a i r m a n . That would completely wipe out the margin and
before it had fully occurred would have caused distress selling.
Mr. B r o w n . That would be so, sir. I do not quite agree with you on
the extent of the decline up to that time.
The C h a i r m a n . Even a 2 y2 percent decrease would have virtually
wiped out a 3 percent margin; is that not true ?
Mr. B r o w n . That is correct.
The C h a i r m a n . Before the margin has been completely wiped out,
the distress signals began to come from the banks; is that not true?
Mr. B r o w n . Yes.
The C h a i r m a n . And demanded, “ You better put up more margin
to protect your 3 percent,” is that not so?
Mr. B r o w n . Yes.
The C h a i r m a n . I think you have already answered the question
that the low margins contributed to the cumulative decrease in bond
prices of Government securities.
Mr. B r o w n . I believe so.
The C h a i r m a n . I congratulate you on the honesty of that testimony.
Do you think this decrease in the prices of Government bonds is prop
erly a matter for congressional concern, or whether this is simply a
matter for the trade ?
Mr. B r o w n . I do not think the fluctuations in Government bonds
are of any concern to the public.
The C h a i r m a n . Not any concern for the public?
Mr. B rown. Not particularly.
I have reasons for saying that.
1586
EM PLOYM ENT, GROW TH, AND PRICE LEVELS
The C h a i r m a n . Y o u mean the market is more or less insulated from
the general financial situation and the reputation of the Government ?
Mr. B r o w n . I do not think the price of Government securities has
anything to do with the reputation of the Government, which is
involved only inasmuch as it spends more than it takes in, or finances
in the wrong way. I would say that everybody knows that Govern
ment bonds are going to be paid at par. What the value of the money
at maturity is, is what the public is concerned about.
Senator B u s h . But those items you mentioned would have an effect
on the opinion on Government bonds.
Mr. B r o w n . I b e lie v e so.
The C h a i r m a n . I find that my memory was not at fault. I will
submit this to the Senator from Connecticut so he may audit my
statement.
Senator B u s h . I do not question it.
The C h a i r m a n . I do not say you question it. I want you to audit
the accuracy of my comment. I take the insert chart between pages
90 and 91 of the report showing the prices of the 2% and the Sy2 bonds.
In early June it was at par or slightly above. By the end of August
it was slightly below 94. By the end of October, about 93%.
Would the Senator from Connecticut say whether the Senator from
Illinois has read the chart correctly ?
Senator B u s h . Yes.
The C h a i r m a n . In the case of the 3y2 percent bonds, in June the
price was about 103, and by the first part of September it was below
93, and by the end of October it was about 93%. May I ask the wit
ness if that is correct ?
Mr. B r o w n . That is correct, sir.
The C h a i r m a n . In other words, Senators can sometimes remember
these prices better than dealers. I do not want to rub it in.
Mr B r o w n . Y o u a re right.
The C h a i r m a n . I think that is all that I want to ask.
Senator Bush ?
Senator B u s h . Mr. Brown, does C. F. Childs or any of these
Government dealers publish a statement for the public to see their
financial condition?
Mr. B r o w n . I believe only one dealer publishes a statement.
Senator B u s h . Does the Federal Reserve Board receive your
financial statment ? Do you disclose your financial statement to any
of the Government authorities?
Mr. B r o w n . We do. We give our statement to all our lending
banks. We give it to several State agencies, and also to the Federal
Eeserve System.
Senator B u s h . So it is not a tight secret by any means. There
are a great many people who might have reason to want to know
about it who do know about your financial condition; is that right?
Mr. B r o w n . Yes, sir.
Senator B u s h . Why do you not publish your statement, then?
Mr. B r o w n . It is something that we have never done.
Senator B u s h . Y ou mean it has become so general in the last 25
years, I would say, that I wonder why a firm like yours does not
publish it.
EM PLOYM ENT, GROWTH, AND PRICE LEVELS
1587
Mr. B r o w n . It is a family corporation. Perhaps the family does
not care to have that information divulged.
Senator B u s h . I s it a secret as to how much capital there is in your
firm? Would you prefer not to state that?
Mr. B r o w n . The information is available. I would say it is ap
proximately $41/2 million, at the present time.
Senator B tjsh . I beg your pardon ?
Mr. B r o w n . At the present time.
Senator B u s h . Do you happen to know whether that is larger or
smaller than other dealers in the same line of business?
Mr. B r o w n . I could only compare it with the one that is published.
I do not know about the others.
Senator B u s h . Who is that?
Mr. B r o w n . I understand it is the Discount Corp.
Senator B u s h . Who?
Mr. B r o w n . The Discount Corp.
Senator B u s h . They publish their statement ?
Mr. B r o w n . Yes, sir.
Senator B u s h . What do they show?
Mr. B r o w n . I think they show, going by memory now-----Senator B u s h . We will ask them. They are coming up here
tomorrow. We will ask them that question.
A decline like the Senator from Illinois was talking about is an
unusually sharp decline in the market; is that not right ?
Mr. B r o w n . Yes.
Senator B u s h . It was a really sharp break which lasted, or as you
say, it still has not corrected itself very much, but it lasted certainly
in a very sharp way pretty much into the late autumn of 1958, did
it not?
Mr. B r o w n . And has still kept going. As a matter of fact, only
recently those securities have hit new low levels.
Senator B u s h . The prices are better?
Mr. B r o w n . They have recovered slightly; yes.
Senator B u s h . The break, according to your testimony and the
Senator’s questioning, no doubt began with the forced selling or
accelerated once underway by the forced selling of borrowing
accounts ?
Mr. B r o w n . Yes, sir.
Senator B u s h . My point I am coming to is this: One has breaks
like that from time to time in markets such as yours, but other things
being equal, stable conditions in the mortgage market and other mar
kets, in employment and that sort of thing, a break occasioned by over
borrowing and forced selling would likely correct itself in time, would
it not?
Mr. B r o w n . Yes, sir.
Senator B u s h . In other words, if the market was forced down by
forced selling, it would no doubt rebound and find its level again in
relation to other securities which had not been involved in the breaks,
corporate bonds, municipal bonds, and other securities; is that right?
Mr. B r o w n . Yes, sir.
Senator B u s h . It would find its level in the long-term money
market again; is that right?
Mr. B r o w n . That is correct.
1588
EM PLOYM ENT, GROWTH, AND PRICE LEVELS
Senator B u s h . Were these breaks in bonds last summer confined
to Governments?
Mr. B r o w n . No, sir.
Senator Busii. Were there similar breaks in corporate bonds?
Mr. B r o w n . All bond markets.
Senator B u s h . Municipal bonds, State bonds, and so forth?
Mr. B r o w n . Yes.
Senator B u s h . They all joined in the procession, did they not?
Mr. B r o w n . That is correct.
Senator B u s h . While I am not attempting to deprecate the impor
tance of the margin selling that the Senator has brought out here, I
think it is fair to assume that there must have been other conditions
besides the margin selling that brought about this extended decline
in long-term and in short-term bonds.
Mr. B r o w n . That is correct. The speculation was only the fuse
that set this off.
Senator B u s h . In your judgment, what was the cause o f this
continued decline that we have been talking about?
Mr. B r o w n . I believe the cause of the continued decline w a s the
change in Federal Reserve policy and the change in the direction of
the economy and a realization on the part of investors that if business
became better, money was going to get tighter.
Senator B u s h . Do you think that the lenders anticipated the needs
of the borrowers by firming up interest rates before there was a
demand or did the demand begin to take hold pretty rapidly and
cause interest rates to rise ?
Mr. B r o w n . The holders of Government securities always
anticipate.
Senator B u s h . That would be true of Government securities. It
would not necessarily be true in other forms of borrowing.
Mr. B rowtn . I a m s o r r y , s i r ; I d i d n ’t q u ite h ea r y o u .
Senator B u s h . I agree that they certainly try to, and I think prop
erly should try to anticipate. That would not necessarily be true
of other borrowers such as those in the mortgage market and corpo
rate issuers and so forth.
Mr. B r o w n . I believe everybody in the financial business tries to
anticipate. The corporate borrower, as well as the municipal bor
rower or any others, if they can, unless they are hampered by some
factors beyond their control.
Senator B u s h . D o you think that the deficit that we incurred in
the Federal budget, which was anticipated at that time, had anything
to do with this sharp decline in Government bond prices ?
Mr. B r o w n . It most certainly did.
Senator B u s h . It had an adverse effect on the psychology of long
term investors in your opinion ?
Mr. B r o w n . Yes, sir.
Senator B u s h . In this report here, I observe on the opening page
it is said :
The opinion was almost universally held—
This is among the people that were consulted by the inquisitors
here------
EM PLOYM ENT, GROWTH, AND PRICE LEVELS
1589
The C h a i r m a n . May I say I do not think the Federal Reserve
and the Treasury should be designated as inquisitors. I do not think
they are comparable to the members of the inquisition.
Senator B u s h . What would you like to call them?
The C h a i r m a n . I would prefer to say investigators. I do this out
of justice to the Federal Reserve.
Senator B u s h . I know the Senator always tries to treat the Federal
Reserve as gently as possible.
The C h a i r m a n . Not gently, but fairly.
Senator B u s h . I am sure of that. They say that the opinion was
almost universally held among those consulted that Federal fiscal
policy was an overriding influence in the market for Government
securities in 1958 and lias been the single most important factor
depressing the market in recent months. Do you agree with that?
Mr. B r o w n . I do.
Senator B u s h . There has been som e question from time to time,
and even a slight difference of opinion between m y distinguished
chairman and myself regarding the extent to which this unfortunate
condition of our fiscal affairs should be discussed in public. 1 under
stand in a way his position on that, but I rather hold to the view that
the people should know.
The C h a i r m a n . I quite agree with you.
Senator B u s h . Wait a minute. You have not heard what I was
going to say. How do you know you agree ?
The C h a i r m a n . I think the people should know and have a right
to know.
Senator B u s h . I was going to bring that out and ask you if you
did not agree.
The C h a i r m a n . I d id anticipate what you were going to say. I
say I prefer it.
Senator B u s h . I would prefer to make my statement and then let
you come in when you properly should.
The point is if we are going to bring about more stability and better
management of our fiscal affairs, it is really important for the people
to know the facts about them so that they may make known their
wishes in that respect to the Members of Congress.
Do you agree with that ?
Mr. B r o w n . I do.
Senator B u s h . I will not ask any further questions at the moment.
1 would be glad to yield to the Senator.
The C h a i r m a n . I quite agree that the people should know about the
deficit.
I think they should also know the responsibilities for the
deficit. Of the $12*4 billion deficit, between $6 billion and $7 bil
lion came from a decline in revenues. That was due to the recession
which a good many people tried to pretend did not exist.
Senator B u s h . What was the balance due to ?
The C h a i r m a n . The balance was due to military expenditures,
to the farm program, to foreign aid.
Senator B u s h . Increased expenditures.
The C h a i r m a n . Yes. But not by appropriations by Congress.
This is the important point. Congress had cut the President’s budget
by $8 billion in the 4 preceding years.
1590
EM PLOYM ENT, GROW TH, AND PRICE LEVELS
Senator B u s h . I s the Senator suggesting that Congress has lost
complete control of Government spending which it is charged with
having in the Constitution ?
The C h a i r m a n . I would say that to a large degree we have. It is
largely in the hands of the Executive. We now find our powers
diminished.
Senator B u s h . Would the Senator like to join me in recapturing
that control ? I think we have lost a large measure of it, too.
The C h a i r m a n . Under legitimate circumstances. We are going
to cut the President’s budget this year. The foreign aid appropria
tion will be cut when it is finally put through. That is a large reduc
tion. It was cut in this year between $500 million and $1 billion.
As far as the open-end appropriations are concerned, or back-door
financing is concerned, the Senator from Illinois has tried for 2 or 3
years to provide that farm price supports shall not be given on com
modities for which there are no production controls. He failed in
connection with the corn and feed bill.
The party to which I have the honor to belong failed in connection
with the wheat bill. The biggest back-door financing that we have
indulged in in this session has been at the urgent request of the admin
istration for $41/2 billion for the World Bank and the Monetary Fund,
which is back-door financing par excellence, and an additional portion
of the back-door financing for the Inter-American Bank.
Since the Senator from Connecticut started this Donnybrook, I
will reply in kind and say I believe in the public’s right to know, but
their right to know all the facts.
Senator B u s h . I wish they could get at them a little better, Senator.
I agree with you about that. I wish that those who feel as you do,
that we ought to get better control and balance our budget, which
you have said we should, and would come up with a program that
would make it possible legislatively by getting these matters before
the taxation committees of the Congress, on one of which the distin
guished Senator is an able member-----The C h a i r m a n . Which I did, and failing before the Finance Com
mittee because of the opposition of the administration and the bi
partisan coalition, we then brought it to the floor.
Senator B u s h . What was before the Finance Committee?
The C h a i r m a n . The plugging of tax loopholes.
Senator B u s h . Did the Finance Committee hold hearings on this ?
The C h a i r m a n . Yes. This year. I demanded hearings.
Senator B u s h . You usually do.
The C h a i r m a n . It is wise. Have we terminated our passage of
arms?
Senator B u s h . I yielded to you.
The C h a i r m a n . Congressman Reuss?
I want to say Congressman Reuss comes from an old banking
family. I do not want to betray all his banking connections, but his
family, I believe, have the controlling interest in one of the oldest
and best established banks in what used to be the Northwest, and is
now the Middle West. So for the benefit of the financial writers
and financial community of New York who believe that all Congress
men and Senators from the Middle West are ignoramuses, I give him
this introduction.
EM PLOYMENT, GROWTH, AND PRICE LEVELS
1591
Representative R e u s s . Would the part about the controlling
interest be true?
Mr. B r o w n . Did I hear you correctly when I thought you said in
your opinion the public did not have any interest in the fluctuations
in the U.S. securities?
Mr. B r o w n . I do not believe I said the public had no interest. I
think the public is very much interested in the fluctuations of Gov
ernment securities.
Representative R e u s s . Can you recall what your statement was
on that ? I do not mean to pick at it. I did think you expressed the
view that U.S. securities would be paid off 100 cents on the dollar
when they matured, and hence, it did not matter very much to the
public what the intermediate price was.
Mr. B r o w n . Not to the true investor. I do not recall exactly what
I said.
Representative R e u s s . Let me ask you, then, do you think the
public and its representatives in Congress should be concerned with
fluctuations in outstanding marketable U.S. securities, particularly
the kind of sharp fluctuations which we have had in the last year?
Mr. B r o w n . I do not think they should be too concerned about it.
They should expect them as conditions in the economy change. You
are bound to have fluctuations in the interest rate.
Representative R e u s s . Do you not think that sharp fluctuations
downward in the market price of longer term U.S. securities make
it more difficult for the Treasury, when it either has to borrow addi
tionally or when it is refunding, to sell additional U.S. securities?
Mr. B r o w n . It might.
Representative R e u s s . Does not that greater difficulty in selling
long terms force the Treasury more and more into short terms, ana
particularly more and more into the sales of short terms to banking
institutions ?
Mr. B r o w n . Yes,
Representative R e u s s . Is that not a less than ideal way to manage
the national debt?
Mr. B r o w n . It is less than ideal.
Representative R e u s s . Is not, therefore, the Congress, which is
charged with maintaining the national credit, justifiably concerned
about sharp fluctuations in the prices of long-term U.S. securities?
Mr. B r o w n . I do not know how to answer your question. Of course,
we are concerned with all manner of fluctuations, those that are
particularly interested, being in the business. I f you are an investor
or banker, if you have your money invested in securities, you would
like to see the price doing all right. However, you are more concerned
with what sound monetary practices are than you are with what the
interest level happens to be at any one time.
Representative R e u s s . I understand perfectly your statement from
the standpoint of a member of the financial community, and particu
larly a dealer. I think if I were a dealer I would subscribe to that
statement as regards dealers.
But how about the total public interest which is represented by
Congress? Would you not agree with me that sharp downward fluc
tuations in the market price of longer-term U.S. securities should
justifiably concern Congress?
1592
EM PLOYMENT, GROW TH, AND PRICE LEVELS
Mr. B r o w n . It is an interesting subject, I f you are trying to say to
me that we should artificially support those securities I would
disagree.
Representative R e u s s . I am against artificiality financially and
elsewhere.
What I asked is whether you agreed with me that Congress, and
the Joint Economic Committee, and the public, have a right to be
concerned with a situation in the national debt characterized by sharp
downward fluctuations in the price of outstanding U.S. securities,
particularly longer-term U.S. securities?.
Mr. B r o w n . I would say that you should be concerned and endeavor
to remedy the reason for the concern. You might ask me what would
that be.
Representative R e u s s . I perhaps will later, but meanwhile let us
go to another subject, Suppose I wanted to become a dealer in U.S.
securities—and I may assure you parenthetically that irrespective of
my desire in the matter it is not particularly that I shall want to e x e r
cise it—how would I go about it? How did you become a dealer?
Mr. B r o w n . G e t e n o u g h c a p ita l a n d k n o w -h o w .
Representative R e u s s . That is all that is needed. What I am get
ting at is, do you need a license, a piece of paper from anyone saying
you are a dealer ?
Mr. B r o w n . Y ou need a good credit standing with the banks of the
country, the larger ones particularly. I f you have know-how you
probably will get that recognition if you have the capital.
The C h a i r m a n . Did you say know-how or know-who ?
Mr. B r o w n . Knowhow.
Representative R e u s s . Obviously in order to be a successful dealer
you need capital and know-how.
My question, however, related more to administrative requirements.
Suppose you have capital and know-how, do you need anything more ?
Does anybody have to punch your ticket and say you are a dealer, or
are you automatically a dealer?
Mr. B r o w n . There are some States in which we may have to register.
Representative R e u s s . Does the U.S. Treasury or the Federal
Reserve System, the Open Market Committee or any other govern
mental agency, throwing in the Comptroller of the currency, have to
authorize a dealer to become a dealer ?
M r . B r o w n . N o , sir.
Representative R e u s s . He sets himself up himself ?
Mr. B r o w n . That is right. That is m y b e lie f.
Representative R e u s s . Can you run through the arithmetic of
dealers for me briefly ? I think there are 17 dealers of all types in
U.S. securities.
Mr. B r o w n . That is correct.
Representative R e u s s . And none of those 17 has any special license
or authorization from any Federal source to be such a dealer. The
Securities and Exchange Commission does not have to okay him ?
Mr. B r o w n . No. There are some firms that may belong to the SEC
and be somewhat under the jurisdiction of that body. As far as we
are concerned, and as far as those who deal mainly in Goverment and
municipal securities, we don’t have to account to the Federal.
EM PLOYM ENT, GROWTH, AND PRICE LEVELS
1593
Representative R e u s s . Could the Federal Reserve System, and par
ticularly its Open Market Committee, refuse to trade with a particular
dealer for whatever reason ?
Mr. B r o w n . They could, but I don’t think they do. I f we were
about to begin an organization we probably would apply to them for
some kind of recognition. But there is none needed.
Representative R e u s s . N o w we are getting to what I a m driving a t
and perhaps m y questions have not been clear enough.
How does this application look? Is it on form V-63(b) or is it
just a letter somebody writes?
Mr. B r o w n . We don’t have to make any application.
Representative R e u s s . H o w do you do it ?
Mr. B r o w n . We hire an office and put some telephones in, put our
money in the bank, and start in operating, if we know how to do it.
Representative R e u s s . One of the reasons you put in the telephone
is so you can call the Federal Reserve Open Market Committee and
say, “ I want to buy,” or “ I want to sell” ?
Mr. B r o w n . We could make that attempt, but our principal reason
for going into business would be to service the public, to service the
banks and other institutions that need to buy or sell Government
securities.
Representative R e u s s . Suppose the Federal Reserve either didn’t
answer your calls or said, “ Sorry, but we have our 17 dealers, and they
are about enough.”
Mr. B r o w n . I don’t think they would say that. I think they would
welcome more dealers. They are not that kind of people.
Representative R e u s s . Suppose somebody set himself up with ade
quate capital, which he had procured by some ill-gotten means-----The C h a i r m a n . Or well-gotten means.
Representative R e u s s . Or well-gotten means—and the Federal Re
serve System on examining his record felt that he was not a financially
responsible person, or someone they would not like to do business
with—what then?
Mr. B r o w n . I think the banks would know that, too, and they would
not extend credit.
Representative R e u s s . However, let us assume that this hypothet
ical dealer, like quite a few, is self-financed internally.
Mr. B r o w n . I am afraid I didn’t hear y o u .
Representative R e u s s . Let us suppose he doesn’t need to rely on
bank credit.
Mr. B r o w n . He couldn’t be in the Government bond business. It
requires a great deal of capital to be in the Government bond business,
and it requires a tremendous amount of borrowing.
Representative R e u s s . S o what you are saying in effect is that banks
through their credit powers in effect determine who can be a dealer.
That is to say unless someone is credit worthy, he cannot really be
an effective dealer because his own ante in a world of 3 percent margin
is not enough.
Mr. B r o w n . I don’t know about the margins, but it depends on
the banks. I f you don’t have a good reputation, then you don’t get
the money.
Representative R e u s s . In conclusion on this subject, if the Fed
eral Reserve Open Market Committee wished not to deal with a
1594
EM PLOYM ENT, GROWTH, AND PRICE LEVELS
particular dealer, it could refuse to do so as far as any law is
concerned ?
Mr. B r o w n . I b e lie v e so.
Representative R e u s s . Let me turn to the question of the so-called
bills-only policy of the Federal Reserve, and ask you whether in your
opinion the application of that policy has resulted in a healthier mar
ket in the long-term maturity sector over the years since its adoption
in, I think, 1953, or whenever it was.
Mr. B r o w n . 1951, I th in k .
Representative R e u s s . Or 1952 or 1951, whenever it was.
Mr. B r o w n . I think the market has bentfited from the bills-only
policy. It has more breadth, depth, and resiliency.
Representative R e u s s . Those are the three virtues which its pro
pounders ascribed to it when it was first adopted, if I am not mistaken.
Mr. B r o w n . I b e lie v e so.
Representative R e u s s . In view of this depth, breadth, and resiliency
which you say the bills-only policy has brought to the long-term
maturity sector, how do you account for the wide swings that have
occurred in the market prices of bonds in recent years, and particu
larly the mid-1958 break which has been the subject of discussion
earlier this morning.
Mr. B r o w n . We are not interested in determining the level of the
market. We are interested in if a Government bond can be exchanged
from one hand to another. What the price is, we don’t care. The
breadth, depth, and resiliency of the market in my opinion means
that there is a market that you can do the business you want to do*
You can always do business in Government securities if you want
to give, if you do business at the level where there is a buyer or a
seller. You don’t have any trouble. It is only those who want the
price that they can’t get that are kicking about the situation.
Representative R e u s s . Of course there is always a buyer at some
price, is there not ?
Mr. B r o w n . I b e lie v e so.
Representative R e u s s . I f the market for U.S. securities went down
to 20, there would be buyers at 20 ?
Mr. B r o w n . We t h in k so.
Representative R e u s s . But this would not be a healthy condition
from the standpoint of the public interest or congressional interest
for the reasons that I have described before, would it ?
Mr. B r o w n . I don’t recall all your reasons, sir.
Representative R e u s s . I will recall them to you. My reasons were
that as the market price of U.S. securities fluctuates sharply down
ward, it becomes much, more difficult for the Treasury to consummate
current financing on a sound basis, and it is tempted inexorably to
go more and more into short-terms and more and more to load the
banks with U.S. securities. I f you disagree with me, that those are
not good conditions, I will be glad to give you my reasons for them.
But it seems to me rather widely accepted that those are not good
ways to manage the debt.
Mr. B r o w n . I believe that is correct. I f the Treasury is in dif
ficulty or the country is in difficulty and the price of the bonds is
down, the Treasury has to resort to short-term security sales. That
is not a healthy situation.
EM PLOYM ENT, GROWTH, AND PRICE LEVELS
1595
Representative R e u s s . What you mean, then, by saying that the
bills-only policy has brought depth, breadth, and resiliency to the
long-term bond market, is that at som3 price you are able to find
buyers for U.S. bonds?
Mr. B r o w n . That is part of the answer; yes. There is more to
it than that, however.
Representative R e u s s . Before we go on to the “more to it,” I would
pick out a difference of view between yourself and myself. I do
think it is a matter of public concern at. what price U.S. securities sell,
and particularly the sharpness and depth of the fluctuations of U.S.
bonds.
Be that as it may, let me ask you now the other attributes of depth,
breadth, and resiliency which you feel the bills-only policy has
brought about.
You said, one, that you have always been able to find buyers at a
price.
What other good things come about from a bills-only policy ?
Mr. B r o w n . In the breadth of the market there are more individuals
holding long-term bonds today than there were a year ago. I don’t
recall the exact figures, but I think it must be somewhere in the
neighborhood of 2% billion or 2y2 billion. The public has been
interested in the bond market recently and the higher rates have
brought them in. We recently had a 4% percent issue on which we
made more sales which we can account as going to individuals than
in any issue within my memory.
Representative R e u s s . This is within the last year. The period
we are comparing is pre-bills-only days with post-bills-only days.
Is it true that since the adoption of the bills-only policy around
1952 that long-term bondholdings have increased ? Just the contrary
is the fact, is it not? Is it not a fact that the average maturity of the
entire marketable area of U.S. securities has declined from on the
order of 5 years 8 months, to on the order of 4 years 7 months?
Mr. B r o w n . That is correct.
Representative R e u s s . Do you point to that as a great achievement ?
Mr. B r o w n . We have been in a period of rising interest rates for
many years past. We can trace the trend in interest rates upward
back to the days of the peg, back to 1951 when the Federal Reserve
and the Treasury made their agreement.
Since then the Government securities market has been allowed to
seek its own natural level. It has been affected by supply and demand
factors which previously were not allowed to take place.
Representative R e u s s . The result has been, among others, that the
public holds more U.S. bonds than it did, and the average maturity
has gone down on the order of more than 20 percent; is that not so?
Mr. B r o w n . That is so, because the Government securities were
not as attractive as other forms of investment, and because of the
fiscal policy being followed by the Government, money was attracted
into other forms of investment.
Representative R e u s s . Does your firm carry a larger inventory
of U.S. bonds under present conditions than it did prior to the adop
tion of the bills-only policy ? If you object to answering that for your
firm for any reason, just tell me what your impression is of dealers
generally.
1596
EM PLOYM ENT, GROW TH, AND PRICE LEVELS
Mr. B r o w n . I would say that under the bills-only policy we would
be much more willing to maintain a substantial position than otherwise.
Representative R e u s s . In long-term bonds?
Mr. B r o w n . That is correct.
In all areas of the market, but particularly in long-term bonds.
We may not want those anyhow. We would probably carry a larger
inventory on the theory that we could more nearly figure out what
might happen than if the Federal Reserve were instructed or followed
as a policy a manipulation of the long-term Government securities
market by purchases and sales.
Because what might seem logical to us at one moment might seem
logical to the Federal who might try to offset the very things that
you might figure to happen, and we would very quickly be out of
business.
Representative R e u s s . D o you have figures on the inventories of
U.S. bonds by the dealers for the last 10 years?
Mr. B r o w n . We have no knowledge of that. Those figures are
not public.
Representative R e u s s . Can you suggest any way whereby this com
mittee could get hold of figures on the holdings of U.S. bonds by
dealers in inventory over the last 10 years? This, of course, is very
significant to this committee because if it turns out that the adoption
of the bills-only policy has produced a greatly increased inventory
of U.S. bonds by dealers, we would like to know this, or if the contrary,
we would like to know.
Mr. B r o w n . I know of no figures concerning dealer inventories
except those possessed by the Federal Reserve Bank of New York,
to which we report every day. We cannot speak for other dealers,
but if you want to get the figures from the Federal Reserve bank and
publish them in the aggregate and can get permission of all of the
dealers, we will go along.
The C h a i r m a n . They declined to furnish those figures yesterday,
except upon their being released by the Secretary of the Treasury for
whom they act as agent, and by the dealers.
Would you be willing to give your consent to having the Federal
Reserve Bank of New York publish the global totals?
Mr. B r o w n . Yes, sir.
The C h a i r m a n . Thank you very much. This is in keeping with
the public and cooperative spirit which your firm has shown.
Representative R e u s s . Would you be willing in the event that the
Federal Reserve feels itself constrained not to publish the global totals
because it can’t get the asset of each one of the 17 dealers, would you
be willing that your own firm’s totals be published?
Mr. B r o w n . We would not.
Representative R e u s s . Thank you.
The C h a i r m a n . Congressman Widnall.
Representative W i d n a l l . Thank y o u , Mr. Chairman.
Unfortunately I was not able to be here yesterday, so I didn’t hear
the testimony at that time. But I understand that there is consider
able talk about the contributing factors to the 1958 violent fluctuation
in prices. Much of that is attributed to excessive speculation. Do
you feel that there should be margin requirements in connection with
dealings in Government bonds?
EM PLOYM ENT, GROWTH, AND PRICE LEVELS
1597
Mr. B r o w n . I don’t think they are necessary. Personally, I would
have no objection unless they were put on dealers. You would ham
per the operation of the dealers if you put on margin requirements
that were excessive.
Representative W i d n a l l . In what way would it hamper operations ?
Mr. B r o w n . A dealer has to borrow a great deal of money. I do
not think that any dealer has capital sufficiently large to take care of
the tremendous flow of Government securities that is going through
the market. You must keep in mind that the Government dealers are
aiding the Federal Reserve in the distribution of reserves or the
contraction of reserves.
Every bank in the country is settling its balances by the sale of
Treasury bills or certificates or other short-term paper. There is a
constant flow. It would be impossible for any dealer or any bank,
as a matter of fact, I believe, to finance without the ability to borrow
very large sums of money on very short-term paper.
Representative W i d n a l l . If there had been margin requirements
on nondealers, do you think that would have had a marked effect on
the price fluctuation?
Mr. B r o w n . Yes, sir.
Representative W i d n a l l . I f margin requirements were put into
effect, what do you think would be a safe margin to be asked of a nondealer ?
Mr. B r o w n . It would depend on the circumstances. I f you would
put a 5 percent margin you may invite more speculators than you
have today because you would be publicizing the fact that a fellow
could make 1 dollar work 20 times. You should leave that to some
authority like the Federal Reserve System and give them sufficient
latitude so that they can operate and make any margin requirements
that are necessary to the times.
Representative W i d n a l l . But you feel if this was imposed upon
the dealers it would materially handicap the Government bond
market ?
Mr. B r o w n . I b e lie v e so.
Representative W i d n a l l . On the basis of your own experience,
could you give us any idea as to how profitable over the long pull deal
ings are in Treasury issues as compared to operation by the bond
dealers in other types of securities?
Mr. B r o w n . I would say it is pretty poor. That is probably one
reason why you don’t have more Government security dealers. There
is not enough money in the business.
Representative W i d n a l l . Why is that so; and the charges are
made that you make such excessive profits.
Mr. B r o w n . We d o not make excessive profits.
Representative W i d n a l l . Are there any figures available that can
be placed in the record to make those comparisons between profits of
the dealers in bonds in non-Government securities as against those
who deal in the Government securities?
Mr. B r o w n . I don’t know of any way you can do it except if you
got the statement or balance sheet of every firm in the business.
Representative W i d n a l l . This next question has four parts to it.
In your opinion, what would be the implications of a move by the
Treasury toward auction marketing of long-terms, first on interest
costs to the Government?
38563—59H~tpt. 63------ 7'
1598
EM PLOYMENT, GROWTH, AND PRICE LEVELS
Mr. B r o w n . It might cost them more and it might cost them less.
It all depends on what kind of market you are in.
If you are in a bear market, or down market, and interest rates are
increasing, you will pay more for the money. If you are in an up
market, you will attract more speculators. You will find folks who
are anticipating and wTho would cause the cost to the Treasury to
drop. It will work two ways.
Representative W i d n a l l . In other words, it will be comparable to
our present experience. It will cost more or less, depending on the
nature of the demand at the time.
Mr. B r o w n . I b e lie v e so.
Representative W i d n a l l . What about the auction marketing of
long-terms as to the breadth of the market? Would it increase the
market or lessen the market ?
M r.B R O W N . I t h in k it w o u ld be in c lin e d to k e ep th e p u b lic out
m o r e th a n th e p re se n t sy ste m .
Representative W i d n a l l . On what do you base that?
Mr. B r o w n . An auction is for professionals, banks, sophisticates
in the market. They have more knowledge of what to bid and how
to bid. The general public wouldn’t know what to do. So the
professionals would simply put in bids, depending on the trends of
the market, and figure on a lower market or putting in throwaway
bids and things of that sort.
In a higher market, we figure the market is going higher so we pay
a good price to unload on the public at a higher price.
Representative W i d n a l l . What effect do you think it would have
on access by long-term investors in the market ?
Mr. B r o w n . The auction ?
Representative W i d n a l l . Yes.
Mr. B r o w n . I don’t think long-term investors could act rapidly
enough to take advantage of an auction if they knew enough to take
advantage of it. I am only giving you my personal opinions.
Representative W i d n a l l . That is all I am asking you for. The
other is as to the stability of the market. Do you think an auction
marketing program would give more stability or less stability than
the present ?
Mr. B r o w n . My personal opinion is that it would give less sta
bility to the market.
Representative W i d n a l l . Earlier Representative Reuss amazed
me by saying that he was against artificiality. I would like to ask
you a couple of questions. Maybe I should ask them of Congressman
Reuss.
Do you think if the Government lends money at 2% percent and
borrows it at 4 percent, that is artificial ?
Mr. B r o w n . It seems so.
Representative W i d n a l l . The reason I ask that question is that I
think Representative Reuss is for a number of those programs where
we lend money at less than we borrow the money for our Government
purposes.
Do you think it is artificial if the Government exercises the par
purchase requirement of mortgages in the FNMA program ?
Mr. B r o w n . Please restate your question.
Representative W i d n a l l . In the FNMA program—the Federal
National Mortgage Association program—the Government is required
EM PLOYM ENT, GROWTH, AND PRICE LEVELS
1599
to purchase mortgages at par and not through operation of the
market. Do you think that is artificial ?
Mr. B r o w n . I f your statement is correct that they are obliged to
purchase mortgages at par. I don’t believe they are. They may be
obliged to purchase some types of mortgages at par. FNMA buys
mortgages at a discount.
Representative W i d n a l l . Perhaps this is an unfair question to ask
you, because you are probably not familiar with that program.
Mr. B r o w n . I a m n o t.
Representative W id n all . There is a type of program where the
Government is required to purchase mortgages at par. It doesn’t
reflect the operation of supply and demand at all. I am merely trying
to point out that there are a number of programs that Congress has
enacted that are completely artificial as to operation, and I am rather
amazed at the statement that Representative Reuss made earlier that
he is against artificiality because they are as artificial as anything.
Representative R euss . Would the gentleman yield?
Representative W id n a l l . Yes.
The C h a ir m a n . Before the gentleman yields, I would like to say
for the benefit of the audience that they have discovered what attend
ants to congressional hearings commonly realize, that there tends
to be a running battle between members of the committee during the
examination of witnesses.
Representative R euss . Yes. I don’t want to prolong it because I
think Mr. Brown is being most helpful and generous by coming here,
and I would not want to embroil him in the great Republicans versus
Democrats controversy. I would ask the gentleman, my friend
Mr. Widnall, is he against FNMA purchases of securities which
permit housing for the elderly ?
Representative W id n a ll . I am against the type of program that
is being suggested in the present Congress and was included in
Senate bill 57, vetoed by the President, where there is direct lending by
the Government at an artificial pegged interest rate. This is classed
as social legislation, and therefore you are supposed to be able to do
this. This is the philosophy where you can’t in other circumstances.
There are always other roads that can be taken where the facilities
are furnished just as well without cost to the taxpayer. We have that
going on right now in the housing program.
The C h a ir m a n . Congressman Reuss.
Representative R euss . I would just say in conclusion that the
gentleman has opened up a whole field of subsidies and some other
time, without taking the time of the witness, I hope we can discuss
subsidies to magazines, and the carrying of them at a subsidized
rate, subsidies to the airline industry, subsidies to shipbuilding, sub
sidies to shipping lines, each one of which, it seems to me, has to be
considered on its own merits.
I unblushingly am entirely willing to use the power of the Federal
Government to make possible housing for the elderly as one example.
Representative W id n a l l . My point was artificiality.
Thank you very much.
The C h a ir m a n . We came to the question of margins. I take
it you are not opposed to the imposition of margins on purchases of
Government securities, other than the 17 specialists ?
1600
EM PLOYM ENT, GROWTH, AND PRICE LEVELS
Mr. B r o w n . I won’t say we are for it. We are not against it.
The C h a i r m a n . You say you are not opposed to it?
Mr. B r o w n . That is correct, sir.
The C h a i r m a n . I understood you to say that you would be opposed
to the imposition of excessive margins upon the 17.
Mr. B r o w n . Yes, sir.
The C h a i r m a n . Would you be opposed to the imposition of ade
quate but not excessive margins ?
Senator B u s h . Tell me what adequate means.
The C h a i r m a n . Wait a minute.
Mr. B r o w n . It all depends on what you mean by adequate.
The C h a i r m a n . That was the next question. What do you regard
as an adequate but not excessive margin for insiders ?
Mr. B r o w n . I think it must be determined by the lender. I think
our banks are doing a remarkable job. I think they are quite capable.
The C h a i r m a n . It was testified that the margin on short-time
Governments was virtually nonexistent. Two or three hundredths
of a point, as I remember it. Evidence seems to indicate that margins
of 1 or 2 percent on notes or certificates, 3 percent or a little over on
bonds of 5 years’ duration. Do you regard those as adequate but not
excessive ?
Mr. B r o w n . Yes.
The C h a i r m a n . Would a 5 percent requirement be adequate but
not excessive?
Mr. B r o w n . Under certain circumstances.
The C h a i r m a n . This is not the universal rule now.
Mr. B r o w n . It all depends on the lender. Banks have been dealing
with Government security deals for a long while and they have learned
by the evolutionary process what they can do.
The C h a i r m a n . Y ou can trust the lenders to protect the public
interest. I think you minimize the public interest in these fluctuations.
That is, you do not regard the public interest as being greatly involved ?
Mr. B r o w n . I d o n o t.
The C h a i r m a n . Therefore, you feel this is a private matter prima
rily between lenders and borrowers and the lender can be trusted to
protect himself and not have margins which are too low ?
Mr. B r o w n . I t h in k so.
The C h a i r m a n . Do you feel the same way about margins for
noninsiders ?
Mr. B r o w n . Yes, I d o .
The C h a i r m a n . That the banks can be trusted. So there is no
need of any public regulation in your judgement?
Mr. B r o w n . I d o n o t b e lie v e so.
The C h a i r m a n . Yet in the absence of this resolution you had the
cumulative decline in the prices of Government securities which, as
we have seen, amounted to approximately 10 points or 10 percent in
the case of the 3 ^ ’s last year in the space of 2 months, and approxi
mately 6 to 7 percent in the case of the 2%’s.
You have testified that the sharpness and extent of this decline
was intensified by the low margins, have you not?
Mr. B r o w n . Yes, sir; I have.
The C h a i r m a n . But you say this does not require public action.
EM PLOYM ENT, GROWTH, AND PRICE LEVELS
1601
Mr. B r o w n . I wouldn’t say it has done any particular damage
except to the speculators themselves, and they have learned their
lesson. The lenders came out fine.
The C h a i r m a n . The profits of the banks last year were quite
adequate in their dealings with Government securities.
Mr. B r o w n . They operated at a profit, so I understand, but I c a n ’t
t e ll you what it is.
The C h a i r m a n . I think the hearings will reflect that the profits
of the bank last year amounted to $641 million, I think it is about
$641 million.
Mr. B r o w n . I am sorry, sir, I d id not hear you.
The C h a i r m a n . Congressman Patman introduced figures based on
the monthly reports of the Federal Resrve Board that the profits of
banks last year in dealings wdth Government securities amounted,
if the memory of the Senator from Illinois is correct, to approxi
mately $641 million.
I will again ask the staff to see if my memory is correct.
I want to say that the Senator from Illinos does not pretend in
this instance to be correct within a few millions of dollars. He will
allow for a margin of 5 percent for error in his memory.
Senator B u s h . The Congressman d id not relate his figures to any
other figures.
The C h a i r m a n . That is right.
Senator B u s i i . He just p u lle d it out of the hat.
The C h a i r m a n . N o, it was not pulled out of the hat. It was pulled
out of the report of the Federal Reserve Board. I want to say that
the Federal Reserve Board is not in the business of selling hats.
Representative R e u s s . Though they sometimes wear two of them.
The C h a i r m a n . They do.
Mr. B r o w n . I have some figures, Senator, i f y o u w o u ld lik e to hear
them.
The C h a i r m a n . First I want to check the accuracy of my memory.
Senator B u s h . Would the Senator yield for a question while the
research is in process?
The C h a i r m a n . Yes, with the understanding that the remarks of
the Senator will come at the end of the examination by the Senator
from Illinois.
Senator B u s h . Listening about this colloquy about the declines in
bonds has been very interesting. But is it not true that when people
come into the Government market and buy Government bonds they
buy bonds that will be paid off at maturity, and nobody doubts that?
Mr. B r o w n . That is right.
Senator B u s h . S o the important thing, it seems to me, to have in
mind when we are considering these matters, is that the fluctuation
as far as the public intereest is concerned is a very minor matter,
because if you buy a bond that is due in 2y2 years from now, a Federal
security, you know you are going to get it. You should not buy it
unless you are willing to hold it through possible declines and maybe
it will go up and maybe it will go down. If it goes down you need
not worry because you will get your money back 2y2 years hence,
with interest. I think that is the important thing to remember. As
far as the public interest is concerned, people who trade in the market
for profits, capital gains, or whatever, they do that at their peril.
1602
EM PLOYMENT, GROWTH, AND PRICE LEVELS
But if they are bona fide investors, which is what we really need, espe
cially in the long-term market, they invest to hold to maturity. I f
they do not want to do that, if they change their minds, they know
at the outset when they buy the issue that there is risk in it. But
there is no risk so far as dollars are concerned if they hold to maturity.
Do you agree with that ?
Mr. B r o w n . I d o.
Representative R e u s s . May I comment while the research is going
on?
The C h a i r m a n . Yes.
Representative R e u s s . I suggest to my colleague. Senator Bush,
that one of the troubles with the U.S. bond market right now is that
investors are aware of the risk of downward fluctuation, and that
is why they are to a lamentable degree staying away from it, and
that is why we have the crisis in debt management which has been
exercising Congress.
I am sure the gentleman would feel as strongly as I do that anything
that can be done to make U.S. securities more attractive to investors
should be done because it is important that we have a strong and
continuing market for new securities.
We may disagree as to how to do it, but I am sure we agree on the
end result.
Senator B u s h . I am not so sure that we do agree, because m y
recollection is that the gentleman has been imposing the removing
of the interest ceiling, which I would favor very strongly. You are
not agreeing with me on that point.
Representative R e u s s . Yes, sir, I do. You have me all wrong. I
am for taking the 4 ^ percent ceiling and accompanying it by some
advice from the custodians of the national credit, for example, the
Congress, to its deputy, the Federal Reserve, on how to minimize the
chances that it will be necessary to use this power to any very great
extent, this power to put a coupon greater than 41/4 percent out.
Senator B u s h . I am very glad to be corrected on the gentleman’s
position, and apologize for having a mistaken impression.
Representative R e u s s . I hope the gentleman will go along with
me on the matter of advice to the Federal Reserve.
Senator B u s h . I assure the gentleman I certainly will not.
The C h a i r m a n . I f we may revert to the question of profits o n
dealings of insured commercial banks, published in the Federal
Reserve Bulletin for June, page 695, total profits on dealings in all
securities, $681.5 million. The one stuck in my mind, the six stuck
in my mind, but I had the four. I had $641 million. I was in error
of $40 million, or something like 6 percent, and exceeded the limit
which I tried to set for myself of 5 percent.
I would like to point out that this covers all securities, not merely
Government securities. It is somewhat hard to differentiate, but
on interest and dividends on U.S. Governments, $1,544 million, and
others, 501, 502. So at least three-quarters of the earnings came
from Governments.
Therefore, I do not think it is too far off to say that three-quarters
of the profits possibly came from the Governments, which would
make net earnings on the sale of Governments on this basis not far
from $500 million rather than $641 million.
1603
EM PLOYM ENT, GROWTH, AND PRICE LEVELS
In any event, what you are saying is that the lenders did not do
badly in 1958.
Mr. B r o w n . That is right, sir, in 1958.
The C h a i r m a n . Then who took it on the chin in 1958 ?
Mr. B r o w n . The lenders also took it on the chin.
The C h a i r m a n . Not as a whole. Some of them did.
Mr. B r o w n . As far as they reported or as far as these figures are
concerned. Banks operate on two types of years. They have a profit
year or a loss year. A bank will operate one year to make a profit
and the other year to take a loss.
The C h a i r m a n . I am speaking of 1958, which was the year of the
debacle. Apparently the banks did all right.
Mr. B r o w n . They had established their profits prior to the debacle
in most cases.
The C h a i r m a n . This is supposed to be for the calender year, not
for the fiscal year. I suppose such differences as we have, Mr. Brown,
come from a question as to whether this is a matter of public concern
and interest. If you deny that and say that this is merely a matter
of private transactions between buyers and sellers and lenders and
borrowers, then you can say the declines in the prices are of no public
concern and therefore no proper field for action by Congress so far
as margins or other requirements are concerned.
The issue turns simply on that question which I suppose we can’t
settle this morning but which I think should be discussed in some
detail. I agree with Congressman Reuss personally that this is a
matter of public concern, and affects the public credit both actually
and psychologically.
(Senator Bush subsequently submitted the following for the
record:)
All insured commercial hanks—Profits
(+) or losses { — ) on securities
[Millions of dollars]
Year
Profits
1950________________
1951________________
1952________________
1963________________
1954.......... ............. .
N
90.5
56.6
33.8
38.9
416.5
Losses
38.7
83.8
97.5
156.0
66.7
N et
+ 5 1 .8
-2 7 .2
-6 3 .7
-1 1 7 .1
+ 349 . 8
Year
1955________________
1956_______________
1957________________
1958________________
Profits
57.1
31.2
64.4
681.6
Losses
221.2
317.4
237.5
93.7
Net
-1 6 4 .1
- 2 8 6 .2
- 1 7 3 .1
+ 5 8 7 .9
o t e . — Summary
6
is as follows:
3 profit years________________________________________________________________________________ $989, 500,000
loss years__________________________________________________________________________________ 831,400,000
9 years net__________________________________________________________________________________
158,100,000
Source: F D IC 1958 reports.
The C h a i r m a n . N o w let me turn to another matter, if I may.
When the accord was negotiated and the obligation of the Federal
Reserve to support the Government bond market was removed—ana
the Senator from Illinois played a leading part in getting that accord
through—the Reserve made an exception that in the case of a dis
orderly market they come in to support the market.
Would you characterize the fall of 10 percent in S^s, and 7 percent
in the^price of 2%s occurring in the space of a relatively few weeks
as a disorderly market?
Mr. B r o w n . Not necessarily.
1604
EM PLOYM ENT, GROW TH, AND PRICE LEVELS
The C h a i r m a n . H o w much of a decrease would you have to have
in order to have a disorderly market?
Mr. B ro w n . As long as there are buyers and sellers there is no
disorder, in my opinion.
The C h a i r m a n . Even in the great stock market debacle of fall of
1929 there were buyers. There was never a day, I think, in which all
trading dried up on the stock exchange. Every student of economics
knows that the demand function is a continuous one, and that there
will be a given quantity demand—not a fixed quantity, but a quantity
demand—at any price.
You are saying that as long as there are purchasers it is not a dis
orderly market. Let us use Congressman Reuss’s illustration, suppose
the market breaks to 20. At that point there will be those who would
purchase Government bonds.
Would you say that was a disorderly market?
Mr. B r o w n . I would say a disorderly market is one in which there
is practically no market at all and no buyers.
The C h a i r m a n . The market has to disappear. The sharpness and
degree of price fall has nothing to do with the question of whether it
is disorderly.
Mr. B r o w n . That is my judgment.
The C h a i r m a n . I congratulate you on your frankness, and I am
very glad this is on the record, and I don’t hold it against you because
you have said this. It raises a very interesting point.
You are saying no matter how sharp the decline may be, as long as
there are any transactions it is not a disorderly market and therefore
the Federal Reserve is under no obligation to prevent the disorderly
market from occuring. Therefore, the Federal Reserve did not make
any error in failing to come to the support of the market in the summer
of 1958.
Mr. B r o w n . But they did come to its support.
Senator B u s h . Will the Senator yield?
The C h a i r m a n . Yes.
Senator B u s h . I think it is fair to say that what the witness is
talking about is as a professional about the market.
The C h a i r m a n . I understand.
Senator B u s h . Y o u are talking about something a little different,
which is whether it is a good idea for the market to fall to 20 as
Congressman Reuss said, or to go down 10 points in 2 or 3 months.
What he is saying, as I understand it. it is perfectly possible for that
to happen, and it did happen in an orderly market.
In other words, where there are always buyers and sellers and they
are making the prices on the way down, but there was always a market
and a big market. It was big. I hope you don’t mind my making
that observation, because I think he is trying his best to cooperate
with us, and very ably, as you agree.
But there is a lack of understanding on the wTord “market” . Mar
ket is sometimes erroneously spoken of as price. He is talking about
it as a marketplace, as I see it.
The C h a i r m a n . I would say I have never noticed any riotous
conduct by the dealers in Government securities in the marketplace
of Government securities. As far as I am concerned, I think their
conduct has been decorous in the extreme. It has been an orderly
marketplace.
EM PLOYM ENT, GROWTH, AND PRICE LEVELS
1605
But I don’t think that the Federal Reserve was concerned with
the order in the place so much as the sharpness of the decline.
It is true that our trains of thought go somewhat by each other.
The witness and his associates are very skilled specialists.
It is
natural when they discuss these issues they should discuss them in
the light of their daily experience. We are not skilled in this field
and we betray our ignorance frequently. But we are charged with the
public interest. Really this is a very real issue here: The sharpness
of decline in these issues which has occurred, is it a matter of public
concern or is it something which merely concerns specialists. I am
not putting words in the witness’s mouth, but has said this is not a
matter of public concern.
Congressman Patman.
Representative P a t m a n . I would like to ask one or two questions,
if you please.
Are you an advocate of the bills-only policy ?
Mr.
B row n.
Yes, sir.
Representative P a t m a n . Suppose the Fed should decide that if the
long-term bonds of intermediates should go down to where they would
yield more than 5 percent, that their policy would be to support the
market? Would that meet with your approval or do you think
it would be wrong ?
Mr. B r o w n . I think it would b e wrong.
Representative P a t m a n . I s there any point at which you think the
Fed should support the market ?
Mr. B r o w n . In time o f emergency, dire necessity. In the case of
war.
Representative P a t m a n . Suppose it went down to 50. Would you
say that the Fed should come in and do something about it?
Mr. B r o w n . No; I think Congress should do something about it.
Representative P a t m a n . The Fed is our agent.
Mr. B r o w n . I don’t believe that the Federal needs to do anything
in the way of support of Government bond prices excepting in very
rare cases, war or some dramatic catastrophe of some Kind.
Representative P a t m a n . D o you know of any other central bank
in the world that fails to come to the aid of its parent government in
a case like that ?
Mr. B r o w n . All I know is that they are all in trouble.
Representative P a t m a n . Let us see if they are in trouble. What
about Belgium, what about England, what about West Germany?
Mr. B r o w n . I cannot give you the individual history o f any of
the foreign banks. That is not my specialty.
Representative P a t m a n . Take West Germany. That is a new
country. They have a central bank, and the central bank supports
the Government.
What is wrong with that ?
Mr. B r o w n . I don’t think they got so much support since the
inflation.
Representative P a t m a n . I thought they had considerable support.
I was there last year and w^as impressed with it. Every bank supports
their government except in the United States, and they have seceded
from the Government.
Mr. Brown, yesterday the testimony was that all the dealers here
had interlocking telephone connections. They had telephone con
1606
EM PLOYM ENT, GROWTH, AND PRICE LEVELS
nections with one another. Do you have that in Chicago with the
New York dealers?
Mr. B r o w n . Our telephone connection with other dealers is mainly
in New York.
Representative
P a tm a n .
Y ou have a New York Office?
Mr. B r o w n . Yes, sir.
Representative P a t m a n . But your Chicago office does not interlock
with the New York office?
Mr. B r o w n . We have a direct connecting wire system with all.
Representative P a t m a n . Since this accord has been brought up so
many times I want to say something about that. I have refrained out
of respect for Senator Douglas, but he understands my views, and
I understand his. I have great respect for Senator Douglas.
The C h a i r m a n . I want to say I have similar respect for the
Congressman.
Representative P a t m a n . Thank y o u , sir.
We get along fine because we talk frankly and forthrightly. But
here is a statement I want the Senator to consider. I accepted the
figures for a long time that was given about the great benefit that is
supposed to come to the country from the reason of the so-called
accord. I don’t agree that there is an accord at all. I will call it
a so-called accord. An analysis of the growth of the money supply
for a 4-year period since 1946 shows that from 1946 to 1950 the money
supply as measured by time and demand deposits and currencies,
grew by 8.5 percent while the gross national product in constant
dollars grew by 12.6 percent in the same period.
After the peg was removed on the other hand, the money supply in
the 4-year period following the Federal Reserve-Treasury accord
increased by 17.7 percent, while output failed to keep pace, and
increased by only 14.1 percent.
As we move to the latest 4-year period of the growth, we find a
startling swelling of the money supply by 14.9 percent, while produc
tion lagged behind at 9.9 percent growth, representing only twothirds the growth rate of the money supply.
The accompanying tables illustrate the growth and money supply
output and show the increases and the interest rate.
In other words, the money supply increased, but we did not have
a comparable growth in our economy.
At the same time, of course, the interest rates greatly increased.
I have the table here which I would like to insert with the whole
statement in the record, Mr. Chairman, including the tables and the
gross national product, and money supplies. It is 3 pages.
(The information referred to follows:)
I n f l a t io n a r y I n c r e a s e s i n t h e M o n e y S u p p l y B efore a n d A f te r t h e F ed e r al
R e s e r v e - T r e a s u r y A ccord
It is generally recognized that increasing the money supply at a faster rate
than increases in output of goods and services is inflationary. But holding down
increases in the money supply to less than the rate at which the economy
tries to grow restricts that growth. During World War II and up until the
beginning of 1951, the Federal Reserve was committed to buy Government bonds
whenever necessary to prevent the market prices from falling below par— which
meant a maximum interest rate of 21/2 percent. The Federal Reserve contended
that it had to buy so many bonds to maintain the peg that it increased the money
supply too fast and caused inflation.
1607
EM PLOYMENT, GROW TH, AND PRICE LEVELS
An analysis of the growth of the money supply by 4-year periods since 1946
shows that from 1946 to 1950 the money supply (as measured by time and demand
deposits and currency) grew by 8.5 percent while the gross national product
(in constant dollars) grew by 12.6 percent in the same period.
After the peg was removed, on the other hand, the money supply in the 4-year
period following the Federal Reserve-Treasury accord increased by 17.7 percent;
while output failed to keep pace and increased by only 14.1 percent.
As we move to the latest 4-year period of growth, we find a startling swelling
of the money supply by 14.9 percent while production lagged behind at 9.9 percent
growth— representing only two-thirds the growth rate of the money supply.
The accompanying tables illustrate the growth in the money supply and output
and show the increases in interest rates.
Increase in money supply as a ratio of real increase in gross national product
[In percent]
Currency in circulation, plus—
All time and
demand deposits
(including sav
ings banks and
postal savings)
Time and de
mand deposits
in commercial
banks
44
57
89
94
67
126
151
1946-50______________________________________________
1950-54______________________________________________
1954-58____ . . __________________________________
Demand deposits
in commercial
banks
104
67
N o t e — The above figures are computed from Federal Reserve sources and reflect the Fed’s normal
adjustments to eliminate interbank deposits, items in process of collection, etc.
,
Comparison of changes in the money supply and changes in real output 19^6-58
Year
1947_______________________________________________
1948_______________________________________________
1949_______________________________________________
1950_______________________________________________
Percent
increase in
real G N P
(1954 dollars)
-
4.8
1.3
Percent
increase
in money
supply 1
m2
2.2
Percent
increase
in money
supply 1
Ms
4.4
3.5
.5
1.0
—.5
—
1946-50___________________________________________
1951_______________________________________________
1952_______________________________________________
1953_______________________________________________
1954_______________________________________________
0.1
3.8
.1
8.7
Percent
increase
in m oney
supply 1
Mi
-
1.0
2.1
2.5
12.6
8.5
7.2
5.6
7.5
3.4
4.4
4.2
5.4
3.6
3.0
5.1
5.1
2.4
1.3
1.6
3.8
5.4
4.1
3.4
1950-1954_________________________________________
14.1
17.7
12.5
14.7
1955_______________________________________________
1956_______________________________________________
1957_______________________________________________
1958_______________________________________________
8.2
2.1
3.9
1.9
3.5
1.4
.5
-2 .3
4.2
2.4
3.0
4.5
4.3
1.0
9.9
14.9
9.3
6.6
1954-58___________________________________________
1
-
1.8
2.8
Data for money supply are based on 13-month averages.
o t e .— Real G N P : The total gross national product (representing the total national output of goods and
services) measured in current dollars has been converted to 1954 constant dollars.
M i M oney supply as measured by total deposits and currency outside banks. Total deposits include
demand deposits other than interbank and U .S. Government, less cash items in the process of collection;
and time deposits in commercial banks, mutual savings banks, and the Postal Savings System, excluding
interbank time deposits, U .S. Treasurer’s time deposits, open account, and deposits of Postal Savings
System in banks. “
M 2 M oney supply as measured by adjusted deposits of the commercial banking system and currency
outside banks. Adjusted deposits of the commercial banking system include demand deposits adjusted and
time deposits in commercial banks.®
M 3 M oney supply as measured by demand deposits adjusted and currency outside banks. Demand
deposits are adjusted to exclude interbank deposits, U .S. Government deposits, and cash items in the
process of collection. 3
° These data are based on 13-month moving averages and therfore will differ somewhat from money supply
data published in the Federal Reserve Bulletins, which are based on end-of-month data.
N
1608
EM PLOYMENT,
GROWTH, AND PRICE LEVELS
Gross national product, money supply, and interest rates, 19^6-58
[In billions of dollars]
Date
1946______________ ______ _______
1947____________________ ______ _
1948____________________________
1949____________________ _______
1950____________________________
1951__________________ ______
1952____ _______________________
1953____________________________
1954____________________________
1955____ _______________________
1956____________________________
1957____________________________
1958____________________________
Real GNP
(1954
dollars)
$282. 5
282.3
293.1
292.7
318.1
341.8
353. 5
369.0
363.1
392.7
400.9
408.3
399.0
Money
supply
Mi
$157.2
164.8
166.9
166.9
170.6
177.1
186.6
194.2
200.8
209.2
214.3
220.8
230.8
Money
supply
m2
$137.9
144.0
145.5
144.8
147.8
154.0
162.3
168.2
173.3
180.0
183.5
188.6
196.8
Money
supply
M3
$105.7
109.4
109.9
108.8
111.5
117.2
123.2
126.2
127.9
132.4
134. 2
134.9
136.3
Average
rate on
Interest short-term
yield on bank loans
long-term to business,
selected
Govern
cities
ment bonds
Ri
r2
Percent pet
annum
2.19
2.25
2.44
2. 31
2. 32
2. 57
2 . 68
2.94
2. 55
2.84
3. 08
3. 47
3. 43
Percent per
annum
2.1
2.1
2.5
2.7
2.7
3.1
3.5
3.7
3.6
3.7
4.2
4.6
4.3
N o t e .— Real G N P : The total gross national product (representing the total national output of goods and
services), measured in current dollars, has been converted to 1954 constant dollars.
M i M oney supply as measured by total deposits and currency outside banks. Total deposits include
demand deposits other than interbank and U .S. Government, less cash items in the process of collection;
and time deposits in commercial banks, mutual savings banks, and the Postal Savings System, excluding
interbank time deposits, U .S. Treasurer’s time deposits, open account, and deposits of Postal Savings
System in banks.®
M 2 M oney supply as measured by adjusted deposits of the commercial banking system and currency
outside banks. Adjusted deposits of the commercial banking system include demand deposits adjusted
and time deposits in commercial banks.®
M 3 Money supply as measured by demand deposits adjusted and currency outside banks. Dem and
deposits are adjusted to exclude interbank deposits, U .S. Government deposits, and cash items in the
process of collection. 0
Ri The series showing long-term interest rates is not a constant series. The securities included are: 1946
to March 1952, bonds due or callable after 15 years; April 1952 to March 1953, bonds due or callable after
12 years; April 1953 to date, bonds due or callable 10 years and after.
R 2 Annual averages of rates of interest (percent per annum) charged on commercial loans maturing in
1 year or less made by banks in 19 large cities.
° These data are based on 13-month moving averages and therefore will differ somewhat from money
supply data published in the Federal Reserve bulletins, which are based on end-of-month data.
Representative P a t m a n . It occurs to me we fared better under th e
system of so-called pegged prices. Incidentally, I object to the word
“ peg” because that indicates that it can move neither up nor down,
but the peg was to prevent it from going down—I believe we are in
accord with that.
It seems to me like we did a lot better under the pegging procedure
than we did in subsequent 4-year periods for the reason that the first
4 years that I have indicated here were among the hardest years in
our history, right after the greatest war on earth, World War II, and
when there was a built-up demand for all kinds of things like auto
mobiles and everything else, and lots of money, and the greatest
inflationary threat we ever had.
During that 4-year period, one of the most trying times I think,
in history, our situation looks considerably better under the pegging
procedure than it has in the subsequent 4 years.
Senator
B u sh . I
do not see how you can get that out o f these figures.
Representative P a t m a n . The wav I interpret the figures, interest
rates went way up, the money supply went way up, but the growth
of our economy did not go up in proportion.
The C h a i r m a n . Congressman Patman and I try to minimize in
public the one point on which we differ. I have great respect for the
EM PLOYMENT, GROW TH, AND PRICE LEVELS
1609
Congressman, I may say, and these figures that he has produced are
very interesting.
I have no doubt, so far as they go, that they are correct. It is my
belief, however, that an analysis will show that the money supply
since 1952 has increased because of the lowering of reserve require
ments by the Federal Reserve System which has permitted the banks
upon the same absolute amount of member bank reserves to expand
the credits which they extend to their borrowers and hence to increase
the money supply rather than through open market operations on
the part of the Federal Reserve Board purchasing Government secu
rities and hence increasing member bank reserves.
This brings us to the point, I think, that the Congressman and I
agree upon—all three of us I think agree upon—namely, to the degree
that the money supply is expanded, at least in the future, it should
be done primarily by open market operations rather than by the low
ering of reserve requirements because the lowering of reserve require
ments gives to the private banks free of charge the full 100 percent
of the credit which they create, whereas open market purchases would
give to the Federal Reserve System and hence ultimately to the Treas
ury 15y2 percent of the total amount of credit which the banks create.
Since the ultimate effect of lowering reserve requirements and open
market purchases will be the same, and since because of your wide
network of offices and relationships with banks all over the Country
there is not any marked difference in the speed with which banks do
business, I would say that method is better which yields the greater
percentage of income to the Government.
This is, I think, the gravest issue at present which we have with
the Federal Reserve System. The Chairman of the Federal Reserve
has testified repeatedly that he is not concerned with making a profit
either for the Federal Reserve System or the Government. The
position of the chairman of this committee, and I think of the other
members, is that if approximately the same result can be obtained
by open market purchases as by lowering reserve requirements that
the open market system is preferable because it would yield on an
average growth factor of 3 percent a year, a capital gain for the
Reserve System of approximately $600 million a year which at 4
percent would be an increase in net income of $24 million a year. This
would be cumulative,
So while the net increase would be $24 million for the first year, it
would be $48 million for the next, $72 million for the next, $96 for
the fourth, $120 million for the fifth, and so on. This would be a
very important increase of governmental revenues.
Furthermore the purchase of long-time bonds by the Federal and
the use of these surplus earnings to reduce the national debt would
appreciably steady the long-time bond market. This is a profound
question of public policy and it is really whether the Federal Govern
ment is to get its present commission of 15y2 percent upon the crea
tion of additional monetary purchasing power while the banks get
84y2 percent, or whether the private banks are to get the full 100
percent and the Government nothing.
I had not intended to fight this issue out with you because you are
not responsible, except as a citizen, in the decision. I think this is
the point that the Congressman has really raised, and on action for
1610
EM PLOYMENT,
GROWTH, AND PRICE LEVELS
the future I think we are united, whatever our views may be con
cerning the 1951 accord.
Representative P a t m a n . Yes, sir; we are. May I proceed just
briefly ?
The C h a i r m a n . Yes.
Representative P a t m a n . Yesterday I made a statement about the
Federal Reserve Banking System in which I stated that the 11 regional
banks outside of New York served no particular central banking
functions. Their principal duties are clearing checks for banks and
so forth. The inference was drawn, at least by one newspaperman,
that I was against a central bank, which I am not. I am for a central
bank, but I believe it should be a real central bank. I do not see any
need for these 11 other regional banks because no one can name any
important function that they performed since the 1935 act. That
is the reason I said we should reevaluate the Federal Reserve Banking
System, not for the purpose of making it weaker, but making it
stronger as a central bank.
I think we have to have a central bank and a good one.. But these
other banks do not serve any other particular purpose. That was
the impression I wanted to leave instead.
May 1 say, Senator Douglas, that I am in accord with your point
about the method of adding to reserves. I think it is a fine thing that
you are demanding and insisting that in order to increase reserves,
they should do it by buying interest-bearing securities of the Gov
ernment, holding these securities and, after paying expenses out of the
interest they receive, turning the remainder over to the Treasury.
Ninety percent of the net—which incidentally was $500 million
last year, no small amount—Hows to the Treasury and another 10
percent goes into surplus funds and still belongs to the Government
since it can be taken at any time that the Congress wants to appropri
ate it. Such surplus funds have been appropriated in the past and
can be appropriated in the future.
The C h a i r m a n . 1 want to caution some credit on this., I am very
proud of this position, but I want to say that Congressman Reuss and
Congressman Metcalf deserve a great deal of credit for this because
this is the principle which they have been urging in the amendment
which they succeeded in getting the House Ways and Means Commit
tee tentatively to adopt, which the Treasury originally more or less
expressed its willingness to accept, but which upon the opposition of
the chairman of the Federal Reserve Board, Mr. Martin, was later
withdrawn.
In view of the fact that Congressman Reuss and Congressman
Metcalf have taken a very severe beating from the New York finan
cial press because of their proposal, I think the full nature of that
should be known.
Representative R e u s s . Thank you, Mr. Chairman. It is a real
pleasure for me to hear the Reuss-Metcalf amendment position thus
praised in the lower part of Manhattan Island. I would add just
one thought to your excellent description of the issue, Mr. Chairman,
the issue being whether a policy should be adopted which can save the
taxpayers of this country around $1 billion in the next 10 years,
conservatively estimated, or whether the policies and practices of
the Federal Reserve Board which would deny that saving to the tax
payers should be continued.
EM PLOYMENT, GROWTH, AND PRICE LEVELS
1611
This had not been a political question at all until very recently.
It had been a source of disagreement between most Democrats and the
Governors of the Federal Eeserve Board. However, just recently the
Eisenhower administration and a very impressive portion of the
political machinery of the Eepublican Party has come out in strong
support of the Federal Eeserve’s position, so I guess this does become
a political question, and if so, so be it. It probably will have to be
decided in the political arena.
The C h a i r m a n . I would add one word. I want to make it clear
that we are not proposing to increase the present percentage of the
split in the purchasing power between the banks and the Government.
We are willing to let the banks have 84% percent of the total increase
in monetary purchasing power free of charge. But I think I speak
for my colleagues in saying that we do not believe that the present
share of the Government of 15y2 percent should be further reduced,
and it should certainly not be cut to nothing on the additional
increments.
Further we do not believe that reserve ratios should be reduced to
a general average of 10 percent, which has been declared to be the
policy for the Eeserve, moving back to the old 10 percent average.
Senator Bush ?
Senator B u s h . Mr Chairman, now that the chairman has divided
up the credit for those old new ideas, I would like to get back to the
purpose of this meeting for a moment, and say to you, Mr. Brown,
I think you and your colleagues have been very patient, indeed,
while these profound discussions have been going on, and I applaud
your patience and indulgence.
The C h a i r m a n . Y ou d o not regard them as beneath their
consideration, do you ?
Senator B u s h . I have not said anything of that kind.
The C h a i r m a n . I am glad you have not said so and I hope you do
not think so.
Senator B u s h . I will not comment on that because it is not appro
priate to what I was going to say. What I want to ask you, Mr.
Brown, is this: Obviously the purpose of this hearing and all these
hearings is to try to get helpful suggestions and acquire information
that will help this committee in preparing a report which may be
useful in formulating legislation dealing with these important matters.
Have you any suggestion voluntarily to make to this committee
appropriate to any of the questions that have been raised or that have
not been raised with you today? We would very much appreciate,
I am sure, any voluntary suggestions that you might wish to make
respecting this whole business of the Government bond market and
the Government’s interest in it or anything at all that you think
might be helpful to us.
We need the help and the advice of the practical people in this
business and certainly your firm is outstanding among them.
Mr. B r o w n . I believe that basically the Government of the United
States has got to follow sound fiscal policies. You have to keep your
budget balanced and take in as much as you pay out if you want the
public to have faith in the dollar, if you want foreign holders of
dollars in this country to keep them here.
You have to have a sound dollar. You cannot continually debase
its value as has been done in the past. I think that basically is what
1612
EM PLOYM ENT, GROWTH, AND PRICE LEVELS
you have to do and let the markets go free. They will decide what
the interest rate should be.
I f you do the first thing, you accomplish all the others. That is
my opinion.
Senator B u s h . That is all you have to say on that ?
Mr. B r o w n . I could get more detailed if you like.
Senator B u s h . We have plenty of time if you think of some helpful
observations. That is why we came all the way up here.
Mr. B r o w n . Establishing a margin requirement is sort o f a fringe
benefit to the market, you might say. It might help a little bit. It
might help to keep out a certain number of speculators. I think the
government securities market, as it has been operating during the
past-----Senator B u s h . Has the Federal Reserve Board authority now
sufficient within its powers to establish margin requirements for such
purposes ?
Mr. B r o w n . Not that I know of. They have no authority. I f I
may comment on the sense of Congress amendment, I would like to
make a remark.
Senator B u s h . I would like to hear your views on that very much.
Representative R e u s s . I would like to hear them, too.
Mr. B r o w n . The Federal Reserve System has the privilege or the
right or the capability of buying and selling any Government security
outstanding that is marketable right now. They do not need that
sense of Congress amendment.
I f the Congress puts it in, then they are in effect telling Mr. Martin
how to steer a ship. I f he feels obligated to steer it the way Congress
wants it steered, then there is only one thing he can do, and that is to
buy bonds. I f he buys them, he has to sell them. That creates chaos
marketwise. I thought we referred to that a little earlier in our
conversation.
If you mean by the sense of Congress amendment that they should
only purchase securities, then you are really contributing to inflation.
The Federal Reserve has to be able to take out what it puts in. I f it
deals with bonds, as well as bills, notes and certificates, and other types
of securities, then it distorts the market when it comes back to offset.
But if it only buys, then it makes for inflation. It is giving money
to those who really should not have the money. When they follow a
bills-only policy, the Federal Reserve System can correct any mistakes
or miscalculations it makes very easily without any damage or concern
to the market.
The fluctuations are small. But in the Government securities mar
ket, if you merely buy securities it is only a question of time, in good
times, in times of vigorous economy; you simply add fuel to the fire.
When Government bonds go down, you put them up, you make
money. You just fall into loose policies that contribute to inflation*
by giving money to those who really should not be getting it, is my own
personal way of putting it.
An insurance company that has bonds selling at 10 or 15 points
discount is less apt to sell them than if at par. I f they are selling
higher than they should be selling relative to other types of invest
ment, he will dispose of every Government security he can dispose of
and put it into something else which might give a false boom to the
economy.
EM PLOYM ENT, GROWTH, AND PRICE LEVELS
1613
When such things happen, you have to be concerned about people
who reside outside of our country who have enormous quantities of
funds in this country and who can very easily take them out. I f any
such thing happens, we are really in trouble.
Another thing about the cost of doing all this: I do not say you
say it, but it is said that the purchase of Government securities, longterms especially, might ordinarily give higher interest rates, might
contribute somewhat to the income of the Treasury Department.
That contribution might cost 10 times that amount.
I am merely picking a figure out of the air. I do not know. I f
you inflate the cost of everything that the Government has to buy,
if you are spending $80 billion a year to defray the cost of Govern
ment and you raise the cost of the products that you have to buy by
10 percent, you just add that to your cost. You might spend $1 billion
more to pay for interest. Now which is better? Those are the
comments that I have to make.
Senator B u s h . Thank you very much, Mr. Brown. That is a very
fine statement.
The C h a ir m a n . While logically, perhaps, I should call on Con
gressman Ruess to ask questions in reply to the statement of the
witness, I think our Republican friends have not had fully half of
the time, so I am going to ask Mr. Widnall.
Representative W id n al l . Mr. Chairman, I do not think I have any
further questions at this time.
The C h a ir m a n . Mr. Reuss?
Representative R euss . Mr. Brown, you just made—and I am sure
unwittingly—such an appalling misstatement of the sense resolution
of Congress that I want to get this straightened out right away
because if the sense resolution did what you have just said it would
do, then indeed, people both here and abroad might be very concerned.
However, it does not bear the remotest resemblance to what you have
just testified it says.
The sense resolution of Congress says that when the Federal Reserve
System in its judgment is engaged in increasing the money supply,
that is, increasing bank reserves, it shall do so in a particular way
for the 2-year life of the resolation, namely, primarily by the purchase
of U.S. securities rather than by a further lowering of bank reserve
requirements.
This does not require or tend in the direction of creating one nickel’s
worth of bank reserves or money that would not otherwise be created
if the Federal Reserve, in its wisdom in the next 2 years, during the
life of this sense resolution, determines that the money supply shall
not be augmented at all, then the sense resolution has nothing to which
to attach. It is only as, if, and when, that the Federal Reserve decides
that the money supply should be expanded—and they have recently
testified before the Congress that in their opinion the money supply
ought to be expanded at the rate of around 3 percent a year—it is
only when they decide that they should expand it, that this resolution
tells them how to expand it.
Indeed, it does tell them how to expand it and the reason it does tell
them how to expand it is that the Treasury has recently or the Federal
Reserve has recently in its testimony before the Congress bragged and
gloated about the practice which it proposes to continue of increasing
38563— 59^-pt. 6B------- 8
1614
EM PLOYMENT, GROWTH, AND PRICE LEVELS
the money supply solely by lowering bank reserve requirements, a
method which it publicly testified to has the purpose and effect of
increasing the earning assets and thus the profits of banks.
Now, I hasten to add that I have no objection whatever to the most
healthy profits by our banking system. The sole reason for the sense
resolution is that given by Senator Douglas a moment ago, that we
who believe in the resolution think that the interests of the taxpayers
and interest of sound debt management require that the Federal Re
serve, when it increases the money supply, and has two methods
available to it of doing it, both identical in their monetary impact,
it should adopt that method, that is, purchase of U.S. securities,
which has the incidental benefit of helping the taxpayers and helping
the Treasury.
In the light of that, I would like your public statement of how
you can testify here that the sense resolution of Congress requires
the Federal Reserve to create additions to the money supply over
and beyond those that the Federal Reserve believes to be necessary
to service the needs of an expanding economy.
You have just indicated that this resolution will require the Fed
to expand the money supply in some particular amount and if that
particular amount is more than the necessity of the economy, this
would cause inflation. Where do you get that idea?
Mr. B r o w x . Maybe I d o not know what your most recent amend
ment is. The sense of Congress amendment that I read called upon
the Federal, whenever they were putting money into the money sys
tem, that they use the method of buying long-term securities.
Representative R e u s s . That they use the method of buying U.S.
securities rather than the method of lowering bank reserve require
ments and added the words “ of varying maturities,” which means
that the Federal Reserve should no longer feel bound by the so-called
bills-only policy.
Mr. B r o w n . We have no argument with those who would prefer
the use of the purchase of securities by the Federal rather than the
changing of reserve requirements.
Representative R e u s s . If I may stop you right there-----Mr. B r o w n . I f you will let me go on later.
Representative R e u s s . I certainly will, and I want you to. When
you have said what you have just said, that you have no objection to
a directive from Congress if it is necessary to the Federal Reserve,
telling them that they should pursue the method of purchase of
U.S. securities, rather than the method of lowering bank reserve
requirements for the creation of additions to the money supply, you
have, whether you know it or not, bought 90 percent of the sense
resolution, because that is the main point.
I might add that all the advantages to the taxpayer just sketched
out by Senator Douglas to purchases of bills only.
The C h a i r m a n . Generally, not to the same degree, but they apply.
Representative R e u s s . With bills bearing an interest coupon of 3
percent or more, the savings to the taxpayers would be very close to
what you said. So I gather we have narrowed our difference to the
three words in the sense resolution—“ of varying maturities.” Those
words are indeed in there and I want to give you all the time you need
to express your disagreement with that.
EM PLOYM ENT, GROWTH, AND PRICE LEVELS
1615
Mr. B r o w n . First let m e go back to this reserve change relative to
the purchase of Government securities. I am speaking as a Govern
ment bond dealer that it does not matter to us, frankly, as far as we
are concerned. It does not matter to the market. It might matter
a great deal to the banks.
It might be a better thing for the Federal to raise or lower reserve
requirements.
Representative R e u s s . We are not talking about raising reserve
requirements. We are talking about lowering them.
Mr. B r o w n . It works both ways. You have to raise them to lower
them. You cannot go down to zero. The Congress recently passed a
law permitting the Federal Reserve bank to raise or lower the reserves.
Representative R e u s s . With the clear admonition in the conference
report on that bill that this was not a mandate to the Federal Reserve
to pursue its policy of recent years of indefinitely lowering total
systemwide requirements, but with the clear indication in the legisla
tive history that the Congress expected the Federal in implementing
the law to bring reserve requirements out at about the same level
systemwide.
So it will not do to say that Congress, by passing this law, was giv
ing a pat on the back to the taxpayer, damaging policies of the Fed
eral Reserve which in the past 5 or 6 years have cost the taxpayers
millions and perhaps billions of dollars.
I wish, if you do not agree with the sense resolution, leaving aside
“ varying maturity point,” I wish you would tell me why. A moment
ago I thought you were saying as to the purchase of U.S. securities
you had no objection. Do you want backtrack on that ?
Mr. B r o w n . I am not backtracking, sir. You either misunderstood
me or I misunderstood you. As far as the varying maturities part of
the sense of Congress amendment is concerned, we are not in accord.
We are not in agreement.
Representative R e u s s . I want to give you a chance in a moment to
explain why. First let us look at the other 90 percent of the resolution
which says irrespective of whether you buy bills or what you buy, when
you are increasing the money supply, do so primarily for the next 2
years by buying U.S. securities, rather than by further decreases in
bank reserve requirements.
Do you oppose that portion ?
Senator B u s h . May I ask a question there for clarification. I am
trying to follow the argument. Does the resolution have a negative
on increasing reserve requirements or decreasing reserve requirements ?
Does it contain a negative on that?
Representative R e u s s . In effect.
Senator B u s h . Not in effect, but actually is there any negative on it?
Representative R e u s s . Yes, because the resolution says when you
are increasing the money supply, do so by purchasing U.S. securities.
Since there are only two ways of increasing the money supply open to
the Fed, that is, lowering reserve requirements systemwide or buying
U.S. securities, this, by accentuating the positive, denies the negative.
Senator B u s h . It certainly accentuates the positive, but I do not
think that the resolution denies the negative. With the frankness
my good friend from Wisconsin speaks, he certainly would have put
it in there if he meant to deny the reserve requirement route.
1616
EM PLOYMENT, GROWTH, AND PRICE LEVELS
Representative R e u s s . 1STo. I do not think it is necessary for me to
state my position twice.
Before the Ways and Means Committee*
I made it very clear that the purpose of this amendment was to change
the Federal Reserve around. They had been increasing the money
supply by lowering bank reserve requirements. For a while I am for
giving the taxpayer a break and doing it by purchasing U.S. securities.
The C h a i r m a n . I think there is one point which needs to be empha
sized. This would not mean any diminution in bank earnings. Quite
the contrary, by permitting the banks to get 84% percent of each
additional dollar of credit created, it would permit bank earnings to
rise.
All it would do would be to say that if the additional increments of
credit are created, the Federal Government should get its present
percentage of 15%. On the additional increments, the banking
system should not get the full 100 percent which the Federal Reserve
under the chairmanship of Mr. Martin is now insisting upon.
Representative R e u s s . From the point of view of the public, Mr.
Brown, and what is good for the people of the United States, do you
oppose that part of the sense resolution which relates not to bills-only
policy, not to what types of securities should be purchased, but to
that part of the sense resolution which says that for the next 2 years,,
when in the good judgement of the Federal Reserve the money supply
needs to be augmented, it should be done by the route of purchasing
U.S. securities rather than by the route of further lowering bank
reserve requirements ?
Do you object to that?
Mr. B ro w n . As a dealer, I do not object. I f I were a banker and if
I were the Federal Reserve authorities, I believe I would object
because I think it ties their hands.
Representative R e u s s . Suppose you are a member of the Joint Eco
nomic committee, concerned with nothing more nor less than the
total economic good of the country ? Would you object to this portion
of the sense resolution we are talking about or would you not object?
Mr. B r o w n . It might be greater for the economic good of the
country not to tie the hands of the Federal.
Representative R e u s s . Do you not think the Federal’s hands should
be tied when they are openly and notoriously announcing that they
are going to pursue the same policies they have been pursuing denying
the taxpayers the benefit of purchase of U.S. securities when the
money supply needs to be augmented? Do you think the Federal
Reserve is right ?
Mr. B r o w n . I do.
Representative W i d n a l l . Would the gentleman yield at that point?
Representative R e u s s . Surely.
Representative W i d n a l l . When did anybody make a statement
like that?
Representative R e u s s . The representatives of the Federal Reserve
made that statement repeatedly in their testimony before the House
Committee on Banking and Currency on the vault cash bill. The
representative of the chairman said so, the staff study said so. It
was repeatedly set forth that the Federal Reserve, in adding to the
money supply at the rate of around 3 percent a year, which it says
was necessary, was going to do so by further lowering of bank reserve
requirements.
EM PLOYMENT, GROWTH, AND PRICE LEVELS
1617
Indeed, the best evidence of the Federal Reserve’s attitude in the
matter is what it has in fact done in the last 5 years, and there the
increases in the money supply have been totally accounted for by
lowering of reserve requirements, one in 1953 and another one in
early 1958.
The C h a ir m a n . I may say that Chairman Martin, in his testinmny
last week before this committee, virtually reaffirmed this policy.
He said he was not concerned with increasing the earnings of the
Federal Reserve System. He believed that the present reserve require
ments were too high and that they should be lowered. He favored
expansion through lowering reserve requirements rather than through
open-market operations.
Representative P a t m a n . And it should be said, Mr. Chairman,
that has been a consistent policy the last 6 years. The reserve require
ments have not been raised one time. They have only been reduced.
The C h a ir m a n . That is right. I may say that the chairman
admitted in response to my question that the ultimate effect of the
two methods would be identical so far as the expansion of credit is
concerned.
One was no more inflationary than the other. I want to make it
clear that we are not advocating a greater increase in the total money
supply than its proper relation to the actual national income. It
should merely keep pace with the increase in real national income in
order to stabilize the price level. The ultimate effect of the two would
be the same. But the open-market method would have the effect
that the Government would get 15y2 percent of the increments of
credit which would be added.
The split, so to speak, would be the same as now; whereas, the policy
which Chairman Martin and the Reserve Board are advocating would
give the full 100 percent to the banking system. I want to make it
clear that we are not proposing to take the 84% percent away from
the bankers. We are merely hoping to retain the public’s 15y2
percent.
Representative W id n a ll . Mr. Chairman, if the purpose is to actu
ally change the basic Federal Reserve System law, there certainly
would not be the confusion as to testimony. The resolution would be
going through the House Banking and Currency where it belongs
truly, instead of being a form of blackmail in connection with an
interest rate fight.
We should nave full hearings on that and as to an amendment to
the Federal Reserve System, I think everybody is in agreement. That
would be the wise approach and the best approach.
Representative R e u s s . If I may comment on that, I am delighted
to hear this. I will wait upon my friend from New Jersey,
Mr. Widnall, who like myself is a member of the House Committee
on Banking and Currency, at the earliest possible opportunity and
trust that he will deliver to me the strong support of the Republican
members of the Banking and Currency Committee to conduct such an
inquiry into the Federal Reserve System and I will heartily ioin
him in that.
I f the gentleman moves with as much speed as I know he is capable
of, we can start those hearings right away. Then the anomaly will
be at an end whereby the Banking and Currency Committee this year
1618
EM PLOYM ENT, GROWTH, AND PRICE LEVELS
has not had the benefit of any of the testimony of Chairman Martin
of the Federal Reserve System, whereas, the House Ways and Means
Committee has had the benefit of his testimony on 11 different days
during which time they learned a good deal about the Federal Reserve
practice.
Representative W idNx^ll. May I ask Mr. Reuss if he has made any
request of the chairman of the House Banking and Currency Com
mittee for this purpose?
Representative R e u s s . Yes, I have, and he told me that he didn’t
think he would like to have hearings because the Republicans would
object. Now that I know that one of the leaders on the Republican
side not only does not object, but is enthusiastically in favor of having
Mr. Martin and the Treasury and the monetary managers of the
Nation up, I am hopeful that the chairman will join with me in set
ting prompt hearings on the sense resolution which I did introduce in
the Banking and Currency Committee before I turned to the Ways
and Means Committee for their reaction, which happily was a favor
able one. Let us all be in fovor of this sense resolution. Let us
bring it up before Banking and Currency.
Representative W i d n a l l . I am just delighted to know the influence
of the 11 Republicans have over 19 Democrats who run that committee.
The C h a i r m a n . Of course, the Republicans have some allies.
Representative P a t m a n . I happen to know, Mr. Chairman, being
on the committee, that when the Republican votes go together it does
not take many Democrats to have the balance of power. That has
occurred many times in the past. I am not criticizing anybody for
their votes.
I am in accord with the statement made by Mr. Reuss to the effect
that we should have hearings before the Banking and Currency
Committee, provided the Ways and Means Committee will hold up
reporting the bill involving the ceiling on the long-term securities
until the Banking and Currency Committee passes on it. We do not
want them to raise the interest rate or make it possible for the inter
est rate to be raised while we are considering the sense resolution in
the Banking and Currency Committee. I hope the gentlemen will
agree to that.
Senator B u s h . Y o u can stop that on the floor of the House, can you
not, Mr. Congressman ?
Representative P a t m a n . We do not know about that, but I have
an idea if the sense resolution remains in, it will pass the House by
a majority vote. Although I will vote against it because I am against
raising the interest rate above 4*4 percent, I think a majority of the
members will vote for it with the sense resolution in. I f the sense
resolution is not in, I do not think it has a chance of passing. I do
not think it will pass at all.
Representative R e u s s . Mr. Chairman, if I may pursue the question
I propounded to Mr. Brown, again leaving aside the bills-only aspect,
you said that the sense resolution would tie the hands of the Federal
Reserve.
Let me add, indeed it would, for the duration of the resolution.
It would tell the Federal Reserve to stop pursuing the policy it has
been pursuing of creating money supply only by lowering bank reserve
requirements, and indeed tell it to pursue primarily the course of
EM PLOYMENT, GROWTH, AND PRICE LEVELS
1619
creating additions of money supply when it deems necessary to do
so by purchase of U.S. securities. Other than the point that I do not
apparently think Congress should ever give advice or tell the Federal
Reserve how to conduct itself, do you have an opinion on the merits of
that operation? That is to say, do you believe it is wise for the
Federal Reserve to concentrate on the further lowering of bank
reserve requirements as a means of making necessary additions to the
money supply, and do you object to the notion that it is time that the
taxpayers were considered and that they were cut in for some of the
benefits, at least, of an expanded money supply?
Do you support substantively the Federal Reserve stand or do you
rest your case on the notion that under our separations of powers,
Congress should not tell the Federal Reserve anything?
Mr. B r o w n . I think I will have to take the side of the Federal.
R e p r e s e n ta tiv e R e u s s . A n d y o u r reason s are------Mr. B r o w n . My reasons are that you have given
them a ship to
steer so let them steer it. Do not try to tell them how to do it by
remote control. I f you want to change the law, change it. Then
you risk the loss of the people that are working for the Federal
Reserve bank and the sound practices they have been following.
R e p r e s e n ta tiv e R e u s s . D o y o u f a v o r a m e n d m e n t o f th e U . S .
C o n s titu t io n to rem o ve th e clau se in i t w^hich g iv e s th e p o w e r to
C o n g r e s s to co in a n d r e g u la te th e v a lu e ?
Mr. B ro w n . I do not propose to change anything. Leave it the
way it is. They already have all the power they need.
Representative R e u s s . Yet you deny Congress the power to indicate
to the Federal Reserve System how it shall manage the credit-creating
power delegated to it.
Mr. B ro w n . I do not deny that Congress has any power it desires
to put into effect or anything it wants to do it can do. I am not a
lawyer nor a Constitution man. I do not know anything about those
things. All I know is that the Federal can do anything that you are
proposing that they do in the sense of Congress amendment, so why
put it there? There must be some other reason.
Representative R e u s s . Then my final question, Mr. Chairman.
Having heard your answer now on what I characterized as 80 to
90 percent of the sense resolution, namely, the recommendation to
purchase U.S. securities, let me turn finally to the three words “ of
varying maturities” which, in effect, is an indication of a congres
sional sense that the self-imposed, self-denying bills-only policy of the
Fed is an unnecessary restriction on its powers and that it should
be free to purchase or sell U.S. bills, certificates, notes or bonds as the
public interest requires.
I will ask you one question on that. The publication of the Ameri
can Banker in a recent editorial referred to the so-called bills-only
policy of the Federal Reserve as silly. Do you agree or disagree with
the American Banker’s evaluation of that policy ?
Mr. B r o w n . When we say bills-only, we mean “ usually bills.” The
Federal Reserve has often departed from the bills-only policy. Even
recently they purchased $2 billion some odd million, 4% notes, from
the U.S. Treasury. On many occasions in the past they have entered
the bond or note or certificate market for one good reason or another.
They are apt to depart from that bills-only policy when circum
stances require. My personal objection to this thing is that you do
1620
EM PLOYM ENT, GROWTH, AND PRICE LEVELS
not need it. There must be some other reason. Are we trying to
undermine the Federal Reserve System? Are we trying to change
things ?
Representative R e u s s . Then I gather that you do not object to
Congress telling the Federal Reserve what you now say they are doing
anyway, namely, abandoning the bills-only policy, but that your objec
tion to the sense resolution is that in some occult, undefined manner
you think that some of the authors of it might have had bad thoughts
in their heads?
Mr. B r o w n . Yes, sir.
Representative R e u s s . Might have turned out a printing press, so
you oppose it?
Mr. B r o w n . Yes, sir. I think somebody has some bad notions
somewhere.
The C h a i r m a n . May I follow this up ?
In the first place, I do not think there are any bad notions. We
will submit to a character test on these matters. Apparently the
witness does not object to the Federal Reserve abandoning the billsonly policy provided it does not have to say it has abandoned it. As
long as it can save its face it can change its policy.
Representative R e u s s . I f I may conclude, I take it from the ques
tions and answers on this sense resolution that the comment which the
witness first made in his colloquy with Senator Bush about the infla
tionary consequences of the Federal Reserve’s pursuing what the sense
resolution would require it to pursue, I take it those remarks of yours
were not really directed to the language of the sense resolution, but to
some assumption on your part that some people who believe in and
propose the sense resolution may have some sinister thoughts of an
undisclosed character.
Is that the theory of statutory interpretation which governed your
statement just now?
Mr. B r o w n . Mr. Reuss, all I can say is that the Federal Reserve
already has the powers you are trying to give it. I f you restate those
powers, you are not adding except a suspicion on the part of a lot of
people and the Federal Reserve Board and the people who are carry
ing out the Federal Reserve policy that you are trying to tell them how
to steer this ship.
Representative R e u s s . That is exactly right. We are trying to tell
them to steer their ship. We are trying to tell them to steer it toward
the benefit of the taxpayers rather than solely to the benefit of bank
profits.
I would caution you when you are interpreting publicly a pending
measure in Congress that you really ought to look at the words of
it, look at what it seeks to do, and confine your observations to that,
and that you may well do our economy and the management of our
national debt a disservice by publicly stating that the sense resolution
has inflationary consequences when in the light of your subsequent
testimony it is perfectly apparent that there are no such consequences
and that your sole reason for opposing it is that you do not think
that Congress should talk to the Federal Reserve.
Mr. B r o w n . Sir, I h a v e th e sa m e g o o d p u r p o se s t h a t y o u or
a n y b o d y else h as.
The C h a i r m a n .
Do you think we have bad purposes?
EM PLOYM ENT, GROWTH, AND PRICE LEVELS
1621
Mr. B r o w n . I believe you are sincere in your attitude. All I tried
to do was point out where I think you are wrong.
The C h a i r m a n . I think our Republican friends should have a
chance to ask questions.
Senator B u s h . I have no further questions, Mr. Chairman, but I
do think we are expecting a great deal of Mr. Brown or any other
witnesses that come before us in the capacity that he is to talk about
the Government bond market, to get him into the highways and
byways of politics.
Representative R e u s s . Y o u got him in. Then I had to ask about
it.
Senator B u s h . I asked if he had any suggestions.
Representative R e u s s . I think my good friend from Wisconsin for
whom I have great respect has imposed a severe interrogatory.
The C h a i r m a n . We have introduced nothing about the personal
character of Mr. Brown or the reputation of his firm. We repeatedly
paid tribute to him.
Senator B u s h . I am not saying that. I do think this thing is getting
too political for the good of the inquiry. We ought to stick to inves
tigating the Government bond market. That is what we came up to
New York for. I hope we wTill with the subsequent witnesses hew
to the line a little more. I f they have voluntary statements to make,
about the Reuss resolution or anything else, that is one thing.
I do think we ought to try not to put the witnesses on the spot
about things which they are really not perhaps competent to debate.
The C h a i r m a n . I think the witness is very competent. I deny
the charge of the Senator from Connecticut that the witness is not
competent.
Senator B u s h . That is the kind of comment I object to. I did not
make that.
The C h a i r m a n . I want to deny-----Senator B u s h . So do I.
Representative P a t m a n . May I ask one question at this point?
Mr. Brown, have you at any time considered that the operations
of the Open Market Account were discriminatory to some dealers as
against others ?
Mr. B ro w n . N o, sir.
The C h a i r m a n . I think that is all, except to say that one of the
functions of such hearings as these is to thrash out important matters
of public interest so that the differences in points of view can be
compared.
I think it was Socrates who said that the unexamined life is not
worth living, and that we have that feeling about the financial policy
of the Government and the policies of the Federal Reserve Board,
that they should not be immune from examination, and that this
examination should not be confined to the members of the Board or
to the inner sanctum of the Board.
These are matters of public concern. We are not questioning the
integrity of the members of the Board. We do question their judg
ment. We do not question their integrity. We certainly do not
question the integrity of the witnesses this morning.
I think the Childs firm is a very fine firm. I paid tribute to it
earlier. We appreciate the honesty of the witness’ statements. We
1622
EMPLOYMENT, GROWTH, AND PRICE LEVELS
are grateful for him coming. We think the morning served a useful
purpose and we wish to thank him.
This afternoon we will reconvene at 2 :30 and the witness will be
Alfred H. Hauser, vice president of the Chemical Corn Exchange
Bank.
(Whereupon, at 12:50 p.m. the committee recessed, to reconvene at
2 :30 p.m. the same day.)
AFTER RECESS
The committee reconvened at 2 :30 p.m., Senator Paul H. Douglas
(chairman of the committee) presiding.
The C h a i r m a n . The hour of 2 :30 having arrived, the committee
will come to order.
We are very glad to welcome as our witness this afternoon Mr.
Alfred H. Hauser, vice president, Chemical Corn Exchange Bank
of New York.
Mr. Hauser, do you want to give a prepared statement, or do you
want to develop these points through free give and take ?
STATEMENT OF ALFRED H. HAUSER, VICE PRESIDENT IN CHARGE
OF INVESTMENT DIVISION, CHEMICAL CORN EXCHANGE BANK,
NEW YORK; ACCOMPANIED BY ALBERT H. SCHRADER, MANAGER
OF GOVERNMENT BOND DEPARTMENT, CHEMICAL CORN EX
CHANGE BANK, NEW YORK
Mr. H a u s e r . I do not have a prepared statement, Senator.
The C h a i r m a n . We will be very glad to have you make any
observations that you would like to make.
Mr. H a u s e r . Thank y o u .
I might first indicate my capacity at the Chemical Corn Exchange
Bank. I am vice president in charge of the investment division.
There are several departments in this division, one of w hich is the
Government bond department, which conducts its business in much
the same manner as an independent Government dealer firm.
Yesterday morning at the beginning of the discussion about the
volume of Government bond business and the number of dealers, I
got the impression that the record will show that some $62 billion of
new issues last year w^ere handled through 17 dealers. The dealers
handled only a small part of that, perhaps a fifth or a quarter. The
rest was handled by direct subscription by investors.
The C h a i r m a n . Thank y o u f o r this amplification.
I think further amplification should be made that these figures
included the refundings of notes, certificates, and bonds, as w^ell as
what might be termed “ fresh receipts,” but does not include the refund
ing of bills.
Mr. H a u s e r . Yes.
The C h a i r m a n . I wonder, Mr. Hauser, if you would b e willing to
estimate as to the total volume of business done by the 17 dealers.
Mr. H a u s e r . I have no original figures. The figure of $ 2 0 0 billion
annually has been mentioned. I have no reason to take exception
to that.
My associate, Mr. Schrader, who is manager of our Government
bond department, sitting next to me here, feels that probably it runs
higher than $200 billion in some years.
EM PLOYM ENT, GROWTH, AND PRICE LEVELS
1623
The C h a i r m a n . S o while we should not have given the impression
that the new governmental issues were handled by the 17 dealers,
exclusively, the global total of $200 billion was probably a conserva
tive estimate.
Mr. H a u s e r . It would seem reasonable; yes, sir.
The C h a i r m a n . Did you have other statements you wanted to
make ?
Mr. H a u s e r . N o, s i r ; I a m a t y o u r d isp o sa l.
The C h a i r m a n . Thank you very much. Were you here this
morning ?
Mr. H a u s e r . N o , sir. I was here most of yesterday, but unfor
tunately I could not be here this morning.
The C h a i r m a n . This morning we discussed the degree of decrease
in the price of the 2% Governments and the Sy2 Governments during
the summer of 1958. I introduced figures from the second volume
of the Federal Reserve Board study and from the chart between pages
90 and 91, showing a decrease in the price of the 2% bond as of 1965
from approximately 100 at the middle of June, to approximately 94
in the middle of September, 92 the first part of October and to 93y2
the latter part of October. In the case of the 3y2 bonds, with maturity
as of 1990, there was a decrease from about 103 in the middle of
June, to 92 the beginning of October and 93'%at the end of October,
or a decrease of 7 percent in the price of 2%s and of around 10 percent
in the case of 3%s.
This checks with your memory ?
Mr. H a u s e r . Yes, it does, sir.
The C h a i r m a n . This meant a corresponding increase in the yields;
did it not ?
Mr. H a u s e r . Yes.
The C h a i r m a n . A r e c ip r o c a l in cre ase in th e y ie ld s ? So th e sh a r p
f a l l in th e p r ic e s o f b o n d s in c re a se d th e y ie ld s o f th e b o n d s a n d d id
n o t in crease th e in te re st ra te.
Mr. H a u s e r . I am sorry, I did not catch your question.
The C h a i r m a n . Wasn’t this equivalent to an increase in the in
terest rate ?
Mr. H a u s e r . An increase in the return that is available on those
bonds; yes, sir.
The C h a i r m a n . Did not this have a general upward influence on
the interest rate ?
Mr. H a u s e r . My interpretation of that would be the opposite, sir.
We had an increasing rate of interest in the general market for funds,
and this was the principal contributing factor in the decline of these
bonds.
The C h a i r m a n . N o corresponding increase in longtime interest
rates. We publish a monthly indicator, as you know. The Indicator
for July, page 29, shows the yield on taxable bonds over 5 years, I
assume, in duration at a rate of 3.2 in June 1958 and a rate of 3.76 or
3.75 in October. That is really the same thing.
Mr. H a u s e r . I think it is.
The C h a i r m a n . Municipals had an increase from 3.56 to 3.96, or
o f 40 points, or over 20 percent.
What you are saying is that it was the general increase in the
interest rate, that forced down the price of Government bonds?
1624
EM PLOYM ENT, GROWTH, AND PRICE LEVELS
Mr. H a u s e r . That was one of the principal factors. The>re were, of
course, other considerations.
The C h a i r m a n . D o you think that the low margins required on
the purchase of Governments was a contributing factor to (<2 ) the
sharpness, and (b) the extent of the decline in the prices of these
two issues ?
Mr. H a u s e r . It is my belief that the ease with which money could
be borrowed to carry these bonds contributed to the sharpness of the
later liquidation. I doubt if it had any bearing on the extent of the
decline. I think that would have followed in any event as business
activity picked up, and the demand for credit rose, as we see it has
continued to do ever since.
I think today’s market is beyond the influence of this period of
June 1958, and that we would be at today’s level regardless of what
happened in June. But I do feel that probably the ease with which
people could acquire these bonds, not knowing the risks they may have
been taking, did contribute to the rapidity of liquidation for a few
weeks in 1958.
The C h a i r m a n . This ease in purchase was fed by the low margins.
Mr. H a u s e r . That was the principal factor that I had in mind.
The C h a i r m a n . Did you favor the imposition of higher margins
on so-called outsiders; that is, other than the 17 dealers ?
Mr. H a u s e r . I hesitate to answer that briefly, sir. May I sketch
in a little background for my conclusion ?
The C h a i r m a n . Please do so, sir.
Mr. H a u s e r . The main question here, I am sure, is the one o f public
interest. It is my impression that the public interest was not damaged,
although a few people were hurt by the decline that took place, and
the losses which they suffered on speculative commitments. I do not
believe that it is desirable in the public interest to try to protect a
relatively few people from their own foolhardiness, if that is the
right word. I do not believe it is necessary in the public interest to
specify restrictions or requirements that should be applied by the
lenders.
I believe the lenders will police the thing properly, not without
some damage to individuals. But I believe in letting a child grow up
and become dependent upon himself, and I think it is best for our
people and our economy if we are self-reliant and do not have to be
protected from burning our fingers.
The C h a i r m a n . Would you favor the removal of the requirement
of margins on the purchase of stocks?
Mr. H a u s e r . No, sir. I believe we have a very different situation
there because people of modest means who cannot afford to lose money
are affected; hundreds of thousands, perhaps millions, of people all
over the country.
There is the possibility that unscrupulous people, of which there
may be a great many all over the country, in places that are not easily
observed, may take advantage of them. This may require more polic
ing, more regulation, and more application of specific protective
devices in the case of stocks.
The C h a i r m a n . Would you favor the removal of margin require
ments for commodity purchases ?
Mr. H a u s e r . I a m n o t su fficien tly f a m i li a r w it h th a t fie ld to c o m
m e n t, sir.
EM PLOYM ENT, GROWTH, AND PRICE LEVELS
1625
The C h a i r m a n . But you feel that in the case of Government secu
rities, (a) that the number of purchasers is much more limited, (b)
that they tend to be more experienced ?
Mr. H a u s e r . Yes, sir.
The C h a i r m a n . And you see therefore ample resources so that the
protection which is required and needed in the case of the purchase of
stock does not apply insofar as Government securities are concerned ?
Mr. H a u s e r . I feel that there is a difference in the people involved.
The C h a i r m a n . Have you considered the bills-only policy ?
Mr. H a u s e r . Yes, sir, I have. Iwould like to point out that this
terminology perhaps has some unfortunate implications. It may
sound on the surface as though the Federal Eeserve banks and the
Open Market Committee never owned anything but bills.
The C h a i r m a n . It is their phrase. It is not ours. It is their
language.
Mr. H a u s e r . Yes, sir. I just want to point out that this does not
mean that they own nothing but bills, which bills-only might imply.
As you know, sir, and the committee members are well aware, only
10 percent, roughly, of the Federal Eeserve’s holdings are bills. The
other 90 percent consist of certificates, notes, and bonds.
The C h a i r m a n . But those were acquired at a prior time.
Mr. H a u s e r . Yes, sir.
The C h a i r m a n . In recent years their purchases have been of bills
only, is that not true, with rare exceptions ?
Mr. H a u s e r . With rare exceptions, yes, sir. Also, I would point
out, that as recently as a week ago they acquired $2.5 billion of 5-year
notes through an exchange offer.
The C h a i r m a n . Do you favor that policy of purchasing $2.5 billion
of 5-year notes?
Mr. H a u s e r . Yes, sir. I think that was a proper move.
The C h a i r m a n . Then you do not favor the policy of bills-only ?
Mr. H a u s e r . I do not favor a policy of bills-only if it is restricted
to this peculiar meaning.
The C h a i r m a n . It is their meaning, Mr. Hauser. That is the point.
Mr. H a u s e r . This term applies to the purchases in the open market
of the Open Market Committee when it is engaged in the process
of expanding or contracting the reserves or the supply of reserves
in the banking system.
The C h a i r m a n . In other words, you say you believe in bills-only
when the Federal Eeserve deals with dealers, but not when it deals
with the Government; is that right?
Mr. H a u s e r . No, sir. I mean that when the purpose of the trans
action is to increase or decrease the supply of reserves I believe it can
be done to best advantage by purchase or sale of bills. This is caused
by at least three factors. One is the bills are short enough so that
buying and selling does not affect the price appreciably.
The C h a i r m a n . Because the total volume is so great?
Mr. H a u s e r . No. I mean because the maturity is so short it is just
a question of decimals in the stated dollar price. I f you were to go
and buy a lot of 30-year bonds you might affect the price by at least
a quarter or a half a point, let us say. But in the case of a bill that
only has 4 weeks to run, it is just pennies in the price.
Secondly, the point that you bring out, there are so many bills
outstanding and they are so similar that buying and selling of bills
1626
EM PLOYM ENT, GROWTH, AND PRICE LEVELS
does not influence the price of a particular issue as it might if the
Federal were to engage in the purchase or sale of an issue of which
perhaps only a billion or a billion and a half are outstanding. There
is not the large floating supply of bonds and notes that there is of
bills.
The C h a i r m a n . I f I may come back to the point I touched on
earlier and bring out the point which I forgot to mention at the
time, I think we can make a very interesting argument and a good
case can be made for saying that the increase in yields on high grade
municipals and on triple-A corporates affected the increase in the
interest rate and the decrease in the price of Government bonds.
It has been some time since I studied the Newtonian principles o f
physics, but as I remember them, Newton based his theory of gravi
tation upon the mutual attraction of matter.
Could you not also say that the prices of other bonds and the yield
on other bonds were affected by the prices of Governments and the
yields on Governments?
In other words, isn’t this a constellation, so to speak, of mutually
interactive securities ?
Mr. H a u s e r . Yes, sir.
The C h a i r m a n . In w^hich the depression in the price of Govern
ments would affect adversely the prices of others and hence send
up their yields as well?
Mr. H a u s e r . There is a constant interplay of the relationship of
yields on the different issues. Any investor who uses all forms of
bonds is constantly on the alert to sell one and buy another if he can
thereby improve his position, get a better yield or whatever advantage
he may be looking for.
The C h a i r m a n . What you say may well be true, and what I suggest
may also be true.
Mr. H a u s e r . Yes. What you suggest is undoubtedly true, sir. I
would like to add to that, that it is not only the price of a given type
of bond that influences the others, but it is all the surrounding eco
nomic circumstances which influence all of them.
The C h a i r m a n . Senator Bush ?
Senator B u s h . Mr. Hauser, have you any general observations to
make that you think would help this committee in connection with
this study of the Government bond market ?
The purpose of these hearings basically in New York is to learn as
much as possible about the operations of the Government bond market.
Of course, the ultimate question is whether any action should be taken
by the Congress that would improve the situation from the public
interest standpoint.
Do you have any observations to make at this time that you think
would be helpful to the committee in that connection ?
Mr. H a u s e r . I would like to touch on the question of the breadth,
depth and resiliency of the market, if I may, in this connection,
because anything that is done in the way of regulation of the Govern
ment bond market and the people involved in it will affect the breadth
of the market.
I believe it is a fair statement to say that the more regulation, the
less activity there is likely to be, or in other words, the less breadth
the market will have. The more difficult it becomes for people to
EM PLOYMENT, GROWTH, AND PRICE LEVELS
1627
deal in Government securities, the less attraction there will be to po
tential dealers or even existing dealers. I f it becomes more difficult
to operate profitably in the Government bond market, I would be
confident that some dealers would drop out of the business.
I am not against regulation in any sense of the word, but I feel that
the impact on the activity and health and soundness of the Govern
ment bond market is a consideration of great importance because it
will have a direct bearing on the manner of handling fiscal policy
and debt management, and will also have a direct bearing on the in
terest cost of the debt.
Senator B u s h . Y ou think it is desirable in the public interest, as
well as that of the Treasury itself, that there be a free, broad, and
active market in Government securities.
Mr. H a u s e r . I do, indeed. The freer it is, I think, the broader it is.
Senator B u s h . The freer it is the broader ?
Mr. H a u s e r . Yes, sir.
Senator B u s h . I gather from that, that fortifies you in your earlier
statement, if I understood it correctly, that if one introduces more
regulation in the form of margin requirements, let us say, where they
do not now exist, that would be one step in the direction of hindrance
or unneeded regulation which would to some measurable or immeas
urable extent hamper a free and active market ?
Mr. H a u s e r . Yes, sir.
Senator B u s h . It might be that much or that much [indicating],
but it would have some effect ?
Mr. H a u s e r . Yes, sir.
Senator B u s h . Therefore, you would be opposed to that type of
regulation or requirement unless it was clearly evident that it was
necessary in the public interest ?
Mr. H a u s e r . Exactly, sir. It is largely a matter of degree. I do
not know how to recommend the degree to which regulation should
be applied. I am sure that very much regulation would be detri
mental. I do not know how far one can go in applying regulation
or how one should go about it. I would only say that I would recom
mend that it be as little as seems to be feasible.
Senator B u s h . Our witness this morning laid some emphasis in
connection with the price of Government bonds on the public’s attitude
toward the Government credit, and suggested that he thought that
if we did not have an orderly management of our fiscal affairs,
including a balanced budget, and perhaps even a surplus in times
of prosperity like this, although he did not actually say that—that
is my language about the surplus—that a failure to attain this orderly
management of our fiscal affairs would have a really adverse effect
upon values of Government bonds and particularly long-term Gov
ernment bonds.
Do you agree with that ?
Mr. H a u s e r . Yes, I do. The appearance o f careful planning and
conservative financing and conservative fiscal policy is certainly
the basis of confidence in the securities. If you have a loss of confi
dence here, or abroad, or both, it will be reflected in the price level o f
Government bonds.
Senator B u s h . Does your business include any business from for
eign countries in the bond markets ?
1628
EM PLOYM ENT, GROW TH, AND PRICE LEVELS
Mr. H a u s e r . Yes, sir. We have direct dealings with banks and
industrial concerns to some extent in, I would say, at least a dozen
foreign countries.
Senator B u s h . Have you noticed any change in the attitude of your
foreign customers toward our Government credits in the last year
or so ?
Mr. H a u s e r . I have had no personal basis for answering that, sir.
Senator B u s h . I am glad to hear that. You have no other special
suggestion to make along the lines of my broad question that you think
might be helpful to the committee, other than what you have said?
Mr. H a u s e r . N o . I think not, sir.
The C h a i r m a n . Congressman Patman ?
Representative P a t m a n . I just want to ask you one question, Mr.
Hauser. You do not think that loss of confidence or lack of confi
dence in the Government or any of its activities caused the long-term
Government bonds to go down in price. You did not mean to say
that?
Mr. H a u s e r . Not at any given moment, sir. I believe that the
cumulative influence of a continuing deficit in our budget has had a
distinct effect on the price of Government bonds downward.
Representative P a t m a n . I thought the yield only was the cause
of that, the fact that interest rates had gone up and these bonds,
most of them being 2y2 percent bonds, just necessarily w€>nt down to
meet the higher interest yield.
Mr. H a u s e r . I would say, sir, that the yield may be the reflection
of a lack of confidence in the credit of the United States. The yield
is also influenced by supply and demand factors.
Here again the deficit is of direct significance in that when we have
a deficit we have to issue additional bonds, which increases the supply.
To take up that additional supply, you have to attract buyers by
offering a higher return.
Representative P a t m a n . I agree with you that deficit financing is
a bad thing. In fact, I wish the Congress in good times would stay
in session until we not only balance the budget but pay a substantial
amount on the national debt. I mean when times are good. I some
how cannot believe that any lack of confidence in the Government
caused by even a deficit as large as we have this past fiscal year would
cause our long-term Government bonds to go down.
I thought they went down only because they had to reflect the
yield of bonds that were currently being issued in interest rates. I
do not think the people in other countries would fail to buy our bonds
on account of any lack of confidence, do you ?
Mr. H a u s e r . I do, sir.
Representative P a t m a n . Y ou think they would ?
Mr. H a u s e r . Yes. This is a very intangible field we are discuss
ing, and you cannot possibly attribute one particular action to this
particular cause. In this field of investment—it applies both to bonds
and stocks—the people who are engaged in it and studying it all the
time are looking ahead. They may be making a wrong guess, but
they are guessing what is going to take place in the future.
The minute they become convinced that there is a trend setting in,
they act on the theory that that trend is going to continue to a point
of danger. The minute they are convinced that the trend is wrong,
they want to be out before everybody else wants to get out.
EM PLOYM ENT, GROWTH, AND PRICE LEVELS
1629
Representative P a t m a n . Am I correct in interpreting your remarks
in meaning, that because of a lack of confidence prompted by deficits
and things like that, the interest rate has been forced upward, and the
interest rate, having been forced upward, the Government bonds
selling for a rate of interest less than the current rate were necessarily
sold at a lower price in order to yield the current rate? So it all
goes back to the lack of confidence or the loss of confidence causing
high interest rates. Is that your testimony?
Mr. H a u s e r . That is one of the factors, sir, as you have stated it,
but that is not the only factor.
Representative P a t m a n . What other major factors?
Mr. H a u s e r . The principal factor is the demand for money.
Representative P a t m a n . If the demand for money causes interest
rates to go up and the interest rates going up causes the 2y2 percent
bonds to go down, where does the lack of confidence come in?
Mr. PIa u s e r . It comes in on the supply side. You have demand
and supply that have to be in balance. When the demand for money
increases, you have to increase the supply. The lack of confidence
works against that increase in supply because funds are not forth
coming if there is a lack of confidence.
I do not say that this has been an established fact. There is no
way to measure it. In terms of theory, a lack of confidence will
reduce the supply of money available to go into any given security.
Representative P a t m a n . Thank y o u , sir. That is all.
The C h a i r m a n . Congressman Widnall?
Representative W i d n a l l . I have no questions at this time.
The C h a i r m a n . Congressman Reuss?
Representative R e u s s . Mr. Hauser, I gather from your last answer
to the questions from Mr. Patman that you are not actually describing
the past period of a year or two when you say that fears of inflation
have been at least in part responsible for the fluctuation downward in
the price of U.S. securities.
Mr. H a u s e r . I did not mention the word “ inflation” at all. I was
confining my remarks to an unbalanced budget or a deficit. I do feel
that this has had some influence, which I cannot measure, on the price
of Government during the past 18 months.
Representative R e u s s . Let me ask you what bad consequences there
are in an unbalanced budget in the minds of knowledgeable investors
other than fear of inflation? That is one of the main reasons I do
not like an unbalanced budget. I thought it was fear of inflation that
is caused by an unbalanced budget.
Mr. H a u s e r . That probably is the end result of an indefinite period
of unbalanced budgets. It is simply not good housekeeping, sir.
Representative R e u s s . The reason it is not good housekeeping is
because indefinitely pursued it does lead to inflation; is that not so ?
Mr. H a u s e r . That is very true.
Representative R e u s s . I f the fears of the consequences of unbal
anced budgets are essentially fears of future inflation, how do you
account for the fact that holdings by investors, both individual and
institutional, of fixed-income securities, have increased in recent years ?
That is to say, taking the total of housing mortgages and corporate
bonds and debentures and shares in savings and loan associations
and other fixed-interest securities, have gone up.
38563— 59— pt. 6B------ 9
1630
EM PLOYM ENT, GROWTH, AND PRICE LEVELS
To me this does not spell any very operative fear of inflation on the
part of the investing public. I am leaving aside the question of
whether they ought to be afraid of inflation and deficit spending.
The question is : were they ?
I put it to you, sir, that this is not really the fundamental factor in
the relatively poor performance of Government securities. Would
you like to comment?
Mr. H a u s e r . Sir, I think I could answer this most simply by just
saying that in spite of the inflationary fears and in spite of the concern
about an unbalanced budget, people want to save. They want to
provide for their future. So they buy insurance. They see it is
going to take twice as much insurance to take care of them in their old
age so they buy twice as much and that puts more money in the hands
of insurance companies wTho can do nothing with it except buy fixedincome securities, and the same applies to savings banks and so on.
I would say all this happens in spite of the fears.
Representative R e u s s . Why do they not buy twice as many U.S.
securities as a further hedge against inflation by this same reasoning ?
Mr. H a u s e r . I cannot answer that, sir.
Representative R e u s s . Let me go into another subject, then. Your
bank, Mr. Hauser, as I understand it, is both a trader for its own
account in U.S. securities, and for the account of a number of cus
tomers ; is that not so ?
Mr. H a u s e r . Yes, sir; except I would take exception to the word
“ trader” simply to clarify the meaning. Let us say we have an invest
ment account in which we place securities for production of income
for our own account and we have a separate department which deals
in or tr a d e s in Government secu rities a m o n g cu sto m ers.
Representative R e u s s . Roughly speaking—and answer this only if
it is a matter of public record— over recent years about how much
of your Government trading or your Government dealing has been
for your own account and how much for the account of customers?
Is it 50-50?
Mr. H a u s e r . N o , sir. The ratio would be very heavily on the side
of the Government bond department. In our investment account we
have relatively small activity, whereas in the dealer department we
buy and sell millions of dollars’ worth of bonds and bills the same
day. We are merchandisers there, and we turn it over as fast as we
can. In the investment portfolio we are buying to hold indefinitely.
Representative R e u s s . Like so many banks, you still retain the des
ignation “bond department” for a desk which, in fact, buys bonds,
certificates, notes, and bills, or any other Government security ?
Mr. H a u s e r . We apply the term “bond department” to these people
who deal in the securities with others. We apply the words “ invest
ment account” or “bank investments” to the portfolio which we hold.
Representative R e u s s . Although the bond department is by no
means restricted to the purchase of bonds. They purchase all sorts
of securities for individual customers.
Mr. H a u s e r . Yes, sir; they handle certificates, bills, notes, bonds,
and agencies.
Representative R e u s s . Y ou do not have a bonds-only policy ?
Mr. H a u s e r . No, sir.
EM PLOYM ENT, GROWTH, AND PRICE LEVELS
1631
Representative R e u s s . It is sometimes said by very respectable au
thorities that the holding of U.S. securities by commercial banKS is
inflationary. By “respectable authorities” I mean President Eisen
hower, former Secretary of the Treasury Humphrey, Secretary
Anderson, Mr. Burgess, et cetera. Is that true or false?
Mr. H a u s e r . An increase in investments on the part of the banks
means an increase in the money supply.
You have an asset on one
side represented by the bonds, and you have a liability on the other
side represented by deposit liabilities of the banks. Those deposit
liabilities are assets of the depositors.
So you have an increase in the money supply and in that respect
it is inflationary.
Representative R e u s s . Would you say that the nub of the question
as to whether it is inflationary or not is whether the increase in the
money supply comes at a time when it is good for the economy to have
an increase in the money supply, and that it is inflationary when it
comes at a time when the money supply should not be increased?
Mr. H a u s e r . I w o u ld s u b m it, sir , it is in fla tio n a r y . It m a y be good
in fla tio n a r y o r b a d in fla tio n a r y .
If it is an in crease in th e m o n e y
s u p p ly , b y m y d e fin itio n it is in fla tio n a r y b ecau se I define in fla tio n
as an in crease in th e s u p p ly o f m o n e y .
Representative R e u s s . Inflation in your book is not necessarily a
bad word?
Mr. H a u s e r . No, sir.
Representative R e u s s . Inflation in your lexicon is what we need
when the money supply needs to be increased and what we do not need
when it needs to be kept intact or decreased.
Mr. H a u s e r . In the sense that inflation is the opposite of deflation,
there are times when it is healthy and helpful to the economy, I
presume,
Representative R e u s s . Let me ask you this question. I was dis
turbed in March when the Treasury in an issue, as I recall, of about
4- or 5-year maturity securities, in allotting subscriptions to various
subscribers, cut down the subscriptions made by so-called real savers,
that is, nonbank savers. I am talking about the ultimate ones.
Mr. H a u s e r . Savings institutions and pension funds.
Representative R e u s s . They cut down the allotment of real savers
in order to give the commercial banks about a third of a billion of
that particular issue. The whole issue was about $700 million. This
disturbed me because I believed some of the utterances of these respect
able authorities about the possible bad inflationary character of bank
holdings of U.S. securities, bad inflation referring to the creation of
this expansion in the money supply at a time when the economy does
not need it.
I was disturbed about that, as I say, because it seemed to me that the
Treasury should first try to place its obligations with nonbank holders.
I took this up with theTreasury and I was told it would be difficult for
them to do that because everyone customarily oversubscribed on these
issues, and hence, they felt they should cut everybody down a bit. I
replied that I thought it might be a good idea if for once they tried
marketing an issue and announced in advanced that nonbank subscrib
ers would, to the extent possible, have their subscriptions met. Then
1632
EM PLOYMENT, GROW TH, AND PRICE LEVELS
banks, to the extent that they wanted to, would come in for the
remainder, if any.
I have not really gotten an answer from them as to why they did
not do that, and I would welcome your comments on the proposition
I put which I will recapitulate.
It seems to me it is sound policy for the Treasury to attempt to place
the maximum amount of new issues in the hands of nonbank holders
and that there is nothing wrong really with the Treasury adopting a
policy of saying that because it is not particularly healthy for banks
to own the national debt that they should come in after real savers
have gotten all that they asked for.
What do you think about that ?
Mr. H a u s e r . I recall the situation that you refer to and it is my
impression that the Treasury, with the help of banking organizations
and life insurance companies and institutions and savings bank groups,
surveyed the availability of funds as a measure of the amount of this
new issue which would go to savings institutions.
It is my impression that they found a fairly good but limited demand
for the issue, an amount which was not as great as the funds which
had to be raised. The conclusion would appear, therefore, to have
been that in spite of the desirability of placing this issue, if possible,
with savings institutions, some had to be sold to banks, because there
was not enough money on hand at the time from savings to take up
the whole issue.
Senator B u s h . I f the gentleman will yield, I would suggest he
pursue this very interesting question, but I think he ought to answer
your question about priority. If I understood your question, it was,
should not the nonbank savers be given priority.
Representative R e u s s . Yes.
Senator B u s h . I did not know whether he got the point about the
priority. I think that is a very important question.
Representative R e u s s . I will press it, Senator. I would say that
as I recall this March issue, the Treasury did markedly cut down the
subscription offer by nonbank potential subscribers and instead
gave it to the banks.
Let me sharpen the question with the help of Senator Bush and ask
you whether you do not agree with me that it would be a better policy
for the Treasury to say very frankly and at the start of these issues,
“ Look, our main object is to place the national debt to the largest
extent possible among nonbank holders. Therefore, while we have
to rely on the banking system to a considerable degree, and wThile we
are grateful for their support, we are telling them and all other pro
spective subscribers right now that nonbank subscribers will be served
first. The debt will be placed with them to the extent it can be and
then the bank subscription will be honored to the extent possible.”
I should think in the light of our effort to combat inflation wherever
possible, that this would be a sound way of managing the national
debt.
Mr. H a u s e r . This suggestion that you make has been used by the
Treasury at times. The Treasury has offered certain issues exclusively
to savings institutions. This goes back a good many years, but there
have been times when no one except certain types of investors could
get certain issues.
EM PLOYMENT,
GROWTH, AND PRICE LEVELS
1633
Representative R e u s s . There are still issues outstanding which are
not bank eligible.
Mr. H a u s e r . They are bank eligible, but they are nonmarketable
issues that were designed specifically for savings institutions. The
Treasury at any time could offer a specific issue to a certain class of
investors and confine it to that class of investors. This, however,
does not make for the best distribution of debt.
I believe—and this is purely a matter of opinion—that it is better
to have some investors of each type participate in a new issue rather
than try to design one issue for a specific class and another for another
class or even to restrict the offering at any given time to one specific
class.
Representative R e u s s . It was just the second that I was talking
about. I was not suggesting that the Treasury get out issues for
which banks are not eligible. I was simply saying that sin ce you
cannot tell until after the marketing how successful it has been that
the Treasury pursues a policy of saying “ R e a l savers will be served
first and satisfied up to 100 percent of their subscription before our
friends the banks have their subscriptions satisfied.”
I gather, however, that you would not approve such a policy.
Mr. H a u s e r . I would not disapprove it. I do not believe it would
accomplish anything, and I do not think it would work as well as
the recently used method. I think what would have happened would
be that the subscriptions from savers, as a class, would have been
much less.
The manner in which Treasury securities have been offered for
many, many years has led to a practice, which is not unhealthy, but
it is a practice, of subscribing for more than you expect to get in cer
tain issues. The Treasury needs an oversubscription to be sure to
place an issue properly. It must then allot to actual bonds on a per
centage basis. I f savers know that they will get 100 percent of their
subscriptions, it would simply tend to reduce the amount of those
subscriptions and then there would presumably have been an amount
left over which would have been allotted to others, including com
mercial banks.
Representative R e u s s . That would be so if the suggestion were
that savers would automatically be allotted 100 percent of their sub
scriptions. That was not my suggestion. My suggestion was simply
that they be allotted a percentage of their total subscription sufficient
to take care of real savers before the banks were allotted any on the
theory that if it is right that bank holdings of the national debt are
inflationary, it would certainly seem to me to be the part of wisdom
to prevent this inflationary situation from arising to the extent that
you do have real savers.
I n o tic e t h a t m y tim e is u p .
P e r h a p s w e ca n r e tu r n to th is la te r .
The C h a i r m a n . I would suggest you go ahead.
Representative R e u s s . I certainly wTant to give you an opportunity
to answer that last.
Mr. H a u s e r . Y o u say they should not be allotted in full necessarily,
but a percentage. Wouldn’t that percentage have to be 100 percent
to make any sense in taking care of the requirements of the investors?
I f it is not 100 percent, sir, I would offer this thought:
1634
EM PLOYM ENT,
GROWTH, AND PRICE LEVELS
The Treasury has no way of accurately determining what the
demand is or may be for a specific issue, and it is therefore helpless
to accept a specific percentage ahead of time, if that is your point.
Representative R e u s s . I did not mean ahead of time. Let us
suppose that the Treasury wants to sell a billion dollars worth of
securities. Let us suppose that real savers bid for $2 billion worth
and banks bid for $1 billion worth, total bid $3 billion.
I would satisfy the real savers 50 cents on the dollar and tell the
banks that you very much appreciate their support, come around
the next time.
The C h a i r m a n . Mr. Hauser, in response to one of my questions,
I understood you to argue that it was the general rise in interest
rates, other than Governments, which caused the yields on Govern
ments to rise in 1958 and hence, the price of Governments to fall.
Did I understand you to say that?
Mr. H a u s e r . In substance, sir. I do not want to quibble over
words, but I want to be sure that I am correctly understood. I would
like to say that the same influence that caused an increase in the
interest rates of all types of obligations also bore on the interest rates
on Government bonds.
The C h a i r m a n . Later in response to a query by another member
of the committee, I understood you to say that it was the fall in the
price of Government securities caused by the fear of inflation which
caused interest rates to rise, and this could only take place through a
fall in the price of Governments.
The question I want to raise is this: Is there a contradiction between
these two statements?
Mr. H a u s e r . I do not believe there is any contradiction, sir. The
yield on any investment is a function of the measure of risk in the
mind of the supplier of the funds. That yield can be influenced by
a great many things. It is influenced by the various items that enter
into the demand and the various items that enter into the supply side.
The fear of inflation is one of the factors that affects the supply
and also the demand for that matter. That is reflected in the yield.
The C h a i r m a n . I believe you defined inflation as any increase in
the money supply. Do you want to hold to that definition of
inflation ?
Mr. H a u s e r . Perhaps I should have said in the sense that I was
using it at the time. Inflation has a great many meanings. It
probably means something different to every individual in this room.
The C h a i r m a n . Y ou know when Pickwick would get into diffi
culty he would always say, “ I am using this term simply in
a Pickwickian sense.”
I want to ask if your definition of inflation is any increase in the
money supply because this is the term which is bandied about a good
deal and it is important to know what it means.
Mr. H a u s e r . In the sense that it is usually bandied about, I would
make an addition.
The C h a i r m a n . What would that be?
Mr. H a u s e r . I would couple with the money supply the supply
of goods and services.
The C h a i r m a n . I think that is a much more correct definition.
Mr. H a u s e r . Yes, sir.
EMPLOYMENT, GROWTH, AND PRICE LEVELS
1635
The C h a i r m a n . I f the increase in the money supply is matched
by a proportionate increase in the quantity of goods and services
produced, so that the net effect is stability in the price level, has there
been inflation?
Mr. H a u s e r . No, s i r ; n o t in th is sense.
The C h a i r m a n . Isn’t that the real sense ?
Mr. H a u s e r . I w o u ld a cce p t th a t.
The C h a i r m a n . I th in k th is would be a v e r y valuable lesson for
many—I do not say all—eastern financial writers. In fact, I would
drop out the word “eastern” and simply say financial writers, and
for many financial experts, because they think that any increase in
the money supply is ipso facto inflationary, even though it is not
accompanied by any increase in the price level.
I think it is proper to stick to inflation as an increase in the price
level and to measure the degree of inflation or the magnitude of in
flation by the degree of increase in the price level.
So when prices are steady,the purchasing power of money remains
the same and there is no change in the value of money, and therefore,
110 inflation. When prices fall, the purchase power of money increases
and we can be said to have deflation; is that not true ?
Mr. H a u s e r . Yes, sir.
The C h a i r m a n . We have heard a lot about the terrors of inflation
and the awful ogre of inflation. Have we had any inflation in the
last year?
Mr. H a u s e r . I d o n o t k n o w th a t I c an a d d a n y t h in g to th e p u b
lis h e d r e c o r d , sir.
The C h a i r m a n .
Mr. H a u s e r . It
What does the public record show ?
would show an increase, as I recall it, of less than
1 percent in the cost-of-living index.
The C h a i r m a n . May I give you the exact figures which are found
on page 23 of the Economic Indicators for July, showing an index
of 123.7, with 1947-49 as the base, in June 1958, 124.5 in June of
1959. This is an increase of eight-tenths of 1 point, or a percentage
increase of six-tenths of 1 percent.
Would you say that was appreciable inflation?
Mr. H a u s e r . Not in the sense of the definition which we have
given to the word.
The C h a i r m a n . And which you thought was the proper definition ?
Mr. H a u s e r . Yes, sir.
The C h a i r m a n . What about wholesale prices? Do you think
those should be considered in the definition of inflation ?
Mr. H a u s e r . Wholesale prices would be another measure o f
inflation.
The C h a i r m a n . On page 24 of the Economic Indicators for July
we have all commodity wholesale prices, 1947-49 equals 100, and in
June of 1958 it was 119.2. For the week ending July 14, 3 weeks
ago, 119.3, or an increase of one-tenth of 1 percent in 13 months.
Would you say that was inflation ?
Mr. H a u s e r . That index does n o t reflect any effects of inflation
during this period.
The C h a i r m a n . That is right. Don’t y o u think that people o u g h t
to be more restrained in their talk about how we are being devoured
by inflation when as a matter of fact we have had stability in the
1636
EM PLOYMENT, GROWTH, AND PRICE LEVELS
price level during the last year or perhaps 13 months? It would be
interesting to see what the figures for July and August are when they
come out.
Mr. H auser . This is a matter o f opinion, but I feel it is necessary
for all of us to holler our heads off about inflation all the time.
The C h a i r m a n . Even though it doesn’t occur ?
Mr. H a u s e r . Even though it doesn’t occur, because the potential
is so great that it could explode at any time if we relax in our dili
gence and in our efforts to hold it down.
The C h a i r m a n . Even though by hollering your heads off, in your
graphic phrase, you weaken people’s confidence in Government bonds
and cause them to buy fewer Government bonds, and thus depress
the price of the Government bonds, and raise the interest rate. It
is still your duty to get to the top of the tallest skyscraper in New
York with a magnified voice and shout your head off on the danger of
inflation ?
Mr. H a u s e r . I think it is very proper to holler about the dangers of
inflation.
The C h a i r m a n . About the reality of inflation ?
Mr. H a u s e r . I don’t think it is proper to get up and say we are
“ going busted.”
The C h a i r m a n . Do you think we should holler our heads off on the
reality of inflation in the last year ?
Mr. H a u s e r . N o , sir. I don’t believe in saying anything that is not
in accordance with the facts.
The C h a i r m a n . The facts are that there has been no inflation in
the last year.
Mr. H a u s e r . That is absolutely correct.
The C h a i r m a n . I f these hearings have done nothing more than this,
to have the eminent financiers of the city of New York say there has
been no inflation in the past year, and prices have been steady, we
will have served our purpose.
Would that the newspapers of the city could hear these winged
words. Would that the life insurance industry could take these w^ords
to heart and cease putting in full-page ads in the newspapers shouting
about the horrors of inflation. Would that the politicians of a certain
political party w^ould stop shouting about inflation, because in so
doing without meaning to do it—and I want to acquit them of any bad
purpose—they help to destroy confidence in Government bonds,
weaken the faith of people in the purchasing power of the American
bond, and decrease the prices of bonds, make it more difficult to sell
bonds and thus raise interest rates.
Don’t you think this calls for moderation, restraint, or a nice
balance ?
Representative W id n all . Will the gentleman yield?
The C h a i r m a n . I would like to have Mr. Hauser answer first, and
then I will yield.
Mr. H a u s e r . Sir, I do not draw the same conclusions that you do
from the concern we have about inflation. I reiterate that I think we
should continue to speak of the dangers of inflation and to recognize
the potential inflation which we are building up under the surface.
The C h a i r m a n . In other words, there is an accumulation of toxic
poisons underneath the surface which have not expressed themselves
EM PLOYM ENT, GROWTH, AND PRICE LEVELS
1637
yet in an increase in the price level, but which will undermine the
health of the body politic in the future.
Mr. H a u s e r . A distinct danger; yes, sir.
The C h a i r m a n . My good friend from Connecticut—may I quote
you on that ?—says, “ Now you’re talking.”
What are these toxic poisons underneath the surface that are build
ing up, and, unless counteracted, will cause the patient to contract a
serious and possibly fatal sickness ?
Mr. H a u s e r . The principal one is the deficit which we experienced
in the past fiscal year.
The C h a i r m a n . That, you know, is over. Curiously enough it was
not accompanied by any increase in prices. The biggest peacetime
deficit in history was accompanied with stability in prices.
Lest any financial reporter, or any member of the opposition party
would say that I declared I favor big deficit as a means of stabilizing
prices, let me say that this is not so, of course.
But it is curious that we have had this huge deficit with no increase
in prices. For the coming year I think it is true that we are going to
balance the budget. In fact, I think the poor Congress which has
taken such a beating from the writers is going to cut the President’s
budget. I think you can carry the message to your foreign friends
who have been so afraid of the instability of the American dollar they
need not be frightened.
We are going to cut foreign aid to such a degree that we will balance
the budget and they need have no fear of stability of the American
dollar.
This should give them a great deal of reassurance.
Will you carry the message to Garcia ?
Mr. H a u s e r . I will be very happy to, sir. Those are very com
forting words.
The C h a i r m a n . I am sure they will comfort the people abroad who
talk to our financial people and are worried about the unbalanced
budget that we have and the deficit that they say is going to come. We
are going to reduce their worries by reducing their aid. This, I know
should make them feel much happier.
I think that is all.
Senator B u s h . In view of the discussion we have just had, I would
like to point out from the same page, page 24, of the Indicator, that
farm products have gone down materially in the year that the Senator
has been talking about, from an index figure of 95.6 to 89.9, which
has been the basic reason that there has been no increase of a material
nature in the cost-of-living index.
As the Senator will see from his chart at the very top of the page
other than farm products and foods, industrial has gone up in the
same 12-month period the Senator has been talking about, in spite of
the fact that during most of that period we had substantial unemploy
ment, and so on and so forth. The farm products picture, as the
Senator knows, has been aggravated by a bad legislative program
which has stimulated the acquisition of billions of dollars’ worth of
surplus food products, and that has had a depressing effect on the
prices.
So I would say primarily if not solely it was due to that very bad
situation that the cost-of-living index has been held down in spite of
the fact that the other-than-farm products and foods have gone up.
1638
EM PLOYMENT, GROWTH, AND PRICE LEVELS
I want to go back just a moment to the Government bond market
because I want to ask you this: I think you have said correctly that
there are various elements which affect interest rates and bond prices.
Supply and demand and various elements that affect the supply and
demand. Confidence is one of them. The general state of business
activity may be another, and so forth, and so on.
But basically Government bonds set the level of the top grade be
cause this is what we call, I believe, undoubted credit as far as dollars
are concerned.
There is no question in the minds of any investor that the Govern
ment bond will pay in dollars. So that is a completely undoubted
credit. They are money-good.
Therefore, if a lack of confidence on the part of long-term investors
for fear of inflation affects the Government bond market adversely,
that in turn affects all other fixed income investments; does it not?
Mr. H a u s e r . Yes, sir; it does.
Senator Busii. I f the A A A undoubted credit is shaken, then that
sets the level and the others take their place in the scheme of things
from the Government bond level; is that not true?
Mr. H a u s e r . Yes, sir. There may be some variation in the relation
ship, but in general terms it is exactly right.
Senator B u s h . Therefore, I come to the point again, I do not feel
quite as untroubled as my delightful friend from Illinois does about
the situation, and I do believe that it is of vital importance that we
restore what confidence has been lost in the Government bond market,
and it is up to the Congress of the United States to take the lead in
that particular effort.
I do very much hope that the people of this country will try to
understand the danger that I believe exists, and try to persuade
Members of the Congress to take this situation seriously, put our fiscal
house in order and keep it under firm control where it belongs, with
the Congress of the United States.
I think you have made an excellent contribution to the deliberations
of this committee, and I compliment you on the splendid manner in
which you have answered the questions today.
Mr. H a u s e r . Thank you, sir.
The C h a i r m a n . Congressman Patman.
Representative P a t m a n . No questions.
The C hx\i r m a n . Congressman Widnall.
Representative W i d n a l l . Mr. Hauser, would you have any records
that would indicate the comparative profits of your own dealings with
respect to Government securities and with other types of bonds ? Do
you find for the long pull that you as an institution do better in
dealing in Government securities or in the other type of securities?
Mr. H a u s e r . That is such a broad question, sir, I have difficulty in
knowing where to start to answer it.
May I point out that we buy both Government bonds and State and
city and municipal bonds for investment, and we also deal in them.
That is, we buy them for immediate resale.
R e p r e s e n ta tiv e W i d n a l l . Y ou d e a l in b o th t y p e s , d o y o u n o t ?
Mr. H a u s e r . Yes, sir. Are you referring to the dealer activities?
Representative W i d n a l l . I am referring to the dealer activities.
I am not talking about one particular situation, but over the long haul.
EM PLOYMENT, GROW TH, AND PRICE LEVELS
1639
What is the comparative profit situation with respect to those
dealings ?
Mr. H a u s e r . In a very general way the dealings in municipal
securities has been more profitable and certainly more regularly pro
fitable than dealing in Government securities. There have been some
years when our Government bond department has had red figures.
Other years have been in the black.
In the municipal activities I can think of only one year when we
had red figures. They have generally been moderately satisfactory
with reasonably regular profitable operations in the municipals.
Representative W i d n a l l . I would just like to make this comment
at this time: I think that because the public at large has become more
aware of the dangers of inflation, that Government spending pro
grams that were poised months ago have been stopped in their track,
and we are getting to the point where we can have a balanced budget.
I am delighted to hear our eminent chairman, Senator Douglas,
say wTe are going to have that balanced budget. But the public has
exerted pressure on the Congress that has helped to hold in check
some of the forces that to my mind would have caused dangerous
inflation.
Mr. H a u s e r . May I ask you a question, sir? Don’t you relate that
fortunate result to the fact that we have been pointing to the dangers
of inflation and the necessity for a balanced budget ?
Representative W i d n a l l . I think that has been very helpful.
Mr. H a u s e r . Thank you.
Representative W i d n a l l . Thank you.
The C h a i r m a n . Congressman Reuss.
Representative R e u s s . Mr. Hauser, you defined inflation as an
increase in the money supply.
In 1953 and 1958, respectively, the Federal Reserve lowered bank
reserve requirements, including the reserve requirements of the central
Reserve city bank in New York, to such an extent that a total of
$4.9 billion new bank reserves was created, permitting an expansion of
the money supply on the order of $30 billion.
Did you holler your head off about inflation as to either of those
Federal Reserve actions?
Mr. H a u s e r . I am afraid my recollection of that particular period
is not very clear, but I will say that I have been concerned about the
inflationary trend in our economy for a good many years. I believe I
was concerned at that time.
I do not say, however, that I was concerned with that particular
move. I do not have a clear enough recollection of the condition of the
economy or the reasons for that particular reduction in reserve
requirements.
Representative R e u s s . Your recollection now is that you did not
publicly, at least, denounce Chairman Martin and the Board of Gover
nors of the Federal Reserve Board?
Mr. H a u s e r . I certainly did not. I can say that, yes, sir.
Representative R e u s s . Could you tell me, Mr. Hauser, in some
detail, the process by which you and your bank in dealing in U.S.
securities gage the^ meaning and significance of Federal Reserve
action ? ^ I am thinking about changes up or down in the discount rate.
I am thinking about open market purchases and sales. I am thinking
about action with respect to bank reserve requirements.
1640
EM PLOYMENT, GROWTH, AND PRICE LEVELS
What significance do you attach to signals of this sort, and how
does it affect the conduct of your own operations?
Mr. H a u s e r . We, of course, study this booklet very carefully almost
daily. Certainly as soon as a new issue conies out we study it and
attempt constantly to follow all the indices of this type to have as
complete an understanding of the state of the economy and the trends
within the economy. We pay particular attention to the figures on
gross national product, personal income, the Federal Reserve Board
index of production, the Department of Labor price indices, figures
on employment, and to the various money rate figures.
We also very carefully follow the published figures, particularly
the weekly figures, which reveal the position of the Federal Reserve
bank and the reserve position of the member banks.
I f there is any one index that we pay particular attention to with
respect to an interpretation of monetary policy, it is the amount of
borrowing by the member banks from the Federal Reserve banks.
Along with this is the adjusted figure which is currently referred
to as net borrowed reserves. This is simply the amount of borrowing
less excess reserves at any given time. That figure, not by itself, but
its trend is to us the most significant indication of the forces at work
and the effectiveness of Federal Reserve policy.
Representative R e u s s . Do you place much weight on information
you and your associates obtain in talking to the Federal Reserve
officials ?
Mr. H a u s e r . We find conversations with the Federal Reserve
people helpful to us in understanding what is going on in the economy.
There is nothing exclusive in this information. It is one of the bits
of information which we put together with information gleaned
from all corners, including discussions with people in all lines of
business, as to how their sales are going, what their operating costs
are, how much inventory they are carrying, how much they are going
to have to borrow from us, and so on.
Representative R e u s s . Perhaps I can best inform myself as to the
way in which you interpret various signals from the Federal Reserve
by asking you about a specific case or two.
In November 1957 the Federal Reserve lowered the rediscount rate
from 3y2 percent to 3 percent, as I recall.
Can you recall what your interpretation of that action was'? What
did that signal to you ?
Mr. H a u s e r . That signaled to us a definite change of policy, and
I believe the same signal was recognized or acknowledged by all
people who keep an eye on these things.
Representative R e u s s . The signal in general terms was that the
Federal Reserve was conveying to the world that a somewhat less
restrictive policy was to be in effect. Is that a roughly accurate
description ?
Mr. H a u s e r . Yes. I would go just about an inch further and
say that it confirmed the fact that there had been a less restrictive
policy, and there was now a move toward ease.
Representative R e u s s . Would you have drawn any different conclu
sion had the Federal Reserve in November 1957, instead of lowering
the rediscount rate from Sy2 percent to 3 percent, which is what it
did, instead conducted its open market operations, or changed reserve
EM PLOYM ENT, GROW TH, AND PRICE LEVELS
1641
requirements in a way to indicate that they were easing the money
somewhat ?
In other words, is there any difference in the kind of signal you
get depending 011 the type of device used ?
Mr. H a u s e r . I wTould say there would be very little difference in
the signal, sir. It wouldn’t have made much sense in the financial
community to have lowered reserve requirements at that time, be
cause that was not needed, as I recall it. The reserve position of the
banks was ample, and there was no reason to increase reserves.
I suppose I could go so far as to say that if reserves had been re
duced the signal would have indicated that a case of panic almost on
the part of the money managers was going on. It would not have
been quite the same signal as the reduction in the discount rate.
Representative R e u s s . In other words, that woud have been a very
very much stronger signal?
Mr. H a u s e r . Yes, sir.
Representative R e u s s . What effect did the receipt of this signal
by you have upon your market action? If you don’t care to talk
about this particular incident, tell me what a similar signal at some
other time might have by way of effect on your market. What does
it make you do when the Federal Reserve indicates that it is easing
things ?
Mr. H a u s e r . As far as the investment account is concerned, there
was very little reason for any change in our market actions. Our
market attitude was somewhat changed in that we felt a little happier
about having better prices on our valuation. As far as the dealer
department is concered, and that is the area with which this inquiry
is particularly concerned, we were very happy to have the opportunity
to step up the volume of our business very substantially. We found
customers of ours all over the country and, in fact, from abroad, more
interested in buying Goverment securities.
Also we had the comfort of a rising market which makes it much
easier to earn the spread which exists between bid and ask prices of
securities. That spread is always there, but in a falling market it is
not there long enough at the same figure to make it possible for a
dealer to consummate both sides of a transaction before the spread
disappears.
Representative R e u s s . In other words, this is a perfectly straight
forward and relatively simple type of reaction. I f the Federal Re
serve indicates that it is going to make credit a little easier, this tends
to make U.S. securities go up in price. Isn’t that about it?
Mr. H a u s e r . Yes.
Representative R e u s s . Other things being equal?
Mr. H a u s e r . And it happens with a rush because all students of
the money market look at the same things, react the same way, and
think the same way. And when a signal is flashed everybody reacts
at once. There was a very quick change and a very sudden rise in
the price level following that announcement.
Representative R e u s s . Thank y o u .
The C h a i r m a n . I understand from my colleagues that they have
no more questions. I have no more questions.
I want to thank you, Mr. Hauser, and your associate, for coming
here this afternoon.
1642
EM PLOYMENT, GROWTH, AND PRICE LEVELS
We will adjourn until 10 o’clock tomorrow morning, and make an
effort to consolidate the afternoon and the morning hearings.
The witness at 10 o’clock is Mr. Maurice Gilmartin, partner, Charles
E. Quincey & Co.; and Herbert N. Repp, president of Discount Corp.
of New York, was scheduled to come in the afternoon.
The chairman will be unable to be here tomorrow because he has a
very important committee meeting in Washington which he must at
tend, but the conduct of the hearing or hearings will be under the
direction of Vice Chairman Patman.
Mr. H a u s e r . Senator, I would like to extend an invitation to any
member of the committee, or your staff, to visit our bond department
and see how we do things.
The C h a i r m a n . I appreciate that but I don’t think many of us,
except possibly the Senator from Connecticut, have money to buy
bonds.
Mr. H a u s e r . Y o u d o n ’t h a v e to b u y a n y .
(Whereupon, at 4:05 p.m., the committee recessed, to reconvene at
10 a.m. Friday, August 7,1959.)
EMPLOYMENT, GROWTH, AND PRICE LEVELS
F R ID A Y , AUGUST 7, 1959
J o in t E
'U .S . C o n g r e s s ,
C o m m it t e e ,
c o n o m ic
,
New York N.T.
The committee met at 10 a.m., pursuant to recess, in room 110,
U.S. Courthouse, Foley Square, New York, N.Y., Representative
Wright Patman (vice chairman of the committee) presiding.
Present: Representatives Patman, Reuss, and Widnall; and Senator
Rush.
Representative P a t m a n . A s our distinguished chairman, Senator
Douglas, would say, if he were here, the time of 10 o’clock having
arrived, the committee is called to order.
We have as our first witness this morning Mr. Maurice A. Gilmartin,
Jr., partner of Charles E. Quincey & Co., of New York.
Mr. Gilmartin, are you ready to proceed ?
STATEMENT OF MAURICE A. GILMARTIN, JR., PARTNER, CHARLES
E. QUINCEY & CO., NEW YORK, N.Y.
Mr. G i l m a r t i n . I am, sir.
Representative P a t m a n . D o you have a prepared statement, or
would you like to make a statement in advance of your questioning?
Mr. G i l m a r t i n . N o, I have no prepared statement, and I prefer
not to make a statement.
Representative P a t m a n . Are you ready to answer any questions
that the members of the committee desire to ask ?
Mr. G i l m a r t i n . I will try my best, within the limits of my ability
to do so.
Representative P a t m a n . Mr. Reuss, you are recognized.
Representative R e u s s . Thank you, Mr. Chairman.
I am very grateful to you, Mr. Gilmartin, for coming here to help
us this morning. I would like to ask a number of questions about
short selling in U.S. securities.
W h a t is th e e x te n t o f s h o r t s e llin g in th e U . S . s e cu r itie s m a r k e t?
Mr. G i l m a r t i n . Mr. Reuss, I have no information on that, nor
would I know where to get such information.
Representative R e u s s . There is no place where it is filed, published,
or kept current, is there ?
Mr. G i l m a r t i n . T o collect the information from all of the dealers?
Representative R e u s s . Yes.
M r . G i l m a r t i n . N o t t h a t I k n o w o f , sir.
Representative R e u s s . It is not like short
sales on the stock market,
where the Securities and Exchange Commission keeps at least monthly
1643
1644
EM PLOYM ENT, GROWTH, AND PRICE LEVELS
records of the short position in all listed stock? There is nothing
comparable to that in the U.S. securities market ?
Mr. G i l m a k t i n . N o t to m y k n o w le d g e .
Representative R e u s s . Having answered me that you simply do
not have access to statistical material on the extent of short selling,
can you tell me anything from your broad general observation ?
Does your firm, if you care to answer, make short sales to other
dealers ; to individuals ?
Mr. G t l m a r t i n . Mr. Reuss, how would you define a short sale in
Government securities ?
Representative R e u s s . I would like your help in defining it. I
guess my idea would be that a short sale would be a transaction
whereby a dealer or individual, seeing that the outstanding market
value of a particular U.S. security was, let us say, 100, and having
a hunch that it is going to go down in value, he borrows a security
of that maturity from somebody who will lend it to him, sells it at
the market, and then attempts to replace it at a lower price, hopefully
90.
I f he guesses wrong and it goes up to 105, he loses. What I am
doing is describing the completion of a short sale in the stock market.
I have assumed, perhaps incorrectly, that this can be done and is
being done in the U.S. securities market. It goes without saying
that short selling in the stock market is perfectly legal and fulfills
a useful function that has been going on since stock exchanges were
invented.
Does this happen in the U.S. securities market as I thought that
it did?
Mr. G i l m a r t i n . I f I understand the way you presented that, you
are assuming that a short sale constitutes the sale of a security for
the future reacquirement of the security at a gain or a loss. Do you
give any consideration in your definition to an offset sale?
A dealer is in the position of having to make a market. His
function is primarily to attempt to accommodate the factors of
demand and the factors of supply as they may arise within a given
market. I f he is forced to accommodate the market by selling a
given issue that he does not have, he will offset that position in turn
by acquiring a distinctly similar security until he can reverse his
position.
Do you consider a sale of that nature a short sale under the defi
nition you have given me of short sales ?
Representative R e u s s . I honestly do not know whether it should
be so considered. But since the purpose of my inquiry is to educate
myself, let me ask you if that kind of offsetting sale occurs ?
Mr. G i l m a r t i n . Very frequently.
Representative R e u s s . This occurs very frequently?
Mr. G i l m a r t i n . Yes.
Representative R e u s s . I suppose that there are no public records
kept on this. Each individual dealer has his own records of the
offsetting sales he accomplishes.
Mr. G i l m a r t i n . A dealer has to run his position with good judg
ment and prudent management. He cannot afford to expose himself
in a manner that is not in consonance with good business practice
or in disregard of his available capital. I f he was consistently
wrong in his judgments, he would not be in business very long.
EM PLOYMENT, GROWTH, AND PRICE LEVELS
1645
Representative R euss . This offsetting sale that you describe does
partake of the stock market short sale that I attempted to describe
a moment ago, does it not, to the extent that it involves a dealer bor
rowing a given security from somebody and selling it ?
The dealer must, of course, ultimately restore an identical security
under the old maxim that he who sells what is not his must go to
prison. I assume that even in an offsetting sale this repayment into the
box must occur.
Mr. G i l m a r t i n . Yes. What could very easily happen is that a
dealer might sell a security at 5 minutes after 10 and have reacquired
that security at 6 minutes after 10 or 11. Would you construe that
as a short sale made for the purpose you described ?
Representative R euss . Certainly not. It is a day-to-day offsetting
transaction even though it does involve technically the borrowing
of a security and a sale which would not otherwise take place were
it not for the desire to offset this.
Mr. G i l m a r t i n . There might not be any borrowing at all. The
dealer might sell that security to accommodate the market and he
reacquires that security on the same day.
R e p r e s e n ta tiv e Reuss. I t m o v es so f a s t t h a t th e r e is n o fid u c ia r y
reason .
Mr. G i l m a r t i n . Physically there would be no short position.
Momentarily there was a technical short position.
Representative R euss . I think you have helped to make me
understand about these offsetting transactions. In addition to these
offsetting transactions, if they are short sales at all, are very technically
short sales ?
Mr. G i l m a r t i n . Yes.
Representative R euss . In addition to those offsetting transactions,
are there the more classic type of short sales in dealer securities?
M r. G il m a r t i n . Y e s.
Representative R euss . The volume of those throughout the entire
market is unknown to you or can you guess at the volume?
Mr. G i l m a r t i n . I have no way of knowing, and a guess would be
an extremely poor one because there are a considerable number of
dealers and others who engage in the Government securities business
and the availability of information of that nature is now available
to any given dealer. The dealer’s knowledge is limited to his own
position.
Representative R euss . Let me ask you this question: In your
opinion, was the accomplishment of short sales either of the classic
variety or of the offsetting technical variety that you have described to
me, did either of those operations play any part in your opinion in
the sharp decline in the bond market of June 1958?
Mr. G i l m a r t i n . I have not had the opportunity to thoroughly
study the joint study of the Treasury Department and the Federal
Reserve. Whether or not the information is contained in that study, I
am not prepared to say. I f it is in there, it would be very interesting.
M y im p r e ss io n is t h a t in th e p a r t ic u la r p h a se o f th e m a r k e t t o w h ic h
y o u h a v e r e fe r r e d , s h o r t s e llin g p la y e d a v e r y s m a ll p a r t in th e e ffect
on th e m a r k e t a n d / o r th e p r ic e stru ctu re.
R e p r e s e n ta tiv e Reuss. I h a v e n o t rea d t h e F e d e r a l R e s e r v e B o a r d
r e p o r t s ectio n on t h is eith er.
38563—59*—pt. 6B-------10
1646
EMPLOYMENT, GROWTH, AND PRICE LEVELS
Do you know offhand whether they queried the dealers as to the
amount of the short position at that time?
Mr. G i l m a r t i n . The information that we were requested to provide
was very extensive, Mr. Reuss, and without referring to the question
naire, which I do not have with me, I would not want to state
categorically whether the question was asked in those terms or not.
Representative R e u s s . I could look it up and find out.
Do you know offhand what types of investors engaged in the classic
sort of short sale operation in the U.S. securities market? You have
already told me that this offsetting trend is frequently used by dealers.
Mr. G i l m a r t i n . Yes.
Representative R e u s s . What other types of investors in U.S.
securities engage in either the classic type or the offsetting type ?
Mr. G i l m a r t i n . Here again, I will have to ask you a question.
A person might sell a given security which he does not possess
and be selling it as a hedge against a security which he does possess.
For any one of many reasons, including tax considerations, lie may
not either wish to sell or be forced to sell the issue which he holds.
A person might have a security, an issue for instance, which he
had the ownership of for a period of 5 months. Let us assume the
security was not selling at a profit. Should the market rise he had
a potential of capturing a long-term gain, but he did not like the then
level of the market. He might elect to sell another security reasonably
comparable to the security he holds, stay short of that security as a
hedge against the security that he owned or held in long position.
Representative R e u s s . In such a case, of course, the total sales
engendered by somebody taking a short position does not exceed the
total sales that would otherwise exist since if they did not make this
short sale they would make a* regular sale. So this type of short
selling does not add to the total amount of sell orders ?
Mr. G i l m a r t i n . I would not think it did; no, sir.
Representative R e u s s . What kinds of investors, if you know, make
either these hedging kinds of short sales in order to avoid certain
tax structures, or for any other reason, and what types of investors
make the remainder of the classic type of short sales ? All kinds, or
are there particular kinds of investors?
Mr. G i l m a r t i n . As a dealer, it would be very difficult for me to
answer that question in such a manner that would be constructively
helpful to the purpose of your inquiry. We do not question the
intent or the purpose^ of a customer when he comes in to.buy or sell
a security. There are no statistics that I know that would reveal the
answer. Any answer that I would give you would be purely
guesswork.
Representative R e u s s . Just one more question.
Are there margin requirements on short sales of U.S.. securities
as there are on long sales?
Mr. G i l m a r t i n . My firm is a member of the New York Stock
Exchange, and the American Stock Exchange. We do not carry
margin accounts for customers. Therefore, we do not in a sense deal
with the customer on a basis that would reveal to us the necessity for
margins in the case of individuals. Fundamentally, margin require
ments on Treasury securities are a flexible matter, depending upon
credit worthiness and upon the length of the maturity of the security
that is offered for collateral to the loan.
EM PLOYMENT, GROWTH, AND PRICE LEVELS
1647
That is a matter that is controlled basically by credit judgment of a
bank officer extending the accommodation. The New York Stock
Exchange is subject to the provisions of rule 325, as amended. It
provides that a member firm carrying Government securities for its
own account, whether the position be long or short, must debit its
capital account to a given percentage of the commitment that it has
in the security. You are familiar with that rule; are you not?
Representative R e u s s . I have heard about it.
Mr. G i l m a r t i n . If you are not, I would be happy to provide you
with a copy of it, sir.
Representative R e u s s . I gather that by and large the same margin
requirements apply to short as to long sales.
Mr. G i l m a r t i n . With respect to the capacity of the borrower, I
would say that is correct.
Representative R e u s s . Thank you very much, Mr. Chairman.
Representative P a t m a n . Since Senator Bush has just arrived, and
he requested that I take my time now, I will do so and interrogate
the witness.
Mr. Gilmartin, the Federal Reserve-Treasury report, volume 2,
shows daily positions for all dealers combined. As a whole, they
started unloading Governments pretty fast in the middle of June 1958.
The question is, Did the small dealers unload the same as the large
dealers? I assume we can have some indication of that by asking
about the profits of dealers. Were the profits of the 17 recognized
dealers larger last year than the year before ?
Mr. G i l m a r t i n . I w o u ld h a v e no way of knowing that, Mr. Patman.
Representative P a t m a n . What about your own firm ?
Mr. G i l m a r t i n . A s far as my own firm is concerned, I would have
to break it down for you and tell you that we had a long-term capital
gain, a short-term capital loss, and an ordinary income-operating
profit.
Representative P a t m a n . What about the small dealer? Did they
come out like the larger dealers did by unloading in June 1958?
Mr. G i l m a r t i n . Would you repeat that, s ir ?
Representative P a t m a n . Did the small dealers come out as well
as the larger dealers profitwise in 1958 ?
Mr. G i l m a r t i n . I could not answer that question very well, Mr.
Patman.
Representative P a t m a n . I realize that you would really not be in
a position to answer it well. Do you advise your customers about the
Federal monetary policy ?
Mr. G i l m a r t i n . Our interpretation of it ; yes, sir.
Representative P a t m a n . H o w do the advisory committees make
estimates to the Treasury of wThat the interest on an issue should be?
Mr. G i l m a r t i n . I a m not a member o f any Treasury advisory
committees, Mr. Patman.
Representative P a t m a n . Y ou are not a member?
Mr. G i l m a r t i n . N o, sir.
Representative P a t m a n . Y ou have a member o f your firm?
Mr. G i l m a r t i n . N o, sir. We are not members of the I.B.A. or
the A.B.A.
Representative P a t m a n . H o w do you feel about oversubscriptions ?
How are they arrived at and why are they oversubscribed on Treas
ury issues ?
1648
EM PLOYMENT, GROWTH, AND PRICE LEVELS
Mr. G i l m a r t i n . I would say that an oversubscription is the result
of the composite judgment of all of those people who express a desire
to acquire the security.
Representative P a t m a n . D o they not normally and almost invar
iably oversubscribe ?
Mr. G i l m a r t i n . I think there have been one or two occasions when
there was a certain degree of apprehension as to the amount of the
oversubscription and the increasing percentage allotment on various
issues has at times caused problems.
Representative P a t m a n . Y o u have direct lines, connecting tele
phone lines, between the 17 dealers. I believe that has been testi
fied to.
Mr. G i l m a r t i n . We have lines to all of the dealers, Mr. Patman.
Representative P a t m a n . And you confer frequently, of course.
Naturally you would.
Mr. G i l m a r t i n . Confer, Mr. Patman?
Representative P a t m a n . I do not mean to say that you are having
understandings or agreements in violation of the law, or conspiracy.
I am not inferring that at all. I am just talking about being in the
same business, you would naturally confer.
Mr. G i l m a r t i n . We are checking one another’s markets; yes, sir.
Representative P a t m a n . That is right. I do not mean that in any
sense in which it would be something bad. In connection with the
Treasury bills and the auction of the Treasury bills, do you have an
estimate of what quantities and classes all the dealers have bids in 5
or 10 minutes after the bidding closes ?
Mr. G i l m a r t i n . I would say within 20 minutes we know pretty well
what the other dealers have bid and the quantities they bid fo r ; yes,
sir.
Representative P a t m a n . H o w do you get that information?
Mr. G i l m a r t i n . Following 1 :30, when the auction bill bid window
at the New York Federal Reserve Bank is closed, and we call the other
dealers and they call us and we give them our bids and they give us
their bids.
Representative P a t m a n . Y o u exchange information?
Mr. G i l m a r t i n . That is correct.
Representative P a t m a n . What percent of the business does your
firm do with other dealers?
Mr. G i l m a r t i n . The percentage of our business with other dealers
relative to our total volume is small. I could not give it to you in
percentage. I f it was essential for your study, I would be glad to
try to have it worked out for you, sir.
Representative P a t m a n . That is not important enough to put you
to the trouble of doing that.
When the Federal Reserve increases the money supply, is there
less business for you and your firm and the dealers if the Federal
Reserve increases its portfolio than if it reduces required reserves of
member banks?
Mr. G i l m a r t i n . State that again, sir, please.
Representative P a t m a n . In other words, if the Fed wants to
increase the money supply, there are two ways that can be done. One.
is by increasing its portfolio by buying Government securities, and
the other is by lowering the required reserves of member banks.
EM PLOYMENT, GROW TH, AND PRICE LEVELS
1649
Mr. G i l m a r t i n . Yes.
Representative P a t m a n . Would you have less business if the Fed
used the first way of doing it, acquiring securities, or would you have
more business ? Would the other security dealers ? In other words, is
a security dealer, profitwise, helped by using the latter method as
compared to the first one?
Mr. G i l m a r t i n . I have to make a distinction here. At this time
we are not a primary dealer in Treasury bills. As long as we have
the bills—usually policy, we would not be affected very much by the
bill volume or the volume of our business would not be affected very
much.
Representative P a t m a n . When you say “very much” would you
define it? Would it be adversely or favorably by the purchase of
securities for the purpose of increasing the reserves ?
Mr. G i l m a r t i n . In our particular case, that is in the case of my
particular firm, Mr. Patman, I am inclined to think that we probably
would be more favorably affected by a reduction in reserve require
ments rather than we would be through the acquirement of bills.
Representative P a t m a n . Would that not be even more so in the case
of the other dealers, whose activities are broader than you say yours
are ?
Mr. G i l m a r t i n . Not necessarily. If a person was a primary dealer
in bills, and it was basically his principal business, I am inclined to
think that he would be in a more favored position at times of purchases
or sales for open market account than he would be by changes in the
reserve requirements.
Representative P a t m a n . I must make a confession, Senator Bush.
Yesterday I visited the Federal Reserve Bank of New York. I visited
it one time before, many years ago. In fact, I sponsored a trip for
Members of Congress to come here. About 75 of us came 20 or 25
years ago and visited the Federal Reserve bank.
Yesterday I w^as back. I was somewhat naive, I guess—in fact,
I know I was, and am—I thought that the banks maintained actual
reserves, that is, the Federal Reserve banks, and when the banks
report $18 billion in reserves of member banks, I thought they had
$18 billion.
I thought when the Federal Reserve Bank of New York reported
that it had $5 billion of actual reserves of member banks that they
actually had $5 billion in Federal Reserve notes, U.S. notes, silver, or
some form of tangible money.
On the theory that wTe have been taught in the books I have read all
the time, that it is an actual reserve like the old gold reserve, and had
to be kept that way subject to call and could not be invested because
it would be causing the reserves to do double duty, therefore, it had
to be maintained in tangible form.
I was told that they have no reserves. That was, of course, not
shocking to me, but almost shocking. I realize that there are ways
of getting around the actual tangible product. But if you wTill
pardon this statement of experience, when I was district attorney in
Texas, a bank robber using the old way of robbing a bank with a gun
drove up in front of a bank in a country town and went into the bank
and held them all aside and threatened to kill them and raked up
all the money and put it in the bag and ran with the bag and put it
in his model T Ford and left for the river bottom.
1650
EM PLOYMENT, GROWTH, AND PRICE LEVELS
They finally caught him. When they surrounded and caught him,
he had clutched in one hand a newspaper clipping from a local paper
which showed that bank had in actual cash $50,000, but he had been
misled and deceived because they had only $300 or $400. He had a
real complaint.
I do not say I have that type of complaint, because I know no one
has robbed the Federal Reserve Bank of New York. I am not charg
ing anyone with doing it. I was surprised that they have no reserves
of any kind whatsoever and that $18 billion is a fiction and that $5
billion is a bookkeeping operation for the Federal Reserve Bank of
New York.
I just wonder if the people who have been accusing some of us of
wanting to do things that would result in printing-press money—
if they are not the ones who are actually using the printing-press
money.
Senator B u s h . Y o u have been familiar with the fact that the money
supply is made up of two kinds of money. One is check money and
the other is currency.
Representative P a t m a n . That is right. We a lso have a different
form of money that is reserved that is not supposed to be used as
checkbook money. It is not supposed to be in circulation. I f I
understand it, it is reserves. Here we have no reserves.
Senator B u s h . What is your conclusion about that?
Representative P a t m a n . The conclusions that the people who have
been accusing others of resorting to printing-press money are them
selves using printing-press money because if one of these banks should
have a run on it, which they are not going to have—“ runs” are out
moded, I know that—and they wanted a million dollars from the
Federal Reserve Bank right quick on its reserves, they would have
to start the printing presses and run off that million dollars and send
it to the bank, unless they already had it printed.
Senator Busn. No.
Representative P a t m a n . How would they do it ?
Senator B u s h . The Federal Reserve would give it to them. I f
they did not have it, they could get it. They could actually get it
from the Bureau of Engraving and Printing. They have the legal
authority.
Representative P a t m a n . I say they have the legal right to d o it.
But they are using printing-press money.
Senator B u s h . May I say to the gentleman that is very interesting;
but what you are saying, if you carried it to the extreme, is that we
would have to abolish all check money.
Representative P a t m a n . No. I am talking about a different thing.
Senator B u s h . I f the Government were to borrow some money on
short-term paper, as they do now, they give the notes to the bank and
the bank credits their account. That immediately increases the money
supply. What you say is that we should not do that.
Representative P a t m a n . N o . I am saying we should do it. I a m
for the Federal Reserve System. I am not against it. I am for it.
I agreed with the Senator when he made a very fine speech on the
Senate floor some few months ago in which he outlined the real print
ing-press money, which is created as the Senator has now suggested.
Where you go into a bank and sign a promissory note and are given
EM PLOYM ENT, GROWTH, AND PRICE LEVELS
1651
credit for so many dollars in the amount of the note, that is really
creating money. That is printing-press money.
Senator B u s h . Adding to the money supply.
Representative P a t m a n . Yes. Here is an entirely different case, as
I see it, Senator. This involves reserves. We have a Reserve System
which I am for, which is good. We have country banks that can make
loans and investments equal to, say, 11-to-l on their reserves, and other
banks a lower percentage, and the central Reserve city banks for the
next 3 years a lower percentage, and then the average is about 7-to-l
of those categories of the three types of banks on demand deposits.
On time deposits, uniformly it is 5 percent. That is for all classes
of banks. So these reserve requirements are different for the different
banks. They can create a different amount of money for the different
banks. That is all right. I am not objecting to that.
But they should pay on something that is tied down that is not
subject to check, that is not subject to investment. It is tied down just
like the old Goldsmith gold dollar was tied down when he sold receipts
based upon that gold dollar.
Senator B u s h . Is it not true that the Federal Reserve notes are tied
to the gold supply?
Representative P a t m a n . The Federal Reserve notes in circulation
are. There are only about $26 billion or $27 billion of Federal Reserve
notes in circulation. The remainder, up to about $31 billion or $32
billion, is represented by U.S. notes and silver and minor coin.
Senator B u s h . I f there was a need for more currency and the gold
supply permitted it, they could increase the gold notes outstanding.
They have to have 25 percent reserve.
Representative P a t m a n . That is right. Under the present law, 25
percent in reserve of the notes in actual circulation, but not on the
checkbook money.
My time has expired, Senator, and I yield to you.
Senator B u s h . I am overwhelmed and somewhat frightened by
your discovery, Mr. Patman, but I hope you are not going to change
the System in a hurry because there are an awful lot of people and an
awful lot of deposits involved in this situation.
I would like to change the subject, Mr. Chairman, to go back to
some discussions yesterday regarding the profits and losses on the sale
of securities by the banks.
I believe that the acting chairman mentioned that himself; and also
Senator Douglas spoke of the figure of $681 million that represented
the profits taken on securities in 1958. So I have gotten together some
figures on that which confirm what you said about the profits in 1958
of $681 million.
My figures also show the losses and they show the profits and the
losses from 1950 through 1958. I think as long as this matter came
up that it would be appropriate to put this table in the record and I
would like to have the information checked by members of our staff
and then have it appear in the record, if possible, at that point follow
ing this discussion yesterday.
Representative P a t m a n . Without objection, it is so ordered. I
think it would be worthwhile.
(The table referred to appears on p. 1603.)
1652
EM PLOYMENT, GROWTH, AND PRICE LEVELS
Senator B u s h . For the information of the Committee, the profits
that the banks took in that period all came in a 3-year period. There
were 6 years in which they actually lost on their transactions in securi
ties. So that the net result of the 9 years showed total profits of $989
million and losses in 6 years totaling $831 million. So that over the
9-year period, the profits amounted only to $158 million, which I think
is a little different picture of that situation than we had in mind.
I would like to be checked. I would like to have these figures
checked and put in the record.
Representative P a t m a n . With the understanding that any member
can elaborate on it at the same point if he desires.
Senator B u s h . Absolutely. I am sure these figures are right because
they are taken from the same source that the $681 million figure came
from.
Representative P a t m a n . I do not question the source.
May I invite your attention to the fact that the main earnings of
banks on the sale of securities that we are talking about were 1954,
just after the depression or recession in 1953, when the banks5earnings
were $424 million, I believe, and 1958, just after the recession year of
1957,when they ran to $681 million. There seems to be some relation
ship to the recession preceding the year in which the large profits w^ere
made.
Senator B u s h . I do not know that has been proven at all. I do
not know what the significance of it is anyway. What I think is of
major importance is the fact that over the years—you cannot judge
these things for 1 year because circumstances may occur, as one of the
witnesses said yesterday, which a bank may have planned its portfolio
for years ahead and something occurs that possibly they did not fully
foresee, so it changes their policy and they make some sales and take
some profits.
But in the next 2 or 3 years they may have been taking losses. In
9 of these years we are talking about, 6 years were years in which they
took losses and only 3 in which they took profits.
Representative P a t m a n . The point should not be overlooked,
Senator, that in 1953 the bond prices went way down. Whether they
were forced down or not, I do not know. The banks acquired these
bonds. When they went up in 1954, they sold them and made the
enormous profits.
In 1957 the bonds went down again, and they acquired bonds, and
when they w^ent up in 1958 they had to sell them in a very short period
of time. They happened to sell them at the right time. They made
50 percent more than they did in 1954.
T h e p o in t, I th in k , i f th e r e is a n y , is th e h u g e p r o fits t h a t a re m a d e
b y th e se g y r a t io n s o f th e m a r k e t in U . S . b on d s.
Senator B u s h . I do not think you would call $158 million of profits
taken over a 9-year period by all banks insured by the Federal Deposit
Insurance Corporation as a tremendous profit.
Representative P a t m a n . That is not the point, as I see it. That
was over a long period of time when they made no profits at all. The
major point is that they do not make a profit over a long period of
time, but all at once the bond price went down in 1953 and up in 1954,
and they made huge profits.
EM PLOYMENT, GROWTH, AND PRICE LEVELS
1653
In 1957 they run down and they buy them up and they make huge
profits in 1958 by selling over a short period of time.
Senator B u s h . A s long as they are taking losses in more years than
they are taking profits, I am sure you would not forbid them from
taking profits at the proper time. They would go out of business if
they just took the losses.
Representative P a t m a n . N o . I think it is interesting to examine
the situation and see if there is a possibility of the market being forced
down in certain years to a low- level for the purpose of acquiring huge
profits.
Senator B u s h . I would agree w^e should certainly find that out. I
cannot believe it would be in the interest of the banks and their deposi
tors, which is their primary concern, to participate in any action which
would force prices down on securities which they own and which pro
tect their deposits. It would seem that would be very much against
the public interest.
Representative P a t m a n . I agree it wTould be against the public
interest.
Senator B u s h . I yield the floor.
Representative P a t m a n . Mr. Widnall ?
Representative W i d n a l l . I have no questions.
Representative P a t m a n . I will state another surprise I had at the
bank yesterday. It is in the spirit of automation and things that are
happening now that are new.
When I was over there more than 25 years ago, I was impressed by
seeing in the bond room—and they did not have so many bonds then—
a lot of people engaged in clipping coupons and getting ready to col
lect the money from the Treasury.
Yesterday I was over there and asked to see the actual portfolio
of $25,900 million in Government securities that they hold here in the
New York Federal Reserve Bank for themselves and the other 11
regional banks, and that portfolio was about that high [indicating].
I took one of the bonds, and very much to my surprise, which is
all right—it is in the spirit of the way things wTere done—that bond
was $500 million. I had never seen a $500 million bond. The cou
pon on it was $9,375,000. So the $25 billion plus bonds were a stack
about that high, about 8 inches, which is no particular interest but
shows that the Federal Reserve is keeping up with the times, which
we are all proud of, but it is so different than it was when I was here
more than 25 years ago. However, they actually had those bonds.
It was not like the reserves, which were not there.
S e n a to r B u sh . W h y d id t h e y c h a n g e th e sy s te m ?
R e p r e s e n ta tiv e P a t m a n . I t is p e r f e c t ly reaso n ab le.
T h e T reas
u r y is c o o p e r a tin g w it h th e m , as i t sh o u ld .
T h e y issu e th ese la r g e
p ie ce s to ac co m m o d a te th e F e d e r a l R e se rv e .
Senator B ush . T o sim plify the procedures.
R e p r e s e n ta tiv e P a t m a n . Y e s ; a n d to m a k e i t easier f o r b o th th e
F e d a n d th e T r e a s u r y .
I t h in k it is a v e r y fine t h i n g to do.
B u t it
is r a th e r unusual to h a v e a $500 m illio n bon d .
I do n o t t h in k i t
c o u ld be ca sh e d in m a n y p la ce s.
S e n a to r B u sh . M r . G il m a r t in w o u ld p r o b a b ly b u y i t i f t h e y wanted
to s e ll it.
M r . G i l m a r t i n . T h a n k y o u v e r y m u ch .
1654
EMPLOYMENT,
GROWTH, AND PRICE LEVELS
Representative P a t m a n . What is the smallest amount in which
you trade?
Mr. G i l m a r t i n . One bond. I might say in some securities it is
$100 apiece [denomination].
Representative P a t m a n . Whatever the bond is ?
Mr. G i l m a r t i n . I beg your pardon ?
Representative P a t m a n . Whatever the bond happens to be? You
have no limitation ?
Mr. G i l m a r t i n . N o , sir; none other than available denominations.
Representative P a t m a n . D o you obtain some loans from life
insurance companies ?
Mr. G i l m a r t i n . Loans from life insurance companies ?
Representative P a t m a n . Y e s , sir.
Mr.
G ilm a r tin .
T o my knowledge, we have never made one.
Representative P a t m a n . Have you ever asked the Federal Reserve
to make you a repurchase agreement ?
Mr. G i l m a r t i n . Yes, sir.
Representative P a t m a n . Did they grant your request ?
Mr. G i l m a r t i n . It is dependent very largely on their requirements
at a given time. As I explained before, Mr. Patman, the firm of
Charles E. Quincey & Co. is not a primary dealer in Treasury bills.
In these circumstances, it would be expected by us that such accom
modations as the Federal wished to grant under repurchases would
first be extended to the primary dealers, and, secondly, if it fitted the
operation in which they were engaged at the time to go beyond those
dealers, I am sure the accommodation would be available to us.
Representative P a t m a n . Could you give us an estimate of the
percentage of your business that is done by, first, commercial banks;
next, insurance companies; and next, investment corporations ?
Mr. G i l m a r t i n . A s members of the stock exchange, I would have to
tell you sir, that we also do a stock business. Not a margin business,
but a stock commission business. Without examining our records,
and I would be glad to do this if the committee would like it, it would
be very difficult for me to estimate with any degree of accuracy the
percentage of business done by the categories of investors that you
have named.
There are so many other classes of investors that would have to be
included, sir, to have the figures meaningful and significant, that I
think I might be remiss to just guessing on a few.
Representative P a t m a n . The chairman intends to send out a ques
tionnaire, I think, to the dealers and I would suggest to him that he
put this on the questionnaire and save you some trouble on that. It
will be more specific. Mine is a little too general, I admit. It will
be more specific to make it easier for you.
Senator B u s h . Would the Senator read that question, not that I
object?
Representative P a t m a n . Yes. Giving an estimate of th e percent
age of his business that is done by commercial banks, by insurance
companies, and by investment companies.
Mr. G i l m a r t i n . Again, Mr. Patman, I would like to say to you,
sir, that my figures might not be compatible with others for the simple
reason that we are dealers in U.S. securities and not primarily dealers
in Treasury bills. We specialize to a large degree in obligations of
the agencies and instrumentalities of the U.S. Government.
EM PLOYMENT, GROWTH, AND PRICE LEVELS
1655
Of course, when we think in terms of Government securities market,
we think of those securities as a component part of it and not isolated
from it.
Representative P a t m a n . Yes, sir. Are you a member of th e
Treasury Advisory Committee or any member of your firm?
Mr. G i l m a r t i n . N o , sir.
Representative P a t m a n . Do dealers have superior knowledge of
trends in corporates and noncorporate liquidity ?
Mr. G i l m a r t i n . I think the dealers in Government securities—I
know this is true of my firm and I presume it is true of all other firms
—follow all information publicly available with respect to the Treas
ury, the Federal Reserve, the nonfinancial corporations, the commer
cial banking system, the savings bank industry, the savings and loan
industry, the agencies of Government, as closely as we can follow them.
It is essential.
Representative P a t m a n . I suppose you interview people in all
these groups and different corporations in order to get the firsthand
information.
Mr. G i l m a r t i n . N o , wre do not interview the corporations. We
make offerings of securities to them or we make bids to them for secu
rities. That is talking with their treasurer’s department. It would
be most infrequent that we would do an analysis of that corporation
from the point of view of trying to figure their flow of funds.
We would try to be familiar with their tax and dividend require
ments because those would be important maturing dates for them and
we would wTant to take care of their required commitments.
Representative P a t m a n . Did the professionals anticipate the down
ward trend in 1957 ? Did they think it was correct to increase the
rate in August 1957? Did they do well in forecasting the revival
in April and May of 1958? Would you like to answer separately?
Mr. G i l m a r t i n . Yes.
Representative P a t m a n . Did the money market professionals
anticipate the downturn in the economy in the fall of 1957 ?
Mr. G i l m a r t i n . Not until after August of 1957.
Representative P a t m a n . Did they believe it was correct to raise
the discount rate in August of 1957 ?
Mr. G i l m a r t i n . I can only speak for myself. At the time I
believed explicitly so. In retrospect, it might seem that the timing
could have been better. But a decision has to be made at a given
moment. It is unfair to be a Monday morning quarterback.
Representative P a t m a n . Did you, as a group, do fairly well in
forecasting the revival in April and May of 1958 ?
Mr. G i l m a r t i n . The revival of the economy in April and May of
1958?
Representative P a t m a n . Yes.
Mr. G i l m a r t i n . There again, sir, if you will permit me the oppor
tunity to explain; in the Federal Reserve index you had a 1-point
improvement in May over April, and a 1-point improvement in June
over May. The figures for the month of June obviously did not
become available until July. There were a great many of us that
were not convinced that the business picture had turned definitely
until late July or perhaps very early in August of 1958. Isolated
surveys or statistics indicators had been noted but earlier were not
deemed conclusive.
1656
EM PLOYM ENT, GROWTH, AND PRICE LEVELS
I do not think that all dealers acted the same. I think some dealers
maj- have liquidated a material part of their positions for tax consid
erations or other reasons, such as their reading of the economy and
the action of the long bond market at the end of April and the first
part of May. I do not think all did the same thing.
When the Treasury came to the market in June, I think the business
climate at that time, or the turn in it that you are now referring to, w^as
not generally perceived. I f it had been, I do not think that the
Treasury would have received subscriptions totaling $7,400 million
to an issue of which the preliminary estimates of distribution ran
between $3 billion and $3,500 million.
Representative P a t m a n . In the early months of 1958, the Fed
lowered reserve requirements and bought securities. What was your
interpretation of this action? What did you do in the market fol
lowing this action? Would you have acted differently if the Fed
had increased member bank reserves solely by open market purchases?
What was your interpretation of this action, that is, when the Fed
lowered its reserve requirements in the early part of 1958? What
was your interpretation of that action ?
Mr. G i l m a r t i n . That the decline in the economic climate, or in
other words the recession, would tend to deepen. It was necessary for
them under the circumstances, as they have done other times in the
past, to provide a cyclical remedial action.
Representative P a t m a n . You, of course, acted accordingly in the
market with your own firm?
Mr. G i l m a r t i n . Yes, sir.
Representative P a t m a n . Would you have acted differently if the
Fed had increased member bank reserves solely by open-market
purchases ?
Mr. G i l m a r t i n . No, sir; I think not.
Representative P a t m a n . H o w would you have acted then ? What
would have been your action? Just the reverse?
Mr. G i l m a r t i n . In both instances we are talking about the increase
in the available money supply?
Representative P a t m a n . Yes.
Mr. G i l m a r t i n . In either case we would have interpreted that as
a continuing bearish outlook on the economy and we would have inter
preted that as a lesser demand for funds and, therefore, a greater
demand for investment securities, and to provide the supply that we
later would be expected to make to our customers and to the market
generally, we would have increased our positions.
Representative P a t m a n . Would you like to make any statement on
your own before concluding your testimony ?
Mr. G i l m a r t i n . There are two things I would like to discuss, Con
gressman. The first, in yesterday’s discussion, the chairman laid
great emphasis on what had happened to the increase in the consumer
price index and the wholesale price commodity index in the last year—
a period of tightening Federal Reserve policy.
The chairman did not go back to the date upon which the index was
based. He did not take much significance from the small percentage
change that occurred last year, and he ignored the significance in the
erosion of the dollar in terms of the increase in prices from the date
of the concept of the index or the base date of the index (194749 = 100) to the present time.
EM PLOYM ENT, GROWTH, AND PRICE LEVELS
1657
I do not think that we can take any isolated period, sir, and be
considered objective. I think if we are examining a situation of
this nature, we must look at it over an entire period and find out the
impact on all of the people in the country over the entire period.
I f the decline in the purchasing power of the dollar over the entire
period is measured, and is assumed to be roughly just over 50 percent,
I think that we do have to pay a considerable amount of attention
to the continuing threat of inflation and to any further erosion of the
purchasing power of the dollar.
Another question I would like to ask, sir. I heard some figures
recited yesterday—it may have been yesterday or the day before—
of the comparison of the total volume on the New York Stock Ex
change in dollar units and the total volume of trading in the Gov
ernment securities market.
I would like to ask the committee member who prepared those
figures for you whether they were on a comparable basis? I do not
wish to make a categorical statement, but I believe when you meas
ure stock exchange volume, a purchase and a sale of 100 shares of
stock, is reported as 100 shares not 200. When the dealers report
their trading volume in Government securities, a purchase of $100,000
par value and an equivalent sale is reported as $200,000 par value.
It is conceivable that relatively the magnitude of the dollar figure
you have used to show the volume of trading in Government bonds
has the possibility of being in error by as much 50 percent.
Representative P a t m a n . Your suggestions are appreciated. W e
will look into that carefully. Senator Bush ?
Senator B u s h . Just one question in line with what you are just
talking about. Your firm is a member of the exchange?
Mr. G i l m a r t i n . Yes, sir.
Senator B u s h . I was not here if this question of trading on the
New York Stock Exchange in Government bonds has been discussed
before this committee.
Representative P a t m a n . Briefly. I think Senator Douglas men
tioned it very briefly.
Senator B u s h . Just to develop the point, one sees that the volume
of Government-bond trading on the New York Exchange is very
small in relation to the total volume of the market daily.
Mr. G i l m a r t i n . That is right.
Senator B u s h . For the record, will you tell us why you think
that is?
Mr. G i l m a r t i n . Senator, you ask me a question that I am very
much interested in. I have explored this problem many times.
At one time I was an active member of the New York Stock Exchange
from the year 1931 to the year 1937. During those particular years
much of the buying and/or selling for Treasury investment account
and/or open-market account was conducted on the floor of the Stock
Exchange.
Senator B u s h . On a commission basis?
Mr. G i l m a r t i n . On a commission basis. The economics of the
business itself eliminates the trading of bills, certificates and notes
on the floor of the stock exchange. I am sure you appreciate that the
differential of an 0.01-percent discount on a 91-day bill is 2y2 cents per
$1,000 par value, or $25 per million. It would be a little difficult to
interpose a commission fee and not adversely affect the yield or dis
1658
EM PLOYMENT, GROWTH, AND PRICE LEVELS
count value of that bill rather materially. It would become a less
worthy investment or a less attractive investment.
The same condition exist as we move into the certificates of indebt
edness and as we move into the notes. The only prospect that I can
see for use of the so-called auction market—and I have often said that
I thought it was worthy of further exploration—would be in its use
wTith respect to long-term Government bonds in this area. The
significance of ti e commission has less impact. “ The Treasury-Federal
Study of the Government Securities Market,’’ part I, pages 93 and 94,
contains interesting considerations on the subject.
Senator B u s h . Does the size of the commission authorized b y the
New York Stock Exchange forbid cutting that commission?
Mr. G i l m a r t i n . The New York Stock Exchange has no commis
sion rules on Government securities. They are subject to mutual
agreement.
Senator B u s h . A member can charge whatever he wants ?
Mr. G i l m a r t i n . That is correct. But it costs money to do
business, sir.
Senator B u s h . Yes. It is the cost of the transaction that forbids
more trading on the stock exchange in Government securities. Is
that a fair statement ?
Mr. G i l m a r t i n . I would like to express it slightly differently.
It would be the diminution of yield on any short-term security occa
sioned by the interjection or imposition of a commission. Is that
clear ?
Senator B u s i i . Yes, it says the same thing in a different way,
doesn’t it, which is all right with me.
Obviously you cannot do this exactly, but would you say that 5,
10, or 1 percent of the daily trading in Governments as a whole was
done on the board of the different stock exchanges vis-a-vis the
dealers’ markets ?
Mr. G i l m a r t i n . It would be a rare occasion in my opinion where
more than a fraction of 1 percent would be done on the floor of the
stock exchange.
Senator B u s h . Less than 1 percent ?
Mr. G i l m a r t i n . Yes.
Senator B u s h . That would be normal ?
Mr. G i l m a r t i n . Yes.
Senator B u s h . That is all, Mr. Chairman.
Representative P a t m a n . Are there any other questions, gentlemen;
if not, thank you very kindly. The testimony will be furnished to
you in the next couple of days and if you desire to extend your remarks
like Members of Congress extend their remarks in the Record, you are
privileged to do so and to clarify your answers.
Mr. G i l m a r t i n . Thank you very much.
I appreciate this opportunity to have testified and also the courtesy
you have extended to me.
Representative P a t m a n . We appreciate your appearance.
Mr. G i l m a r t i n . Thank y o u , sir.
EM PLOYMENT, GROWTH, AND PRICE LEVELS
1659
STATEMENT OF HERBERT N. REPP, PRESIDENT, DISCOUNT CORP.
OF NEW YORK; ACCOMPANIED BY ROBERT M. COON, VICE PRESI
DENT AND TREASURER; AND ROBERT H. BETHKE, VICE PRESI
DENT, DISCOUNT CORP. OF NEW YORK
Representative P a t m a n . Mr. Repp, you may have your associates
accompany you, sir, if you desire.
Mr. R e p p . Thank you very much.
Representative P a t m a n . Y ou may identify them after you identify
yourself, please.
Mr. R e p p . Thank y o u .
Representative P a t m a n . I understand you have a prepared state
ment, which is all right. We are glad to have you and we are glad to
have any statement you desire to make. You may proceed in your
own way, after identifying yourself and your associates.
Mr. R e p p . My name is Herbert Repp. I am president of the
Discount Corp.
Mr. Robert Coon is vice president and treasurer of our corporation,
and Mr. Robert Bethke, on my right, is also a vice president.
I have just identified myself as president of Discount Corp. of New
York, one of the primary dealers in U.S. Government securities. I
appear here today as a witness before the Joint Economic Committee
in response to the invitation of Senator Douglas, chairman of that
committee, to discuss in practical terms the operation and the effects
of the Government's monetary, fiscal, and debt management policies.
I should warn you at the outset that I am not an economist. My
area of competence—or professional experience—lies in the markets
for bankers acceptances and U.S. Government securities. It is pri
marily as a practitioner in these specialized sectors of the money and
capital markets, viewing the areas of your present concern from the
operating level, that I hope to he able to assist in the committee’s
current inquiry. Because so much able work has already been done
in these areas by congressional committees, economists and others (in
cluding the current Treasury-Federal Reserve study of the Govern
ment securities market) and because of your emphasis on the practical
or operational aspects of the matters in which you are interested, I
believe that direct interrogation by you may be the best way to arrive
at the answers you are seeking.
W i t h y o u r p erm issio n , I w o u ld lik e , h o w e v e r , to co m m e n t b r ie fly on
th e o r g a n iz a tio n o f D is c o u n t C o r p . o f N e w Y o r k a n d in d ic a te th e c u r
re n t ro le o f th e d e a le r in th e o p e r a tio n o f th e m a r k e t fo r U .S .
G o v e r n m e n t secu rities.
Discount Corp. of New York was formed late in 1918, and opened
for business on January 2, 1919. It was created to perform in this
country the counterpart of a function that had long been performed in
London by the discount houses, operating at the center of the London
money market. Because of the character of its intended operations, the
corporation was accordingly chartered under the investment company
article of the New York State banking law, and thereby became, and
since has been, subject to periodic examination by the State supervi
sory authorities. Prior to World War I and for some years there
after, the New York money market was largely confined to call loans
secured by stock market securities which were essentially illiquid.
1660
EM PLOYMENT, GROWTH, AND PRICE LEVELS
During this period, the lack of facilities for the financing of trade—
both domestic and international, even for American account-—required
the use of the London money market.
The passage of the Federal Reserve Act in 1913 encouraged the
banks in this country to create acceptances by which domestic and
international trade might be financed. The creation of acceptances,
however, first required the development of an open money market in
which such paper could be traded. Through their early open market
activities, the Federal Reserve banks attempted to foster the devel
opment of a discount market for self-liquidating paper by increasing
the use of dollar drafts.
It was to assist institutionally in the promotion of such a market
for banker’s acceptances that Discount Corp. of New^ York was
founded. It was the hope and expectation that the corporation could
thus promote a money market vehicle that would be useful to both
borrowers and lenders as well as the Reserve System, and thereby
contribute to a better developed money market. Other tasks and re
sponsibilities soon developed for the corporation, and the nature of its
activities broadened in response to the need for an efficient trading
mechanism for Government securities.
Prior to the First World War, in 1917, the outstanding public debt
totaled less than $1 billion, and consisted mainly of Treasury bonds.
But following the entry of the United States into the war the com
plexion of the market changed as the public debt increased sharply,
reaching a peak of $26 billion in August 1919. By the early 1920’s,
the need for a free market in Government securities to facilitate the
absorption of Liberty bonds was clearly recognized.
In the light of this need on the part of the Treasury, and with the
growing interest of the Federal Reserve System in Treasury obliga
tions as a medium for open market operations, a dealer market began
to assume a new importance.
Along with this development a new area of operation—trading in
Government securities—opened up for the corporation. As the debt
subsequently grew in size and money market significance during the
ensuing years, trading in Government securities became increasingly
specialized in an over-the-counter market among dealers.
Throughout its 40-year history, the corporation has functioned
exclusively as a dealer in banker’s acceptances and U . S . Government
securities. With the rapid growth in the public debt and the attend
ant increase in importance of Treasury obligations in the overall
structure of the money and credit markets, trading in Government
securities gradually became the corporation’s major activity. It is
now active in the creation and maintenance of markets for all issues
of outstanding marketable U . S . Government securities regardless of
term. It operates only from its office in New York, although it services
its customers from coast to coast by telephone, supplementing those
calls with periodic personal visits by representatives of the firm.
The market for Government securities is now the most important
and largest of the specialized subdivision of the over-the-counter
market as a whole. It exists and is given substance through the
operations of dealers, some of which are banks with bond departments,
specializing in Government securities.
EM PLOYMENT, GROWTH, AND PRICE LEVELS
1661
The present market structure has evolved, in a framework of a free
enterprise economy, into an efficient mechanism for insuring contin
uous markets in outstanding Government securities. Although
primarily an institutional market in which the bulk of the transactions
arises out of the operations of skilled professional investors, it pro
vides ample national facilities for meeting the needs of debt holders
of all types and sizes.
The present organizational structure, which is based on an intensely
competitive dealer mechanism through which markets are negotiated,
is a historical response to the constantly changing needs of a growing
group of diverse market participants. The wide range of institu
tional investors now active in Government securities brings to the
market the impact of changing business conditions and credit demands.
The closest and most direct kind of linkage between the money and
Government securities markets is now provided by short-term Govern
ment securities which have now become one of the principal money
market instruments.
At any given time, the market reflects a combination of influences
exerted by economic events, official policies of the Treasury and the
Federal Reserve System, and the public response thereto. Dealers
create a market by maintaining the widest possible contact with all
sources of supply and demand. In the process, they translate the net
of these contending forces into competitive judgments as to prices
at which clearances can be readily effected, buying or selling, for their
own account, any residue. The dealers are, therefore, that area of
the market where the final effort at private purchase and sale takes
place. Thus, the efficient functioning of the dealer mechanism plays
a large part in the ability of the money and credit markets to give
the needed liquidity and shiftability for the secondary reserves of the
banking system and the invested reserves of business corporations
and others.
With these introductory remarks, I am now ready to help in any
way that you may suggest.
Representative P a t m a n . Thank y o u , Mr. Repp.
How is your firm owned, Mr. Repp? Is it owned principally by
banks, or by financial institutions, or by others ?
Mr. R e p p . Our corporation has 50,000 shares outstanding, 60 percent
of those shares are owned by banks.
Representative P a t m a n . Would you name the banks, please?
Mr. R e p p . May I come gack to that in just a minute?
Representative P a t m a n . Yes, you may.
Mr. R e p p . Sixty percent is owned by the banks; 40----- Representative P a t m a n . Sixty percent by the commercial banks?
Mr. R e p p . And 40 percent by the public. We have 600 shareholders.
Representative P a t m a n . You have 600 shareholders?
Mr. R e p p . Yes.
Representative P a t m a n . How many of those shareholders are
represented in the banks, the commercial banks ?
Mr. R e p p . Five.
Representative P a t m a n . Five banks?
Mr. R e p p . Yes.
Representative P a t m a n . Would you name them, please?
38563— 59— pt. 6B-------11
1682
EM PLOYM ENT, GROW TH, AND PRICE LEVELS
Mr. R e p p . Mr. Chairman, I have no objection to naming them.
I am just wondering if I am getting in the realm of discussing the
interests of other people. I would be only too happy to furnish it
to the committee and to its staff.
Representative P a t m a n . I th o u g h t it was a matter of public record.
You state only five commercial banks own an interest in the Discount
Corp. of New York?
Mr. R e p p . Yes. It has not been made a part o f the public record.
Representative P a t m a n . Y ou say 60 percent o f your stock is owned
by those five banks ?
Mr. R e p p . Yes.
Representative P a t m a n . Is it equally owned by the banks, or do
some banks own more than others ?
Mr. R e p p . N o . Some banks own more than the others.
Representative P atm an . Is it approximately pretty evenly divided?
Mr.
R e p p . N o . T w o b a n k s o w n 2 0 p e rce n t ea ch , one b a n k o w n s
10, a n d tw o o th e r in s titu tio n s each o w n 5 p ercen t.
Representative P a t m a n . I had an idea it would be interesting in
formation. I don’t want to press you to do something that you
believe is improper or would not be fair. I certainly would want to
talk that over with members of the committee. I would not want
to insist on you answering something that should not be answered.
Mr. R e p p . Mr. Chairman, I don’t want to be in that position, either.
I would be glad to mention the names of the stockholding banks.
I just wanted to say that I am discussing other people’s business.
Representative P atm an . It is your business, too.
Mr. R e p p . Yes.
Representative P a t m a n . The committee wTill believe it is part of
their business.
Mr. R e p p . All right, sir.
The shareholders are Morgan Guaranty Trust Co., Bankers Trust,
Chemical Corn Exchange Bank, The New York Trust Co., and The
First National City Bank.
Representative P a t m a n . Did you name Manufacturerers Trust?
Mr. R e p p . No, sir . Nor the Chase Manhattan Bank.
Representative P a t m a n . Neither one owns any interest in th e
Discount Corp. of New York?
Mr.
R epp.
No, sir.
Representative P a t m a n . Have they in the past ?
Mr. R e p p . Chase Manhattan Bank, o r at least the Chase Bank a t
that time, did own shares back in 1933.
Representative P a t m a n . Has the Manufacturerers Trust ever
owned any shares ?
Mr. R e p p . N o , they have never been shareholders.
Representative P a t m a n . Has it merged with any concern that had
been a shareholder?
Mr. R e p p . The Manufacturers Trust Co. ?
Representative P a t m a n . Yes.
Mr. R e p p . No.
Representative P a t m a n . I had in mind asking you to supply a list
of the stockholders and the amount owned by each.
Would you object to that, Mr. Repp ?
EM PLOYM ENT, GROWTH, AND PRICE LEVELS
1663
Mr. R e p p . I will supply it to your committee, if I may, in writing.
R e p r e s e n ta tiv e P a t m a n . Y ou w o u ld lik e to h a v e it fo r th e i n f o r m a
t io n o f th e c o m m itte e o n ly , a n d con fin ed to th e c o m m itte e , a n d n o t f o r
p u b lic a tio n ?
Mr. R e p p . Yes.
Representative P a t m a n . I think that would be all right. It will
be acceptable that way.
Mr. R e p p . Thank you.
Representative P a t m a n . Are the directors of the five banks direc
tors of your firm, the Discount Corp. ? Are directors in the five banks
also directors in your firm ?
Mr. R e p p . Yes, we have only one director from each of the five
banks.
Representative P a t m a n . Name the other directors except bank
directors.
Mr. R e p p . There are three directors from the management. I am
a director. Our senior vice president, Mr. Edward E. Anderson, is a
director; our executive vice president, Mr. Charles E. Dunbar, is a
director; and Mr. Dudley H. Mills, who is retired, is a director.
Representative P a t m a n . H o w often do the directors meet ?
Mr. R e p p . We meet twice a month.
Representative P a t m a n . D o the various banks supply you with
information ? I f so, what type of information ? The five banks that
own an interest in your concern.
Mr. R e p p . I am sorry, Mr. Chairman. Information of what nature ?
Representative P a t m a n . Let us say the market, o r anything else.
About what is going on in the market and the advice as to buying or
selling.
Mr. R e p p . N o , sir; they do not.
Representative P a t m a n . Except at directors’ meetings I assume
you discuss that.
Mr. R e p p . At directors’ meetings we report our operations for
the period since the prior meeting. We do it in the broadest terms.
We report to them what has taken place in the market from the broad
aspect; we submit to them a statement of our borrowings as well as
figures on our trading position. They leave the day-to-day manage
ment and operation of the business to the management and give us
the widest latitude.
Representative P a t m a n . H o w much o f your business is Government
securities ?
Mr. R e p p . Practically all o f it, Mr. Patman.
Representative P a t m a n . You stated that all five of the banks were
represented 011 your board. How many directors from the banks?
Just five? One from each bank, or are there more?
Mr. R e p p . In addition to the five you have mentioned, there is one
director from the Chase Manhattan Bank, and one from the Manu
facturers Trust Co.
Representative P a t m a n . They are on your board?
Mr. R e p p . Yes, sir. I thought your original question referred to
the stockholding banks.
Representative P a t m a n . It was.
So
you have seven commercial banks here in New York repre
sented on your board, five of them actually owning an interest, from
1664
EM PLOYM ENT, GROWTH, AND PRICE LEVELS
20 percent on down, and the other two do not own an interest as
banks; but as individuals do they own an interest ?
Mr. R e p p . Their individual interest would be so small I don’t recall
what it is. Probably a share or two.
Representative P a t m a n . But they own some interest?
Mr. R e p p . Probably a qualifying share or two. I really don’t
know exactly what it is. It would be very small.
Representative P a t m a n . H o w does the Discount Corp. finance its
operations ? How does it get its money in addition to its own money ?
Mr. R e p p . Discount Corp. functions the same as every other dealer.
It finances its position through borrowed money in New York City
and also has money available to it from time to time in other sections
of the country.
Representative P a t m a n . What information do these five banks,
through their directors, get from the Discount Corp., if any ? Do you
give them the benefit of any information you have that is worthwhile
or that you consider worthwhile and helpful to them?
Mr. R e p p . We report on the activities o f our business, sir.
Representative P a t m a n . In reporting on the activities of your
business you naturally disclose what you were doing. It would have
to be that way.
Mr. R e p p . We disclose our activities, yes, and our trading. In a
broad sense. We don’t mention any names.
Representative P a t m a n . And that is the extent to which you have
communication with the five bank owners. Just the reports that you
make ?
Mr. R e p p . Yes, sir.
Representative P a t m a n . D o you borrow some o f your money from
insurance companies ?
Mr. R e p p . N o , sir.
Representative P a t m a n . None from insurance companies?
Mr.
R ep p .
N o, sir.
Representative P a t m a n . When you borrow money from banks do
you confine your borrowing from these five or seven ?
Mr. R e p p . N o , sir.
Representative P a t m a n . Y ou borrow from any bank?
Mr. R e p p . Yes, we borrow from any bank.
Representative P a t m a n . And nonsources. What is your prnicipal
nonbank source ?
Mr. R e p p . The nonbank source for funds is not a major factor in our
borrowing capacity. The minor extent to which it is done is through
repurchase agreements with a few corporations around the country.
Representative P a t m a n . You also have repurchase agreements with
the Federal, do you not?
Mr. R e p p . We frequently have had repurchase agreements with the
Federal.
Representative P a t m a n . In the course of 1958 do you happen to
know how much in business you did in the way of repurchase agree
ments with the Federal ?
Mr. R ep p . Mr. Chairman, I really haven’t any idea. May I have
a moment to ask our treasurer ?
Representative P a t m a n . Yes.
EM PLOYMENT, GROWTH, AND PRICE LEVELS
1665
Mr. R e p p . In comparison to the number of loans that we make in
the course of a year, repurchase agreements with the Federal are of
minor proportions. Repurchase agreements with the System are
entered into when the Federal itself wishes to put temporary credit
into the money market, and such repurchase agreements are an ex
tremely flexible money-market mechanism for the Federal to use.
Representative P a t m a n . Senator Bush, would you like to ask some
questions ?
Senator B u s h . I have no questions.
Representative P a t m a n . Mr. Reuss?
Representative R e u s s . Mr. Repp, I was very interested in one of
the statements you made in your prepared statement. It occurs on
the last page of your statement:
The closest and most direct kind of linkage between the money and Govern
ment securities markets is now provided by short-term Government securities
which have now become one of the principal money market instruments.
I take it you are there referring to the operations of the bills-only
policy.
Mr. R e p p . N o , sir. I am really talking about the whole money
market and did not have in mind bills only. I am thinking of the
huge sums of money which are invested almost every day by the corp
orations and other short-term holders of securities.
Representative R e u s s . Y o u are speaking not only o f the trading
in short terms, by the Federal Reserve Open Market Committee, but
the trading in short terms by everybody else ?
Mr. R e p p . I really had in mind the money market as a whole. As
a matter of fact, I had not thought of the Federal Reserve specifically,
although it is part of it.
Representative R e u s s . Y o u mean the operations in the short term in
the money market as a whole ?
Mr. R e p p . Yes.
Representative R e u s s . Y o u say there is a close and direct kind o f
linkage between short-term operations and the money market as a
whole and by which I take it that you mean that there is a linkage
between transactions by everybody in short terms and what happens in
long terms. That is what you mean by linkage, is it not ?
Mr. R e p p . Yes; I would say that the linkage does carry right
through.
Representative R e u s s . Could you detail for us the various means
by which transactions in short terms are linked through to what
happens to long terms both with respect to interest rates and with
respect to all other attributes ?
Mr. R e p p . Practically all investors, outside of the corporations,
and certainly those in the banking system, have a wide range of matu
rities in their portfolios. The corporations, of course, are primarily
interested in short-term securities because of the special needs they
have.
As one rate gets too low or too high, it has its affect on other rates
in the pattern of maturities; it carries right on through the chain.
As a result, somewhere in the marketplace somebody does take action.
I f one rate looks more attractive, they will buy it and sell something
else that looks less attractive. This shifting of issues due to rate differ
entials does create linkage.
1666
EM PLOYM ENT, GROW TH, AND PRICE LEVELS
Representative R e u s s . What you are saying is that the trading
that does occur to the extent that it does occur tends to create the
linkage. The more trading the closer the linkage. Is that a fair
restatement of your thesis?
Mr. R e p p . I would think the fundamental thing, Mr. Reuss, is the
rate factor.
Representative R e u s s . In your opinion, is there a close linkage be
tween the short-term interest rate and the long-term interest rate,
or is the linkage somewhat more remote ?
Mr. R e p p . I would say that from short- to long-term maturities
there is an interest rate curve. Over a period of time any action
which affects either end permeates through the whole curve.
Representative R e u s s . It is a fact, is it not, that at various times
in fairly recent economic history long-term rates have been sometimes
higher and sometimes low^er than short-term rates ?
Mr. R e p p . That is right.
Representative R e u s s . To take a specific point in time when longterm rates and short-term rates were quite a wTays apart, would you
say that early 1958 was such a time? As I recollect, short-term rates
were quite low, and long-term rates were double that or more. Can
you recall what went on?
Mr. R e p p . In early 1958 the Treasury bill rate declined from
February into May toward a 1 percent level. The long-term bond
rate did not respond as rapidly to changing rates.
Representative R e u s s . By and large my recollection is right that
the short-term rate was quite low and the long-term rate quite high.
There was quite a spread in early and up to the middle of 1958.
Mr. R e p p . I a m so r r y .
Representative R e u s s . Y ou are saying my recollection is correct,
that there was quite a considerable spread in the first half of 1958
between short-term and long-term rate ?
Mr.R e p p . Short-term rates responded quicker than long-term rates.
Representative R e u s s . The gap did not close quite as fast.
Mr. R e p p . N o t as rapidly.
Representative R e u s s . Would you agree that the disparity between
short-term and long-term rates may have had something to do with
the disturbances in the U.S. securities market which occurred shortly
after the middle of 1958 ? Specifically, so that you may understand
my question, I have it in mind that perhaps the fact that you could
borrow short-term money very cheaply, relatively speaking, might
have induced investors to borrow at short term and invest in long
term.
Mr. R e p p . I think the availability of money at relatively attractive
rates did have its effect on inducing speculation, yes, sir
Representative R e u s s . Which speculation turned out to have an
ultimately very disturbing, though fortunately not catastrophic,
effect on the U.S. securities market. I am thinking of the sharp dip
that required the Treasury to move in.
Mr. R e p p . Yes.
Representative R e u s s . One would not want to plan it that way if
he were planning it.
Mr. R e p p . Very unfortunate to the extent that there were excesses.
But we should not condemn a reasonable amount of speculative
EM PLOYM ENT, GROWTH, AND PRICE LEVELS
1667
interest in bonds. During a period of declining general business
and monetary ease it is desirable to have buyers for debt creating
instruments, and for the longer term issues offered by the Treasury.
Speculative interest aids such action. One should be careful not to
rule out reasonable amounts of speculation, since it does serve a useful
function.
Representative R etjss. Would you say that the bills-only policy
of the Federal Reserve could have contributed to this unfortunate
situation by keeping the price of bills high and the yield low, while
the yield on long terms w'as up and the price down ? Had the Federal
Reserve been more flexible in its open market policy might not some
of this speculative ultimate result have been avoided?
Mr. R e p p . That is a question of judgment. I am inclined to doubt
it. There were other factors involved in the creation of the episode
of last summer. It was really based on market expectancy, namely,
that business would continue to be at a low level, and that an early
economic recovery was not in sight. Therefore, interest rates would
continue to be low\ Furthermore, the expectancy was that the Federal
Reserve would continue to maintain a policy of ease, and therefore
that Government securities as well as all fixed income securities would
(Continue to be attractive. These were the basic reasons for the
speculation that came into the marketplace.
Representative R e u s s . No doubt, and I thoroughly agree with you,
that this speculation played a part. However, it is your testimony
that the disparity in the yields and prices of the short terms and long
terms could have had an extenuating effect ?
Mr. R e p p . I think my answer to that would be “No,” Mr. Reuss.
The disparity in yields might be divided into two parts. First, was
that the availability of credit allowed people to readily finance their
positions and was aided by a short rate which was approximately
1 percent. Secondly, many of those who wished to carry positions
were willing to pay higher than the going rate. This situation was
attractive to various lenders.
Representative R e u s s . For various borrowers?
Mr. R e p p . For various borrowers and lenders to get together. It
was the availability of credit at attractive rates, and the market out
look for a further increase in bond prices, that induced the speculative
situation that we had last year.
Representative R e u s s . I think I understand exactly what you are
saying, and it seems to me you are now saying exactly what you
said a few minutes ago, that the availability of relatively cheap short
term credit did induce or contribute to inducing a part of the specu
lative interest in long terms.
Mr. R e p p . The speculation ? May we define long terms, Mr. Reuss ?
Representative R e u s s . Let us say other than short terms. Let us
say a year or more, or if you want to define it any other way, please do.
Mr. R e p p . The availability of credit at attractive rates made pur
chases of higher yielding issues look attractive.
Representative R e u s s . Thus the combination of market emphasis
on short terms which combination must be responsible for the exist
ence of relatively low interest rates on short terms during this period
which combination included transactions for the account of the Open
Market Committee, played its part, did it not, in producing a situation
1668
EM PLOYM ENT,
GROWTH, AND PRICE LEVELS
where it was easier to speculate in longer terms than it otherwise would
have been?
Mr. R e p p . The Federal Reserve at that time was engaged in a
policy of ease and w^as increasing the liquidity of the banking system.
Representative R e u s s . They were exercising a policy of ease in the
short term pursuant to the bills-only policy.
Mr. R e p p . The effect of their operation in increasing liquidity in
the banking system did have its effect at that stage primarily on the
short rate. It was not only the purchases by the Federal Reserve
System, but there wTere other factors in the short-term area. In that
period, there were large corporate accumulations of funds for meet
ing expense-paying dates as wTell as providing for taxpayments. There
was not a tax-anticipation bill maturing on the 15th of June. This
induced purchases on the part of corporations of varying maturities,
particularly of the June certificates.
Representative R e u s s . S o you would say that the effect of the Fed
eral Reserve Open Market Committee’s bills-only policy in raising the
price and lowering the yield of short-term securities was accentuated
by the fact that during this period, and particularly for the June tax
reason you mentioned, corporations and other investors in bills were
also adding to the demand side of the market for short terms. These
two factors seemed to have worked together.
Mr. R e p p . The aggregate had its effect on the short rate; yes, sir.
Representative R e u s s . Thank you very much.
Representative P a t m a n . Mr. Widnall.
Representative W i d n a l l . I have no questions.
Representative P a t m a n . Senator Bush.
Mr. R e p p . May I add one thing, Mr. Reuss. My associate reminds
that also during that period we were speaking of, bond prices also
rose. In fact, while Treasury bill yields declined from about 2%
percent to 1 percent—i.e., an increase of less than 1 point in price—in
the first half of 1958, the 32-year Treasury bond due in 1990 rose
about five points in price. That’s a dramatic 5-ton leverage factor
in favor of long-term bond prices brought about by linkage.
Representative R e u s s . Thank you very much.
Senator B u s h . Mr. Repp, you appreciate the purpose of these
hearings. It is for the committee to learn what it can about the op
erations of the Government bond market to see if there are any
recommendations it can make to Congress that would improve the
situation in the whole public interest.
Have you any general comments that you would like to make for
the guidance of this committee in the light of your long experience?
Do you think there is any legislative action that should be taken, or
any course the Government should follow that it is not following that
might be helpful to the whole picture of the Government bond market ?
Mr. R e p p . I have no suggestion, Mr. Senator, as far as any
legislation is concerned.
Senator B u s h . Do you think this situation or the present arrange
ments satsify the needs of the whole financial community as well as
any arrangements that you can think of ?
Mr. R e p p . Yes. While we must not in any way minimize the lessons
to be learned from our experience of last year, the functioning of
the Government security market has and does serve the needs of the
EMPLOYMENT,
GROWTH, AND PRICE LEVELS
1669
investors. It operates on a very efficient basis. Certainly it is a
response to the demands that have been put on it. It is something
that has developed through a long period of years, and it has become
an efficient mechanism through which to handle transactions in Gov
ernment securities. I would like to reemphasize that the Treasury
securities market functioned even during the heavy liquidation of
last summer. It was not a weakness in the market’s functioning that
caused that decline in prices and the attendant rise in interest rates,
but the fundamentals of a change in the business climate. Therefore, I
see nothing in the way of legislation that would broaden or strengthen
the market at the present time.
Senator B u s h . The question has arisen with other witnesses whether
the establishment of margins for trading in Government bonds would
be a desirable thing. Have you any comment on that ?
Mr. R e p p . It is our position that all loans should be margined and
that proper credit practices should be followed. When you approach
the question of margins you must divide it into two parts. One
should relate to the functioning of the dealer market and the second
to other participants who use credit accommodations.
The relationship of the dealers with the banks has developed
through a long period of experience. Arrangements have been
arrived at on a mutually satisfactory basis. It is the relationship
of a borrower and a lender. The lender has margin requirements
that they feel are adequate for their protection.
In the question of margins, care must be taken to see that there
is no imposition of requirements as far as dealer financing is
concerned, which would impair the functioning of the marketplace.
When you go to the other side of the question, again that is a relation
ship between the lender and the borrower. One lesson learned out of
last year’s experience was that in certain instances credit was available
on a basis that may not have been properly margined. However,
I know of no case where the lender suffered any loss.
It seems to me that there is a way of approaching that problem,
too, without legislation. Personally, one thing I have observed from
last year’s experience is that we could have broader information on
such credit extension.
As an example, the New York Stock Exchange has already taken
steps to strengthen their situation as far as margin requirements are
concerned, and also the method of reporting exempt securities held
by its members, and also rules for the allocation of members’ capital.
The Federal, I believe, has expanded the gathering of data from
around the country on money being used to finance Government
securities.
One can read into the Treasury-Federal Reserve hearings that those
authorities are planning a sampling of important corporations who
enter into repurchase agreements. If this date is broken dowTn into
amount, the nature of the collateral, and the type of loan and the
borrower, it should make the Federal and in turn the Treasury, more
aware of the credit situation and place them in a better position to
judge the future, and to spot a situation like last summer’s much
quicker. It was lack of this information, I think, which prevented
them from being more fully aware of developments.
1670
EM PLOYM ENT, GROWTH, AND PRICE LEVELS
Improved reporting, based upon rontinized reporting of data
received voluntarily, and which in turn would be analyzed by those
who receive it, could be used to alert the supervisory authorities of
the various states of unsound developments. On the basis of such
information they could take steps aimed at maintaining proper credit
standards.
Senator B u s h . D o you think public apprehension concerning the
Government bond market has any effect on the price of Government
securities ?
Mr. R e p p . I would say the major effect on the prices of Government
securities is related really to the fundamentals involved. In a period
of intense business activity, demands for bank credit and other types
of credit are competing forces which have their impact on interest
rates on Government securities.
I do think that there is real interest, and in certain quarters concern,
about fiscal affairs. The lack of balanced budgets has entered into
people’s calculations, as far as their willingness to buy Government
securities.
This is more psychological than fundamental, but it is a part of the
marketplace. Rather than expanding the market for Government
securities, I think the fiscal situation, as well as the comparative rate
with other types of securities, has restricted the investment of funds
in Government issues. We see it in public funds throughout the
country. Many of them for a long, long time have been buyers of
Government securities, but they are now going into the corporate field.
You can say that is a rate factor. But there are certain funds who
feel that corporates, excluding the rate factor, are more attractive to
them.
Representative P a t m a n . Mr. Repp, I would like to invite your at
tention to the chart on the left on the wall. I believe you were fur
nished a copy of the chart yesterday morning; is that correct?
Mr. R e p p . Yes, sir.
Representative P a t m a n . I would like to read this statement in
presenting the chart.
The significance of the Discount Corp.’s interlocking directors and
other connections in the financial community arises from the fact that
it is one of the largest dealers in U.S. Government securities. In terms
of volume of trading with the Federal Reserve System’s Open Market
Account, it is the largest single dealer.
The Federal Reserve System’s Open Market Account buys and sells
tremendous quantities of Federal securities in what is called the open
market. All sales and purchases in this open market are with 17
private security dealers. In addition, the Federal Reserve enters into
repurchase agreements with many of these dealers, which repurchase
agreements are in effect loans made to the dealers for the purpose of
assisting them in carrying securities. Last year the Federal Reserve
System’s trading with the 17 dealers amounted to $18 billion,
including repurchase agreements.
The Discount Corp. is reported to be jointly owned by seven of the
New York money-market banks. These banks are: Bankers Trust Co.,
Chase Manhattan Bank, Chemical Corn Exchange Bank, First Na
tional City Bank, Manufacturers Trust Co., Morgan Guaranty Trust
Co., New York Trust Co.
EM PLOYM ENT, GROW TH, AND PRICE LEVELS
It may be noted that three ol
banks h r * also direct dealers
with the Open Market Account. They are
Trust Co., Chem
ical Corn Exchange Bank, and Morgan Guaranty Trust Co.
The directors of the Discount Corp. and its seven owner banks are
also members of the boards of directors of substantially all the top
financial institutions of the country, as well as the top industrial and
utility corporations, which are also large investors in Government
securities. Its interlocking connections include 10 of the top 10 com
mercial banks, 7 of the top 10 mutual savings banks, 9 of tne top 10
life insurance companies, and 7 of the top 10 fire and casualty
insurance companies.
Altogether Discount Corp. and its 7 owner banks are reported to
share directors in common with 160 financial companies, having com
bined assets at the end of 1958 of $190 billion. These include 40
commercial banks, 35 life insurance companies, 25 mutual savings
banks, 39 fire and casualty companies, and 21 other financial compa
nies, including investment trusts and investment banking houses.
The chart shows the interlocking directors between and among the
Discount Corp. and 160 financial companies. In addition, the chart
sets out membership on the advisory committees to the U.S. Treasury,
membership on the boards of directors of the Federal Reserve banks
and membership in the Federal Advisory Council to the Federal Re
serve Board, drawn from among the directors of these 160 companies.
Names of individuals are represented on the chart by code numbers.
The names of the individuals, plus the names of all of the companies
with which the individuals are connected, are provided on the attached
list which also carries the code number reference to the chart.
In 1957, Discount Corp.’s net profits amounted to $1.2 million. In
1958, its net profits increased to $1.8 million, giving a return of 21
percent on its total capital account, including undivided profits.
Discount Corp. directors are members of two of the five advisory
committees to the Treasury. These committees advise the Treasury
concerning the quantities, terms, and interest rates fixed for new
Treasury issues.
Among the 160 leading financial companies which are inter
connected with Discount Corp., there are 72 instances in which
directors of these companies are also members of advisory groups to
the Treasury.
There are, in addition, 24 cases in which directors of these companies
also serve as directors of the various Federal Reserve banks. In
another 18 instances, directors of these financial companies are mem
bers of the Federal Reserve Board’s Federal Advisory Council.
Mr. Repp, you have had an opportunity to examine this chart. You
made a statement this morning that changes it somewhat. We have
here that seven jointly own the Discount Corp. We named the seven.
You state that five of them own it, and the other two have a director
on your board. That alters it some, but I would not consider it sub
stantially altered. Maybe you have a different view of it.
Would you like to make any statement with reference to this chart
in connection with it going in the record of these proceedings ?
Mr. R e p p . Yes, sir, I would, Mr. Chairman.
I wish I had as many hours to study it as it must have taken to
prepare.
EM PLOYM ENT, GROW TH, AND PRICE LEVELS
Representative P a t m a n . iVe will give you more, Mr. Repp. I f you
think of something after you leave here 3tou are perfectly at liberty
to include it in your remarks.
Mr. R e p p . May I read a statement which my associates and I have
prepared on this subject?
Representative P a t m a n . Yes.
M r . R e p p . I r ec eiv ed th is m a te r ia l o n ly y e s te r d a y , a n d h a v e n o t h a d
tim e to p r e p a r e a d e ta ile d d isc u ssio n o f it.
I would like to deal with it in more detail in a memorandum to be
submitted to the committee at a later date, and I ask leave to have the
record kept open for that purpose.
Representative P a t m a n . Without objection it is so ordered.
Mr. R e p p . For here and now, however, I respectfully tell this
committee that this exhibit of so-called interlocking directorates is
meaningless. This is an old myth which holds that when the same
man is on the board of tw^o different companies the two companies are
automatically hooked together in some special conspiracy. This
just is not so. This material seems to be designed to show that
Discount Corp. has some special and presumably not quite proper
connections with a large number of financial corporations, even though
they do not have common directors.
You can draw as many lines as you want and extend them as far as
you want. They just don’t mean a thing. One director doesn’t
control a company, and one director doesn’t control the actions or votes
of his fellow directors when they are sitting on other boards.
Just for the record, I would point out that this chart and the mem
orandum accompanying it are inaccurate in some major details as well
as being completely false in basic concept. They show, for instance,
as I have mentioned, the Chase Manhattan Bank and the Manufac
turers Trust Co. as stockholders of Discount Corp. Neither bank
owns one share of Discount Corp. stock, but these, as I say, are details.
The real fault with this presentation is that it suggests a situation
which simply does not exist in this country.
Representative P a t m a n . Without objection we will insert the chart
along with the statement and material I read and referred to, and
you will have the privilege of extending and enlarging upon your
remarks to bring in anything else you think of before the record is
closed.
Mr. R e p p . Thank y o u , sir.
Representative P a t m a n . I s there objection ? The Chair hears none,
and you may do that. The chart will be inserted in the record at this
point.
(T h e ch a rt r e fe r r e d to fa c e s th is p a g e .)
(Subsequently the following statements were submitted for the
record:)
D a v is , P o l k , W ard w e l l , S u n d e r l a n d & K ie n d l ,
New York, N.Y., August 26, 1959.
Hon. P a u l H. D o u g l a s ,
Senate Office Building,
Washington, D.C.
D e a r S e n a t o r D o u g l a s : Inasmuch as yon are chairman of the Joint Economic
Committee, I am enclosing, on behalf of Mr. Repp, his rebuttal of the “web chart”
and accompanying statement tendered by Representative Patman at the time
of Mr. Repp’s testimony before the subcommittee in New York. Copies have
T
KIN
T
UNT
FINANCIAL
AND 7
TITUTION
/
I
--- -28_
CONN. MUTUAL
LIFE INS. CO.
$1,436 m
v l/
✓ |X ' I '
I
196 EXCELSIOR SAV.
BANK, N.Y.
$195 m
38563
0 - 59 (Face
p. 1672)
'
\ l/
Showing assets in millions
1673
EM PLOYMENT, GROW TH, AND PRICE LEVELS
been sent to the members of the subcommittee who attended the hearings in
New York.
Sincerely yours,
L e i g h t o n H. C o l e m a n .
D i s c o u n t C orp. of N e w
Y ork,
New York, N.Y, August 25, 1959.
■ubject: Rebuttal of the “web chart” and accompanying statement.
Ion. P a u l H. D o u g l a s ,
Chairman, Joint Economic Committee,
Congress of the United States,
Washington, D.C.
D e a r S e n a t o r D o u g l a s : The following statement contains the additional ma
terial which the subcommittee at SM page 401 gave me leave to file after a
study of the “web chart” introduced on the morning of the hearing.
On the basis of this statement and the other material in the record, I ask
the committee formally to vote to exclude the “web chart” and accompanying
statement from the record, pursuant to the colloquy of the members of the
subcommittee (SM p. 410). If, howrever, the committee does not exclude the
chart and statement then I ask to have this rebuttal statement included as part
of my testimony.
1. Limit actual extent of relationships of Discount Corp.’s own directors
Analysis of the chart shows that, including their own boards, only 20 of the
161 names on the chart are direct line directorships of the 12 directors of Dis
count Corp. itself. All the others— or 88 percent of the whole chart— are indirect
relationships, many of a very vague nature.
2. The effect of intense competition
Of the 161 names on the chart, the fact is that Discount Corp. of New York
did no business with 68 of them during the 2-year period, 1957-58. So that
while the presentation suggests a tie-in with many leading financial institutions
the intense competition in the marketplace meant that the Discount Corp. had
no transactions with 42 percent of the so-called connections.
And of the 93 names with which the Discount Corp. did do some business in
1957 and 1958, the volume with 15 percent of these was so small as to be
inconsequential.
Each of the 17 dealers in U.S. Government securities, including Discount Corp.,
is trying each day to do business with, and be of service to, the large holders
Treasury debt. But this is not a business characterized by exclusive orders.
More often the customers ask for bids or offerings which they accept or reject
based upon their appraisal. And frequently a dealer has to go out and create a
demand for an issue owned by a seller, with the dealer with the first or best
results getting the business.
3. Public data on volume of transactions versus Discount Corp.'s share
The “web chart” asserts that Discount Corp. has “interlocking connections”
with 9 of the top 10 life insurance companies. But actually only two of these
companies have directors who are also directors of Discount Corp.
The 10 largest life companies did a total volume in the marketplace of over
$4.9 billion in 1958, of which the Discount Corp. did less than 10 percent.
Also of interest, and illustrative of the meaningless nature of so-called inter
locking connections, is the fact that the top 10 fire and casualty companies
publicly reported a total of over $556 million transactions in U.S. Treasury
securities for the year 1958, of which Discount Corp. did less than 5 percent.
No business was done with 6 of the “big 10” fire and casualty companies.
Only two of these top fire and casualty companies are directly served by
directors who are also directors of Discount Corp.
Jf. The vague and indirect ties to advisory committees
A total of 62 institutions listed on the chart have no connecting line at all to
the Discount Corp. in the center of the web. This means that 38 percent of the
boxes on the chart do not have even an indirect directorship relation to the
corporation. Rather, they were just placed at random in open spaces on the
chart because one of their directors is a member of a Treasury or Federal
Reserve advisory committee or board.
1674
EM PLOYM ENT, GROW TH, AND PRICE LEVELS
Of these institutions, 31 are listed solely because a director of one of them
is a member of one of the five Treasury advisory committees. Yet directors of
the Discount Corp. serve on only two of the five Treasury advisory committees—
namely the American Bankers Association and the Investment Bankers
Association committees.
It is inevitable that the Treasury Department has, over a long period of years
covering many administrations, discussed the problem of debt management
and debt placement with men of practical experience on these matters. From
whom or where else should the Treasury search out skilled thinking on such
matters? And since the Discount Corp. is a primary dealer in Treasury secu
rities, it must endeavor to do business with institutions that hold the debt.
This is part of its economic function of creating and making a market for the
Treasury’s securities.
5. Fallacy of tie-ins with Federal Reserve 'bank directors
A substantial number of the institutions on the chart wTere placed there only
because their board of directors had a representative on the board of directors
of a regional Federal Reserve bank, in such wide-spread districts as Boston,
Chicago, Kansas City, and San Francisco, because the Discount Corp. has one
director who serves the New York bank.
But the boards of directors of the regional Federal Reserve banks, spread
across the country, do not meet together. A director of the Federal Reserve
Bank of New York has no direct board meeting contact with the directors of,
say, the San Francisco Federal Reserve Bank.
The directors of the regional Federal Reserve banks are men who are prominent
in many fields. It would be surprising if some of them were not connected
with firms wThich invest surplus funds in Government securities through the
services of a Government bond dealer.
6\ Position as leading dealer with Federal Reserve's Open Market Account open
to question
The committee statement, which accompanies the chart, said that “in terms of
volume of trading with the Federal Reserve System’s Open Market Account,
it (Discount Corp.) is the largest single dealer.” The officers of Discount Corp.
are aware of many substantial transactions for the System’s account on which
the corporation’s competitive bids or offerings failed to win the business. In
view of the fact that business transactions with the Open Market Account are
not publicly released, the corporation cannot categorically deny the statement,
but questions its accuracy.
7. Discount Corp.'s earnings have averaged only 10% percent on net worth
Since the Treasury-Federal Reserve accord of 1951, and the subsequent years
of free markets, Discount Corp.’s net profits have averaged only 10%. percent of
total capital funds (net worth). This is not spectacular; rather it is a routine
result. For example, even in the recession year of 1958, our country’s 3,574
leading corporations had net profits equal to 9 percent of their net worth— and
this was the lowest percentage return realized since 1945.
8. Inaccuracy in other details of the “web chart”
In addition to being erroneous in basic concept, the chart is inaccurate in
these details:
(a) It shows the Chase Manhattan Bank and the Manufacturers Trust Co.
as “owner banks” whereas neither institution has any direct or indirect stock
ownership interest in Discount Corp. of New York. The elimination of these
two institutions from the chart would reduce the number of implied indirect
tie-ins by about one-fourth.
(b) It includes the name of one of the Discount Corp.’s major competitors—
namely the First Boston Corp. This apparently is due to the fact that repre
sentatives of both dealer firms are on the Investment Bankers Association’s
advisory committee to the Treasury Department. But that committee has not
one, but four representatives from our major competitors. They could just as
well have been added to the chart.
9. Conclusions
In light of the above factual findings, it is concluded—
(a )
That Discount Corp.’s directors serve directly on only 20 of the 161
financial institutions shown as boxes or circles on the chart.
EM PLOYM ENT, GROWTH, AND PRICE LEVELS
1675
(b) That the corporation did no business with 42 percent of all the instititutions shown on the chart during the 2-year period 1957-58.
(c) That, due to intense competition in the Treasury securities market,
the corporation’s volume of business done with leading insurance companies
was a small percentage of the publicly released figures on their total volume.
(d) That 38 percent of the institutions named on the chart have no direct
or indirect directorship relation to the corporation. Rather, they were just
placed at random in open spaces on the chart because one of their directors
is a member of a Treasury or Federal Reserve advisory committee or board.
(e) That the Chase Manhattan Bank and the Manufacturers Trust Co.
are not “owner banks” as specified by the chart’s title.
(/) That the corporation’s net earnings on net worth have averaged a
routine 10% percent since the advent of free markets in 1951.
(g) That the “web chart” presentation is necessarily misleading, since it
is based upon an assumption that a man serving on a board of directors
controls his fellow directors to such an extent that they serving on other
boards control these other boards ad infinitum— an absurd assumption.
(h) That the chart presentation suggests that there is something wrong
with any corporation that has successful business or financial leaders on its
board of directors. Only by having directors of unproven stature and judg
ment could any corporation avoid a similar presentation.
(i) That a similar chart could be prepared for any financial institution
of any importance, purporting to show in like misleading fashion country
wide affiliations that do not really exist.
10.
The committee, in view of the above facts, should vote to exclude the chart
and its accompanying statement from the record of the hearings because of their
misleading nature.
Respectfully yours,
H e r b e r t N. R e p p , President.
H ou se
of
R e p r e s e n ta tiv e s ,
Washington, D.C., September 9, 1959.
Hon. P a u l H. D o u g l a s ,
Chairman, Joint Economic Committee,
U.S. Senate, Washington, D.C.
D e a r M r . C h a i r m a n : This is with reference to the statement of Mr. H. N. Repp,
President of the Discount Corp., which was submitted to you on August 2 6 by M r .
Leighton H. Coleman of the law firm of Davis Polk Ward well Sunderland &
Kiendl.
Mr. Repp’s statement relates to the chart which I had prepared showing the
interlocking directors of the Discount Corp. and those of 7 New York moneymarket banks whose directors make up Discount Corp.’s board, along with several
officers of the corporation, between and among other major financial institutions.
Mr. Repp and his lawyers have now christened this the “web chart,” a not very
appropriate label in my view, since the chart utilizes several concentric circles,
not webs, to connect the various financial institutions with which the subject
institutions share one or more directors. Mr. Repp’s statement points out no
inaccuracies in either the chart or the accompanying listing of the individuals
who make up the boards of the major financial institutions shown on the chart,
although this statement does claim an unspecified omission with reference to the
Investment Bankers Association’s Advisory Committee to the Treasury.
The fact that this advisory committee is represented on the chart at all, and
the fact that other advisory committees and the boards of directors of the Fed
eral Reserve banks are presented on the chart, seem to provide the basis for most
of Mr. Repp’s argument about the chart. Thus he says:
“This means that 38 percent of the boxes on the chart do not have even an
indirect directorship relation to the corporation.”
And at several places his statement objects to the fact that the firms who have
representatives on these advisory committees and boards are “just placed at
random in open spaces on the chart.”
Consequently, in order to simplify the chart and also to avoid unecessary
delay, I have had the chart rephotographed with all the advisory committees
and Federal Reserve Board members masked out. This leaves the chart show
1676
EM PLOYM ENT, GROWTH, AND PRICE LEVELS
ing only private financial institutions, and only those for which interlocking
directors can be clearly and directly traced. So that the record may be complete,
however, I am adding to the listing of the directors a complete list of the members
of the Federal Advisory Committee, the various advisory committees to the
Treasury, and the Board of the Federal Reserve banks.
Further, so that there may be no doubt as to which of the seven New York
banks that have directors on the board of the Discount Corp. also own stock
in that corporation, I have added to the chart a legend specifying the names
of the five owning such stock and, separately, the names of the two that do not.
According to Mr. Repp’s testimony, each of the seven New York money-market
banks has one director on the board of the Discount Corp., with the exception
of Morgan Guaranty, which has two (presumably as a result of the recent
merger of the two banks which formed Morgan Guaranty). Further, the di
rectors of these seven banks, plus several officers of the Discount Corp., make
up the full board of the corporation. Mr. Repp testified, however, that the
Chase Manhattan Bank, though formerly a stock owner in the corporation, has
disposed of its stock; and that Manufacturers Trust owns no stock.
May I now call your attention to two matters on which the record seems
incomplete.
First, during his testimony Mr. Repp agreed to submit a list of the stockholders
of the Discount Corp. showing the amount of stockholdings of each. Mr. Repp’s
statement omits this information, however, and I hope that you will call this
omission to his attention. It is my view that the public record should show
at least the stockholdings of the banks which have been mentioned, plus the
holdings of other institutions as well, if not those of individuals also.
Second, Mr. Repp’s statement asserts that—
“ Since the Treasury-Federal Reserve accord of 1951, and the subsequent
years of free markets, Discount Corp’s net profits have averaged only 10% per
cent of total capital funds (net worth). This is not spectacular; rather it is
a routine result.”
Since the committee is attempting to evaluate the performance of the
Government securities market under different conditions, including its perform
ance under the highly speculative conditions of 1958, it would be extremely
helpful if Mr. Repp would supply the Discount Corp’s outstanding capital
stock, profits, net worth, and profit rate on a year-by-year basis from the period
of the Treasury-Federal Reserve “accord,” or from the beginning of 1951, and
supply also these data for an equal number of years prior to the “accord.”
Now a word of comment on Mr. Repp’s more general objections to allowing
the chart and related materials to remain in the record.
These objections are arrived at by advancing certain possible interpretations
of the data, then arguing that the data are “meaningless” or “misleading” in
relation to these interpretations. In one instance the data are declared to be
of a “meaningless nature,” because they do not support a thesis— supplied by
Mr. Repp— that the Discount Corp. transacts business in Government securities
with each and every financial institution with which the Discount Corp. shares
one or more directors. With reference to the question of significance which
Mr. Repp has suggested here, the fact— pointed out in his statement— that the
Discount Corp. did business in 1957 and in 1958 with 93 of the major financial
corporations with which the corporation enjoyed interlocking connections strikes
me as a rather remarkable showing.
In another instance the chart is declared to be—
“ * * * necessarily misleading, since it is based upon an assumption that a
man serving on a board of directors controls his fellow directors to such an extent
that they serving on other boards control these other boards ad infinitum— an
absurd assumption.”
I agree that the assumption is absurd : it is Mr. Repp’s assumption, however,
not mine, and it is hardly likely that there will be many readers of the commit
tee’s record who will interpret the chart as suggesting either that the Discount
Corp. transacts business in Government securities with each and every financial
institution with which it shares a director or that every man serving on a board
of directors controls all of his fellow directors. Further, if there should be
any reader who is so inclined, Mr. Repp’s statement is more than adequate to
disabuse him of these notions.
Finally, another general objection which has been made to the chart is that
the major financial institutions shown to have interlocking directorates have
been pictured on the chart by an arbitrary arrangement, and that any of several
financial institutions other than Discount Corp. could have been placed at the
EM PLOYM ENT, GROWTH, AND PRICE LEVELS
1677
center of “the web.” That may be true, although I do not happen to know of
another instance in which the seven top New York banks each have a director
or directors on the board of a common corporation, nor do I know of another
instance in which five of these banks own stock in a joint enterprise. Be that
as it may, however, the focus of attention in this particular study is primarily
upon the dealers in Government securities; in some other study where the focus
of attention is upon some other topic, then of course it might be entirely ap
propriate to consider placing one of the other firms at the center of the chart.
It is requested, therefore, that the amended charts and related materials,
as discussed, be printed in the record and that Mr. Repp’s statement be printed
also as he and his lawyers have requested. The amended chart and related
materials are transmitted herewith.
Sincerely.
W e ig h t P a t m a n .
O w n e r s h i p a n d I n t e r l o c k in g C o n n e c t io n s o f t h e D is c o u n t C orp.
( R e v is e d )
The significance of the Discount Corp.’s interlocking directors and other
connections in the financial community arises from the fact that it is one of
the largest dealers in U.S. Government securities. In terms of volume of
trading with the Federal Reserve System’s Open Market Account, it is the
largest single dealer.
The Federal Reserve System’s Open Market Account buys and sells tremendous
quantities of Federal securities in what is called the “open market.” All sales
and purchases in this open market are with 17 private security dealers. In
addition, the Federal Reserve enters into repurchase agreements with many of
these dealers, which repurchase agreements are in effect loans made to the
dealers for the purpose of assisting them in carrying securities. Last year the
Federal Reserve System’s trading with the 17 dealers amounted to $18 billion,
including repurchase agreements.
The board of directors of the Discount Corp. is made up of directors of the
seven top New York money-market banks, plus several officers of the corporation.
These banks are:
Bankers Trust Co.
Chase Manhattan Bank
Chemical Corn Exchange Bank
First National City Bank
Manufacturers Trust Co.
Morgan Guaranty Trust Co.
New York Trust Co.
Further, of the seven banks listed above all but two, Chase Manhattan Bank
and Manufacturers Trust Co., are reported to be stockholders in the Discount
Corp., their combined stockholdings constituting a majority of Discount Corp.’s
stock.
Furthermore, three of the owner banks are also dealers in Government secu
rities and, as such, trade in Government securities with the Federal Reserve
Open Market Account. These are Bankers Trust, Chemical Corn Exchange,
and Morgan Guaranty Trust.
The directors of Discount Corp. and the 7 money-market banks are also
directors of 89 other major financial institutions. Altogether, these large insti
tutions, plus Discount Corp. and the 7 money-market banks— a total of 97
companies— had assets aggregating $132 billion at the end of 1958. These inter
locking connections were with many of the top financial institutions of the
country— with 8 of the 10 top commercial banks, with 6 of the 10 top savings
banks, with 7 of the top 10 life insurance companies, and with 5 of the top 10
fire and casualty insurance companies. In addition, the directors of Discount
Corp. and the seven money-market banks are also directors of many of the
largest industrial and utility corporations, which are, of course, large investors
in Government securities.
The accompanying chart shows the interlocking directors between Discount
Corp. and the 7 money-market banks, as well as between these institutions
and 89 other major financial companies. The names of individuals are indi
cated on the chart by code numbers, and the names of these individuals, plus the
names of all the other componies with which each is connected, are provided
on the attached list.
1678
EM PLOYM ENT, GROW TH, AND PRICE LEVELS
In 1957, Discount Corp.’s net profits amounted to $1.2 million. In 1958, its
net profits increased to $1.8 million, giving a return of 21 percent on its total
capital account, including undivided profits.
I n t e r l o c k i n g D ir e c t o r s o f D i s c o u n t C o r p . a n d I t s O w n e r - B a n k s W i t h
M ajo r F in a n c ia l I n s t it u t io n s
d is c o u n t
CORP.
1. Alexander, Henry Clay:
Morgan-Guaranty Trust Co., chairman.
Discount Corp., director.
Johns-Manville Corp., director.
American Viscose Corp., director.
Standard Brands, Inc., director.
General Motors Corp., director.
2. Anderson, Edward E .:
Discount Corp., senior vice president, director.
East River Savings Bank, trustee.
3. Champion, George:
Chase Manhattan Bank, president, director.
Discount Corp., director.
American Smelting & Refining Co., director.
Blind Brook Club, Inc., director.
Charter Oaks Fire Insurance Co., director.
Chase Manhattan Realty Corp., president, director.
Chase International Investment Corp., director.
Elsin Electronics Corp., director.
Japan Society, Inc., director.
Southern Railway Co., director.
Travelers Indemnity Co., director.
4. Cleveland, J. Luther:
Guaranty Trust Co. of New York, chairman.
Discount Corp., director.
Guaranty Safe Deposit Co., director.
Atchison, Topeka & Santa Fe Railroad, director.
Anaconda Co., director.
5. Colt, S. Sloan:
Bankers Trust Co., director.
Discount Corp., director.
Provident Insurance Co., director.
Royal Exchange Assurance Co., member U.S. Advisory Commission.
Port of New York Authority, commissioner.
Mutual Life Insurance Co. of New York, trustee.
American Bank Note Co., director.
General Foods Corp., director member finance committee.
General Electric Co., director, member finance committee.
American Can Co., director, member executive committee.
Tax Foundation, Inc., treasurer, trustee.
6. Helm, Harold V .:
Chemical Corn Exchange Bank, chairman.
Discount Corp., director.
Corn Products Refining Co., director, member executive committee*
City Investing Co., director.
Home Insurance Co., director, member finance committee, member exec
utive committee.
Home Indemnity Co., director, member executive committee.
Lykes Bros. SS Co., director.
United States Rubber Co., director.
Champion Paper Foundation, trustee.
Association of Reserve City Bankers, member.
New v 0rk Clearing House Association, member clearinghouse committee,
New York Clearing House Building Co., president.
New York Money Market, memb?r general committee.
Whitehall Foundation, Inc., trustee.
Commercial Solvents Corp., director, member executive committee,
audit committee.
Associated Dry Goods Corp., director, member executive committee.
EM PLOYM ENT, GROW TH, AND PRICE LEVELS
1679
6. Helm, Harold V.— Continued
/ (>im & Taylor, director.
Christian Properties Corp., trustee.
Champion Paper & Fibre Co., director.
F. W. Wool worth Co., director.
Eiuitable Life Assurance Society of United States, director, member
executive committee, member finance committee.
Ralston Purina Co., director.
National Industrial Conference Board, vice chairman, trustee.
7. Flanigan, Horace C .:
Manufacturers Trust Co., chairman.
Discount Corp., director.
Dollar Savings Bank, trustee.
New York Fire Insurance Co., director.
Stern Bros., director.
Bankers Club of America, governor.
Union Oil Corp. of California, director.
Hilton Hotels Corp., director.
General Aniline & Film Corp., director.
Allied Stores Corp., director.
Anchor Hocking Glass Corp., director.
Beekman-Downtown Hospital, director.
8. Massie, Adrian M .:
New York Trust Co., chairman.
Discount Corp., director.
Pacific Insurance Co. of New York, director.
Commonwealth Insurance Co., director.
Mercantile Insurance Co., director.
Bankers & Shippers Insurance Co., director.
Jersey Insurance Co., director.
North British & Mercantile Insurance Co., director.
Greenwich Savings Bank, trustee.
U.S. Life Insurance Co., director.
9. Mills, Dudley H .:
Discount Corp., chairman.
Underwood Corp., director.
Great American Insurance Co., director.
American National Insurance Co., director.
G.eat American Indemnity, director.
Rochester American Insurance Co., director.
10. Repp, Herbert N .:
Discount Corp., president, director.
Investment Bankers Association of America, Governmental Securities
Committee, member.
11. Sheperd, Howard C. :
First National City Bank, New York, chairman.
International Banking Corp., chairman.
National City Foundation, chairman.
Discount Corp., director.
National City Realty Corp., president, director.
Anaconda Co., director.
Best & Co., director.
Canadian Pacific Railway, director.
Corning Glass Works, director.
Federal Insurance Co., director.
Federal Reserve Bank of New York, class A director.
New Jersey Zinc Co., director.
Union Pacific Railway, director.
United Aircraft Corp., director.
Consolidated Edison Co., trustee.
East River Savings Bank, trustee.
National City Safe Deposit Co., director.
First National City Trust Co., director.
J. C. Penney Co., director.
12. Sherer, Dunham B .:
Chemical Corn Exchange Bank, director.
1680
EM PLOYM ENT, GROW TH, AND PRICE LEVELS
BANKERS TRUST CO.
Colt, S. Sloan. ( See Discount Corp.)
13. Cullman. Howard S .:
Bankers Trust Co., director.
Cullman Bros., Inc., president, director.
Port of New York Authority, honorary chairman.
Fifth Avenue Coach Lines, Inc., director.
Lexington Ave. & 42d Street Corp., chairman.
Prudential Insurance Co. of America, director.
Waldorf-Astoria Hotel Corp., director.
Philip Morris, Inc., director.
Tobacco Merchants Association, president, director.
14. Given, William B .:
American Brake Shoe Co., chairman.
Bankers Trust Co., director, member executive committee.
Bucyrus-Erie Co.. director, member executive committee.
Mellon National Bank & Trust Co., director.
Combustion Engineering, Inc., director, chairman, executive committee.
Dry Dock Savings Bank, trustee.
Lloyds-Brake Shoe, Ltd., chairman.
Lloyds (Burton), Ltd., director.
Fabrications Auxiliares des Industries Locomotrices (French), honorary
president.
Dominion Brake Shoe Co., Ltd., director.
15. Hanes, John W . :
Olin Mathieson Chemical Corp., director.
Bankers Trust Co., director.
United States Lines Co., director, chairman, executive committee and
finance committee.
Johns-Manville Corp., director.
Purcolator Products, Inc., director.
Mutual Life Insurance Co. of New York, trustee.
P. H. Hanes Knitting Co., director.
16. Lapham, Lewis A . :
Grace Line, Inc., president, director.
Bankers Trust Co., director.
Federal Insurance Co., director.
Barber Oil Co., director.
W. R. Grace & Co., director.
Tri-Continental Corp., director.
H. J. Heinz Co., director.
Maritime Association, Port of New York City, president.
American Bureau of Shipping, member board of managers, member
finance committee.
17. Leeb, Brian P .:
Bankers Trust Co., director.
Franklin Savings Bank, trustee.
Phoenix London Group, director.
18. Montgomery, George G .:
Kern County Land Co., president, director.
Bankers Trust Co., director.
Castle & Cook, Inc., director.
Pacific National Life Assurance Co., director.
Matson Navigation Co., director.
Oceanic Steamship Co., director.
American Trust Co., director.
General Electric Co., director.
Pacific Lumber Co., director.
19. Morgan, Thomas A . :
Bankers Trust Co., member executive committee, member trustee
committee, director.
Lehman Corp., director.
Atlantic Mutual Insurance Co., trustee.
Bulova Watch Co., director.
Centennial Insurance Co., director.
Western Union Telegraph Co., director.
EM PLOYMENT, GROW TH, AND PRICE LEVELS
1681
19. Morgan, Thomas A.— Continued
Shell Oil Co., director.
General Aniline & Film Corp., chairman retirement committee, member
executive committee and research committee, director.
United States Industries, Inc., director, member executive committee.
Jewelers Acceptance Corp., director.
Standard Financial Corp., director.
20. Puckett, B. Earl :
Bankers Trust Co., director.
Allied Stores Corp., chairman.
Jack Black Dry Goods Co., director.
L. S. Donaldson Co., director.
L. H. Field Co., director.
Golden Rule, director.
Herpolsheimer Co., director.
Jordan Marsh Co., director.
Joske Bros., Co., director.
F. N. Joslin Co., director.
Maas Bros., Inc., director.
Meyer’s Co., director.
Morehouse-Martens Co., director.
Muller Co., Ltd., director.
O’Neill & Co., director.
Pomeroy’s, Inc., director.
A. Polsky Co., director.
IIoilman & Sons Co., director.
Louis Samler, Inc., director.
Titche-Goettinger Co., director.
A. E. Troutman Co., director.
C. M. Guggenheimer, Inc., director.
George B. Peck, Inc., director.
Waite’s, Inc., director.
Heer’s, Inc., director.
C. C. Anderson Stores Co., director.
Polsky Realty Co., director.
B. Gertz, Inc., director.
Bon Marche, Inc., director.
Stern Bros., director.
Lehman Corp., director.
Pee Wee Corp., president, director.
Wayne Petroleum Co., president, director.
Robinson-Puckett, Inc., director.
20th Century-Fox Corp., director.
21. Reed, Philip D .:
General Electric Co., chairman, finance committee.
Bankers Trust Co., director.
American Express Co., director.
American Express Co., Inc., director.
Metropolitan Life Insurance Co., director.
National Dairy Products Corp., director.
Scott Paper Co., director.
Hoving Corp., director.
Tiffany & Co., director.
Otis Elevator Co., director.
Bigelow-Sanford Carpet Co., director.
22. Taylor, William T . :
ACF Industries, Inc., chairman.
Bankers Trust Co., director.
Adams Land & Development Corp., director.
American Land & Development Corp., director.
Adams Express Co., member, executive committee and board of
managers.
American International Corp., member, executive committee.
Allied Stores Corp., director.
Fairfield County (Conn.) Trust Co., director.
Basic Research Corp., trustee.
1682
EM PLOYM ENT, GROW TH, AND PRICE LEVELS
23. Tompkins, Boyston A . :
Bankers Trust Co., director.
Bowery Savings Bank, trustee.
General American Investors, director.
Otis Elevator Co., director.
Babcock & Wilcox Co., director.
National Aviation Corp., director.
Flintkote Co., director.
International Paper Co., director.
Detroit Edison Co., director.
Webb & Knapp, Inc., director.
Purolater Products, Inc., director.
24. Watson, Thomas J., Jr.:
IBM Corp., president* director.
Bankers Trust Co., director.
Mutual Life Insurance Co., director.
International Correspondence Schools, World, Ltd., director.
Time, Inc., director.
CH ASE
MANHATTAN
BANK
25. Bell, Elliott V .:
McGraw-Hill Publishing Co., chairman, executive committee, director.
Chase National Bank, director.
Business Week, editor and publisher.
New York Life Insurance Co., member, executive committee; member,
finance committee, director.
Dime Savings Bank of Brooklyn, trustee.
New York Telephone Co., director.
American Agricultural Chemical Co., director.
Revere Copper & Brass, Inc., director.
Tri-Continental Corp., director.
Carrier Corp., director.
26. Catharine, Robert M .:
Dollar Savings Bank of New York, chairman, trustee.
Chase Manhattan Bank, director.
Commonwealth Insurance Co. of New York, director.
U.S. Board, North British & Mercantile Insurance Co., director.
Maryland Casualty Co., director.
Champion, George. (See Discount Corp.)
27. Clay, Lucius D. :
Continental Can Co., chairman.
Lehman Corp., director.
General Motors Corp., director.
Central Savings Bank of New York, trustee.
Metropolitan Life Insurance Co., director.
American Express Co., director.
United States Lines, Inc., director.
28. Davies, Paul L .:
Food Machinery & Chemical Corp., chairman, director.
Chase Manhattan Bank, director.
American Trust Co., director.
California Water Service Co., director.
Caterpillar Tractor Co., director.
International Business Machine Corp., director.
Southern Pacific Co., director.
National Industrial Conference Board, director.
Pacific Gas & Electric Co., director.
Stanford Research Institute, director.
29. De Butts, Henry Ashby:
Southern Railway Co., president, director.
Chase Manhattan Bank, director.
Cincinnati, New Orleans & Texas Pacific Railway, president, director.
Alabama Great Southern Railway, president, director.
Richmond-Washington Co., director.
New Orleans & Northern Railroad Co., president, director.
EM PLOYM ENT, GROWTH, AND PRICE LEVELS
1683
29. De Butts, Henry Ashby— Continued
Georgia Southern & Florida Railway Co., president, director.
Association of American Railroads, director.
Equitable Life Assurance Society of United States, director.
Riggs National Bank, director.
Richmond, Fredericksburg & Potomac Railroad, director.
Woodward & Lothrop, Inc., director.
30. De Witt, J. Doyle:
Travelers Insurance Co., president, director.
Chase Manhattan Bank, director.
Travelers Indemnity Co., president, director.
Chase Manhattan Realty Corp., director.
Hartford Electric Light Co., director.
Charter Oaks Fire Insurance Co., president, director.
Mechanics Savings Bank (Hartford), trustee.
Travelers Broadcasting Service Corp., director.
Veeder-Root, Inc., director.
Hartford National Bank & Trust Co., director.
Holo-Krome Screw Co., director.
Connecticut Public Expenditure Council, Inc., trustee.
Southern New England Telephone Co., director.
United Aircraft Corp., director.
31. Ecker, Frederic W .:
Metropolitan Life Insurance Co., president, director.
Chase Manhattan Bank, director.
China Medical Board of New York, Inc., trustee.
Institute of Life Insurance, director.
Life Insurance Association of America, director.
Life Insurance Medical Research Fund, director.
32. Holman, Eugene:
Standard Oil Co. (New Jersey), chairman; director; chairman, execu
tive committee.
Chase Manhattan Bank, director.
Metropolitan Life Insurance Co., director.
33. Kappel, Frederick R .:
American Telephone & Telegraph Co., president, director.
Chase Manhattan Bank, director.
Metropolitan Life Insurance Co., director.
34. Martino, Joseph A .;
National Lead Co., director; chairman, executive committee.
Chase Manhattan Bank, director.
Chemetron Corp., director.
Allegheny Ludlum Steel Corp., director.
Baker Castor Oil Co., director.
Morris P. Kirk & Son, Inc., vice president, director.
R-N Corp., director.
Pioneer Aluminum, Inc., chairman.
Baritina de Venezuela S.A., director.
Fidelity & Casualty Co. of New York, director.
Minnesota Linseed Oil Co., chairman.
Nickel Processing Corp., chairman.
Titanium Metals Corp. of America, director.
East River Savings Bank, trustee.
ABC Paramount Theaters, Inc., director.
35. McCloy, John J .:
Chase Manhattan Bank, chairman, director.
American Telephone & Telegraph Co., director; member, executive
committee
Metropolitan Life Insurance Co., director; member, finance committee.
Ford Foundation, chairman.
Westinghouse Electric Corp., director.
Rockefeller Foundation, trustee.
United Fruit Co., director.
Allied Chemical Corp., director.
1684
EM PLOYM ENT, GROWTH, AND PRICE LEVELS
36. Oates, James Franklin, J r.:
Equitable Life Assurance Society, president, chairman.
Chase Manhattan Bank, director.
First National Bank of Chicago, director.
Great Northern Railway, director.
Miehle-Goss-Dexter, Inc., director.
37. Percy, Charles Hartig:
Bell & Howell Co., president, director.
Harris Trust & Savings Bank, director.
Burroughs Corp., director.
38. Prior, Frank O .:
Standard Oil (Indiana), chairman, director.
Chase Manhattan Bank, director.
American Petroleum Institute, director.
American Oil Co., director.
First National Bank of Chicago, director.
39. Russell, Frank F .:
Cerro de Pasco Corp., chairman.
Chase Manhattan Bank, director.
National Aviation Corp., director.
Otis Elevator Co., director.
Union Oil & Gas Corp. of Louisiana, director.
Worthington Corp., director.
Popular & Porvenir Cia de Seguros, director.
Martin Co., director.
Circle Wire & Cable Corp., director
Fairmont Aluminum Co., director.
Peruvian American Association, president, director.
40. Stone, Whitney:
Stone & Webster, Inc., chairman.
Chase Manhattan Bank, director.
American Express Co., director.
Stone & Webster Engineering Corp., director.
Stone & Webster Service Corp., director.
Stone & Webster Securities Corp., director
San Salvador Development Co., director.
General Reinsurance Corp., director.
C H E M IC AL CORN E X C H A N G E B A N K
41. Black, James B .:
Pacific Gas & Electric Co., chairman; member, executive committee ,*
director.
Chemical Corn Exchange Bank, director.
United States Steel Corp., director.
Southern Pacific Co., member, executive committee; director.
Equitable Life Assurance Society of United States, director.
Shell Oil Co., director.
Gila River Ranch, Inc., member, executive committee; director.
Firemen’s Fund Insurance Co., member, executive committee; director.
Ford Foundation, trustee.
Del Monte Properties Co., director.
California Pacific Title Insurance Co., member, executive committee;
director.
42. Black, Kenneth E .:
Home Insurance Co., president & director.
Chemical Corn Exchange Bank, director.
Home Indemnity Co., president and director.
Harlem Savings Bank, trustee.
Atlantic Coast Line Railroad, director.
Insurance Society of New York, director.
General Adjustment Bureau, Inc., director.
George A. Fuller Co., director.
National Board of Fire Underwriters Building Corp., president.
Underwriters’ Laboratories, Inc., director.
EM PLOYM ENT, GROWTH, AND PRICE LEVELS
1685
43. Bruce, James:
Chemical Corn Exchange Bank, director.
American Airlines, Inc., director.
Commercial Credit Corp., direcor.
General American Investment Co., director.
Equity Corp., director.
United States Industries, Inc., director.
Fruehauf Trailer Co., director.
National Dairy Products Co., director.
Revlon, Inc., director.
Congoleum Nairn, Inc., director.
Technicolor, Inc., director.
Federal Home Loan Bank of New York, director.
Republic Steel Corp., director.
Avco Corp., director.
Continental Insurance Co., director.
Western Tablet & Stationery Co., director.
Fairbanks Morse & Co., director.
44. Callaway, Cason J .:
Blue Springs Farms, owner.
Chemical Corn Exchange Bank, director.
United States Steel Corp., director.
Nutrition Foundation, Inc., trustee.
Trust Co. of Georgia, director.
Shell Oil Co., director.
45. Drysdale, Robert A .:
Drysdale & Co., senior partner.
Chemical Corn Exchange Bank, director.
Central Savings Bank, trustee.
Guardian Life Insurance Co., director.
Westchester F re Insurance Co., director.
North River Fire Insurance Co., director
U.S. Fire Insurance Co., director.
46. Few, Benjamin F .:
Liggett & Myers Tobacco Co., president and director.
Chemical Corn Exchange Bank, director.
Bank for Savings in City of New York, trustee.
Duke Power Co., director.
47. Grainger, Isaac B .:
Chemical Corn Exchange Bank, president and director.
Safety Industries, Inc., director.
Fort Myers Southern RR. Co., director.
Hartford Fire Insurance Co., director.
Hartford Accident & Indemnity Co., director.
48. Harris, Henry Upham:
Harris, Upham & Co., partner.
Chemical Corn Exchange Bank, director.
Texas Co., director.
Oceanarium, Inc., partner and director.
Stone & Webster, Inc., director.
Great American Insurance Co., director.
49. Hauser, Alfred H .:
Chemical Corn Exchange Bank, vice president.
American L;fe Insurance Co. of New York, director.
Colonial Ice Co., director.
Porete Manufacturing Co., director.
Maracaibo Oil Exploration Corp., director.
American Surety Co., trustee.
Empire City Savings Bank, trustee.
Granby Consolidated Mining, Smelting & Power Co., Ltd., director.
Helm, Harold H. ( See Discount Corp.)
60. Houston, Frank K . :
Chemical Corn Exchange Bank, honorary chairman, vice chairman,
director, executive committee.
Standard Insurance Co. of New York, director.
Thomas Jefferson Memorial Foundation, chairman.
1686
EM PLOYMENT, GROW TH, AND PRICE LEVELS
50. Houston, Frank K.— Continued
Aetna Insurance Co., director.
Century Indemnity Co., director.
Piedmont Fire Insurance Co., director.
World Fire & Marine Insurance Co., director.
Hotel Waldorf-Astoria Corp., director.
51. Humphreys, Harry E., J r.:
IT.S. Rul ber Co., chairman.
Chemical Corn Exchange Bank, director.
Latex F ber Industries, Inc., director.
Terminal Warehouses, Ltd., director.
Great American Insurance Co., director.
Dominion Rubber Co., Ltd., director.
Mutual Life Insurance Co. of New York, trustee.
Rubber Manufacturers Association, director.
National Industrial Conference Board, member.
52. Jackson, N. Baxter:
Chemical Corn Exchange Bank, chairman, executive committee and
director.
General R°insurance Corp., director.
McCrory Stores Corp., director.
American Chicle Co., director.
French American Banking Corp., director.
Interchemical Corn., director.
Western Electric Co., director.
Aluminium, Ltd., director.
Alco Products, Inc., director.
American Chain & Cable Co., director.
Home Life Insurance Co., director.
Ncrth Star Reinsurance Corp., director.
Port of New York Authority, commissioner.
53. Kellstadt, Charles H .:
Sears, Roebuck & Co., president and director.
Allstate Insurance Co., director.
First National Bank (Atlanta), director.
First National Bank (Miami), director.
Continental Illinois National Bank & Trust, director.
Whirlpool Corp., director.
54. McKim, Robert J .:
Associated Dry Goods Corp., president and director.
Chemical Corn Exchange Bank, director.
Bowery Savings Bank, trustee.
55. Williams, Thomas R .:
Ichabod T. Williams & Sons, Inc., president.
Chemical Corn Exchange Bank, director.
George D. Emery Co., president and director.
Edgewater Saw Mills Co., president and director.
Niagara Fire Insurance Co., director.
Astoria Importing & Manufacturing Co., president and director.
Astoria Pan-Americana, Inc., chairman.
56. Woods, J. Albert:
Chemical Corn Exchange Bank, director.
Central Savings Bank, director.
Corn Products Co., director.
Wilson & Toomer Fertilizer Co., director.
American Smelting & Refining Co., director.
FIRST NATIO N AL CITY B A N K OF N E W YORK
57. Allyn, Stanley Charles:
National Cash Register Co., chairman.
First National City Bank of New York, director.
Armco Steel Corp., director.
Western Allegheny Railroad, director.
Northwestern Mutual Life Insurance Co., trustee.
Mead Corp., director.
EM PLOYM ENT, GROWTH, AND PRICE LEVELS
1687
58. Chubb, Percy, 2d:
Chubb & Son, partner.
First National City Bank of New York, director.
Federal Insurance Co., president and director.
Vigilant Insurance Co., president and director.
National Foreign Trade Council, Inc., director.
American Institute of Marine Underwriters, director.
International Banking Corp., director.
Colonial Life Insurance Co. of America, director.
59. Dodge, Cleveland E arl:
Phelps-Dodge Corp., vice president and director.
First National City Bank of New York, director.
Atlantic Mutual Insurance Co., trustee.
Brooklyn Bridge Freezing & Cold Storage, director.
Centennial Insurance Co., trustee.
First National City Trust Co., director.
Dodge Fibers Corp., director.
Habirshaw Cable & Wire Corp., director.
Merchants Refrigerating Co., director.
Montezuma Copper Co., vice president and director.
Phelps Dodge Copper Products Corp., director.
Phelps Dodge Mercantile Co., vice president.
Phelps Dodge Refrigerating Corp., vice president and director.
Southern Pacific Co., director.
60. Follis, Ralph Given :
Standard Oil of California, president and chairman.
First National City Bank of New York, director.
California Commercial Co., director.
American Gilsenite Co., director and deputy chairman.
Arabian American Oil Co., director and vice chairman.
Trans-Arabian Pipeline Co., chairman.
Crocker-Anglo National Bank, director.
U.S. Council, International Chamber of Commerce, trustee.
Federal Engineering Corp., director.
Stanford Research Institute, trustee.
National Petroleum Council, vice chairman.
National Industrial Conference Board, chairman.
American Petroleum Institute, director.
61. Forward, DeWitt A .:
First National City Bank of New York, director and senior vice
president.
National City Safe Deposit Co., director.
Dime Saving Bank (Brooklyn), trustee.
Boeing Airplane Co., director.
International Banking Corp., director.
Allis Chalmers Manufacturing Co., director.
National City Foundation, director.
Phillips Petroleum Co., director.
62. Grace, Joseph P., J r.:
W. R. Grace & Co., president and director.
First National City Bank of New York, director.
Brazilian Technical Fund, president.
Carthusian Foundation in America, Inc., director.
Casita Mara (Elizabeth Seton League, Inc.), director.
Emigrant Industrial, S. B., trustee.
Grace Institute, president and trustee.
International Chamber of Commerce, U.S. Council, trustee.
Grace Line, Inc., director.
Atlantic Mutual Insurance Co., trustee.
Ingersoll-Rand Co., director.
Northern Insurance Co., of New York, director.
Stone & Webster, Inc., director.
Assurance Co. of America, director.
Centennial Insurance Co., trustee.
Yale Institute of International Studies, council member.
1688
EM PLOYM ENT, GROW TH, AND PRICE LEVELS
63. Hagerty, Harry C. :
Metropolitan Life Insurance Co., vice president (F ). director
First National City Bank of New York, director.
Erie Railroad, director.
East River Savings Bank, director.
Rochester Gas & Electric Co., director.
National Broadcasting Co., director.
Radio Corp. of America, director.
64. Horner, H. Mansfield:
United Aircraft Corp., chairman and director.
First National City Bank of New York, director.
Hartford National Bank & Trust, director.
Southern New England Telephone Co., director.
Travelers Insurance Co., director.
65. Nagle, Alexander C .:
First National City Bank of New York, director.
American Radiator & Standard Sanitary Co., director.
National Biscuit Co., director.
United States Steel Corp., director.
Prudential Insurance Co., director.
American Sugar Refining Co., director.
66. Parlin, Charles C .:
Shearman & Sterling & Wright, member.
First National City Bank of New York, director.
United States & Foreign Securities Corp., president and director.
Citizens National Bank, director.
Alfred Hofmann & Co., director.
Celanese Corp. of America, director.
York Commercial Corp., director.
Guerlain Inc., director.
Potash Import & Chemical Corp., director.
Compania Ontario, director.
Pallas Corp., director.
67. Perkins, Richard Sturgis :
First National City Bank of New York, vice chairman.
Phoenix Assurance Co., director.
City Bank Farmers Trust Co., chairman.
Ritz-Carlton Hotel Co., director.
New York Life Insurance Co., director.
Prudential Insurance Co.. Great Britain, director.
Hudson Insurance Co., director.
International Telephone & Telegraph Corp., director.
Royal Globe Group, director.
Bank of Monrovia, director.
International Banking Corp., director.
National City Safe Deposit Co., director.
Phelps Dodge Corp., director.
Provident Loan Society, trustee.
Southern Pacific Co., director.
Allied Chemical Corp., director.
Sheperd, Howard C. ( See Discount Corp.)
68. Temple, Alan H .:
First National City Bank of New York, vice chairman, director.
International Banking Corp., director.
Prudential Insurance Co. of Great Britain, director.
Hudson Insurance Co., director.
Seaboard Surety Co., director.
Atlantic Mutual Insurance Co., trustee.
Centennial Insurance Co., director.
Moore Corp., Ltd., director.
69. Wintlirop, Robert:
Robert Winthrop & Co., general and special partner.
First National City Bank of New York, director.
Green Bay & Western Railroad, vice president, director.
Kewaunee Green Bay & Western Railroad, vice president, director.
EM PLOYMENT,
GROWTH, AND PRICE LEVELS
1689
t>9. Winthrop, Robert— Continued
Stony Point Land Co., director.
First National City Trust Co., director.
Seamen’s Bank for Savings, secretary, board of trustees ; trustee.
Eagle Fire Insurance Co. of New York, director.
First National City Safe Deposit Co., director.
International Banking Corp., director.
Norwich Union Insurance Co., director.
U.S. & Foreign Securities Corp., director.
Wall Street Investing Corp., chairman, advisory council.
M A N U F A C T U R E R S T R U S T CO.
70. Brush, Alvin G .:
American Home Products Corp., chairman.
Manufacturers Trust Co., <i:re -tor.
American Foundation for Pharmaceutical Education, director.
Buck Hill Falls Co., director.
Dime Savings Bank, Brooklyn, trustee.
Electric Bond & Share Co., director.
United Medical Service, director.
71. Crandall, Lou R .:
George G. Fuller Co., chairman.
Manufacturers Trust Co., director.
Curtiss-Wright Corp., director.
Sperry & Hutchinson Co., director.
Harlem Savings Bank, trustee.
General Cable Corp., director.
Home Insurance Co., director.
Sears, Roebuck & Co., director.
Flanigan, Horace C. ( See Discount Corp.)
72. Franklin, John M .:
U.S. Lines Co., president, director.
Manufacturers Trust Co. director.
Baltimore & Eastern Railroad, director.
Worthington Corp., director
Number One Broadway Corp., president, director.
Roosevelt Steamship Co., president, director.
U.S. Lines Co. (Canada) Ltd., president, director.
U.S. Operations, Inc., president, director.
Atlantic Transport Co., Ltd., director.
American Merchant Marine Institute, director.
Home Insurance Co., director.
Continental Can Co., Inc., director.
American Bureau of Shipping, director.
American Steamship Owners Mutual P. & I. Association, Inc., director.
Laurel Race Course, Maryland State Fair, Inc., director.
73. Gerli, Paolino:
Manufacturers Trust Co., director.
American & Foreign Insurance Co., director.
Belding Hemingway Co., director.
International Silk Guild, president, director.
Iiuerstate L'ei>aitment Stores, Inc., director.
Commodity Exchange, director.
La France Industries, Inc., chairman.
Emigrant Industrial Savings Bank, trustee.
International Silk Association, director.
Cheney Bros., Inc., vice president, director.
74. Johnston, Oswald L .:
Simpson, Thacher & Bartlett, partner.
Manufacturers Trust Co., director.
Atlas Corp., vice president, secretary, director.
E. W. Bliss Co., chairman, executive committee ; director.
General Baking Co., director.
Stern Bros,, director.
Harris-Intertype Corp., director.
38563 O— 59— pt. 6B------ 13
1690
EMPLOYMENT^
GROWTH, AND PRICE LEVELS
74. J o h n sto n . O sw a ld L .— C o n tin u e d
75.
76.
77.
78.
79.
Hidden Splendor Mining Co.. director.
Petro-Atlas Corp., director.
Electric Bond & Share Co., director.
Leitliead, Barry T. :
Ovett Peabody & Co., president, director.
Manufacturers Trust Co., director.
Cluett Peabody & Co. of Canada, chairman.
B. F. Goodrich Co., director.
Travelers Insurance Co., director.
Madden, John T . :
Emigrant Industrial Savings Bank, chairman, trustee.
Manufacturers Trust Co., director.
W. R. Grace & Co., director.
J. P. Maguire & Co., director.
Coca-Cola Bottling Co. of New York, director.
Rabe, William G .:
Manufacturers Trust Co., chairman, treasury committee; director.
Hershey Creamery Co.. treasury; chairman, executive committee;
director.
Allegheny Corp.. member, executive committee; director.
First Geneva Corp., president, director.
Aeolian-American Co., director.
Technicolor, Inc., director.
Bankers Commercial Corp., director.
Stern Bros., director.
Beech-Nut Life Savers, Inc., director.
Robinson, William E .:
Coca-Cola Co., chairman, director.
Manufacturers Trust Co., director.
Libbey-Owens-Ford Glass Co., director.
Coca-Cola Export Corp., director.
Coca-Cola Ltd., Toronto, director.
Harlem Savings Bank, director.
Sargent, Henry B .:
American Foreign Power Co., president, director.
Manufacturers Trust Co., director.
Central Mexico Light & Power, director.
Cia Brasileira de Forea Electrea, chairman.
Cia Colombiana de Electricidea, director.
Cia Cubana de Electricidea, chairman.
Cia Panamena de Fuerza y Luz, director.
Cordoba (Argentine) Electric Tramways Construction Co., Ltd.,
director.
Cordoba Light & Power Co., director.
Ebasco International Corp., chairman.
Empresas Electrica del Equador, Inc., director.
Empresas Electrica Argentenas, chairman.
Empresas Electrica Mexicanas, Inc., chairman.
Guanra.iuato Power & Electric Co., director.
Far East Power Corp., chairman, president.
Northern Mexico Power & Development Co., Ltd., chairman.
Pernambuco Tramways & Power Co., Ltd., director.
Puebla Tramway Light & Power Co., chairman.
Public Utilities Investment Trust, Ltd., chairman.
Rio Grandense Light & Power Syndicate, Ltd., director.
South American Power Co., chairman, president.
Shanghai Power Co., chairman.
Telephone Co. of Pernambuco, Ltd., director.
Stanford Research Institute, director.
American Institute for Foreign Trade, director.
Electric Bond & Share Co., director.
U.S. Life Insurance Co., director.
EM PLOYMENT, GROWTH, AND PRICE LEVELS
1691
80. Smith, Harold V .:
Home Insurance Co., chairman, director.
Manufacturers Trust Co., director.
Home Indemnity Co., chairman, director.
Lehman Corp., director.
Pennsylvania Mutual Life Insurance Co., trustee.
Gracie Square-River Corp., director.
81. Van Bomel, Leroy Allison:
National Dairy Products Corp., consultant.
Manufacturers Trust Co., director.
New York University, member council.
Nutrition Foundation, Inc., trustee.
American Surety Co., trustee.
Ryder System, Inc., director.
Transportation Mutual Insurance Co., director.
82. Von Elm, Henry C .:
Manufacturers Trust Co., honorary chairman, director.
Sperry & Hutchinson, director.
George A. Fuller Co., director.
Home Insurance Co., director; member, finance committee.
George W. Rogers Constuction Corp., director.
83. Walker, George S .:
Electric Bond & Share Co., president, director.
Manufacturers Trust Co., director.
Ebasco Services, Inc., chairman.
United Gas Corp., director.
American & Foreign Power Co., director.
Schering Corp., director.
Escambia Chemical Corp., director.
Chemical Construction Corp., director.
MORGAN GUARANTY TRUST CO.
Alexander, Henry C. (See Discount Corp.)
84. Bechtel, Stephen D .:
Bechtel Corp., president, director.
Morgan Guaranty Trust Co., director.
Bechtel International, Ltd., chairman.
Nuclear Power Group, Inc., director.
Bechtel International Corp., chairman.
International Bechtel Builders, Inc., chairman.
Arabian Bechtel Corp., chairman.
Pacific Bechtel Corp., chairman.
Kuwait Bechtel Corp., chairman.
Bechtel International Co., chairman.
Bechtel Nuclear Corp., chairman.
Bechtel Foundation, president.
U.S. Department of Commerce, chairman, business advisory committee.
International Bechtel, Inc., chairman.
Continental Can Co., director.
Industrial Indemnity Co., director.
Lakeside Foundation, director.
Lakeside Corp., president, director.
Canadian Bechtel, Ltd., chairman.
Southern Pacific Co., director.
U.S. Lines Co., director.
Stanford Research Institute, director.
85. Cabot, Paul C .:
State Street Research & Management Co., partner.
Morgan Guaranty Trust Co., director.
State Street Investment Corp., chairman.
Eastern Gas & Fuel Association, trustee; member, executive committee.
National Dairy Proucts Corp., director; member, executive committee.
B. F. Goodrich Co., director.
Continental Can Co., director.
Ford Motor Co., director.
1692
EM PLOYMENT,
GROWTH, AND PRICE LEVELS
86. Cheston, Charles Steele:
Morgan Guaranty Trust Co., director.
Western Savings Fund Society (Philadelphia), member, board of
managers.
Provident Mutual Life Insurance Co. (Philadelphia), director.
Philco Corp., director.
Philadelphia National Bank, director.
Insurance Co. of North America, director.
Monsanto Chemical Co., director.
Mead Corp., director.
Muskogee Co., director.
Plax Corp., director.
Kansas, Oklahoma & Gulf Refinery, director.
American Airlines, Inc., director.
Chemstrand Corp., director.
Indemnity Insurance Co. of North American, director.
Monsanto (Canada), Ltd., director.
Cleveland, J. Luther. (See Discount Corp.)
87. Dickey, Charles Denston:
Morgan Guaranty Trust Co., director; chairman, executive committee.
Beaver Coal Corp., director.
Braden Copper Co., director.
Church Life Insurance Corp., director.
Church Fire Insurance Corp., director.
General Electric Co., director.
Kennecott Copper Corp., director.
New York Life Insurance Co., director.
Panhandle Eastern Pipe Line Co., director.
Western Savings Fund Society of Philadelphia, member, board of
managers.
Merck & Co., director.
Atlantic Refining Co., director.
88. Josephs, Devereux O .:
Morgan Guaranty Trust Co., director.
New York Life Insurance Co., director
Consolidated Edison Co. of New York, trustee.
Carnegie Corp., trustee.
American Smelting & Refining Co., director.
American Brake Shoe Co., director.
Smith, Kline & French Laboratories, director.
89. Morgan, Junius Spencer:
Morgan Guaranty Trust Co., director; member, executive committee.
Continental Can Co., director.
Atlantic Mutual Insurance Co., trustee.
Centennial Insurance Co., trustee.
90. Shanks, Carrol M .:
Prudential Insurance Co., president, director.
Morgan Guaranty Trust Co., director.
Life Insurance Association of America, director.
National Biscuit Co., president.
Public Service Electric & Gas Co., director.
Bigelow-Sanford Carpet Co., director.
Fidelity Union Trust Co. (Newark), director.
Institute of Life Insurance, director.
Georgia-Pacific Corp., director.
Union Carbide Corp., director.
91. Sharp, Dale E .:
Morgan Guaranty Trust Co., president, director.
Standard Accident Insurance Co. (Detroit), director.
Pilot Insurance Co. (Toronto), director.
Planet Insurance Co. (Detroit), director.
Yorkshire Insurance Co., chairman.
Seaboard Fire & Marine Insurance Co., director.
Wilson & Co., director.
EMPLOYMENT,
GROW TH, AND PRICE LEVELS
1693
92. Stetson, Eugene W . :
Morgan Guaranty Trust Co., director.
Textile Banking Co., chairman.
Coca-Cola Co., director ; member, finance committee.
French American Banking Corp., chairman advisory committee.
Illinois Central Railroad, director; chairman, executive committee.
United Stores Co., director.
Air Reduction Co., director ; member, executive committee.
Tri-Continental Corp., director; member, advisory committee.
Gulf Atlantic Warehouse Co., director; chairman, executive committee.
Tri-Continental Financial Corp., director.
93. Symes, James M .:
Pennsylvania Railroad, president, director.
Morgan Guaranty Trust Co., director.
Norfolk & Western Railway, director.
Wabash Railroad, director.
Detroit, Toledo & Toronto Railroad, director.
First Pennsylvania Banking & Trust Co., director.
Insurance Co. of North America, director.
American Railway Engineers Association, member.
94. Wingate, Henry S .:
International Nickel Co. of Canada, president, director.
Morgan Guaranty Trust Co., director.
International Nickel Co. (New York City), president, director.
Whitehead Metal Products Co., director.
Alloy Metal Sales, Ltd., director.
Gap Farms, Inc. (Philadelphia), director.
Centre d’information Du Nickel, Brussels, director.
Centre d’information Du Nickel, Paris, director.
Mond Nickel Co., Ltd., member, advisory committee.
American Radiator & Standard Sanitary Corp., director.
Seaman’s Bank for Savings, trustee.
Bank of Montreal, director.
Canadian Pacific Railway, director.
95. Woodruff, Robert W . :
Coca-Cola Co., director; chairman, finance committee.
Morgan Guaranty Trust Co., director.
Southern Railway, director.
Trust Co. of Georgia, director.
Continental Gin Co., director.
General Electric Co., director.
Metropolitan Life Insurance Co., director.
American Express Co., director.
NEW
YORK
T R U S T CO.
96. Aldrich, Hulbert S .:
New York Trust Co., president, director.
National Sugar Refining Co., director.
Excelsior Savings Bank, trustee.
Bridgeport Brass, director.
IBM World Trade Corp., director.
Noranda Copper & Brass, director.
Penn-Dixie Cement Corp., director.
New Britain Machine Co., director.
American & Foreign Insurance Co., director.
American Machine & Metals, Inc., director.
British & Foreign Marine Insurance Co., Ltd., director.
Globe Indemnity Co., director.
Liverpool & London & Globe Insurance Co., director.
National Distillers & Chemical Corp., director.
Newark Insurance Co., director.
One Hundred Fifty William Street Corp., director.
Queen Insurance Co. of America, director.
Royal Indemnity Co., director.
1694
EM PLOYMENT,
GROWTH, AND PRICE LEVELS
1)0. Aldricli, Hulbert S.— Continued
Royal Insurance Co., Ltd., director.
Star Insurance Co. of America, director.
Thomas & Mersey Marine Insurance Co., Ltd., director.
97. Aldrich, Malcolm Pratt:
Commonwealth Fund, president, director.
New York Trust Co., director.
Southern Pacific Co., director.
Equitable Life Assurance Co. of the United States, director.
98. Anthony, Graham Hudson:
Veeder-Root, Inc., director; chairman, executive committee.
New York Trust Co., director.
Holo Krome Screw Corp., chairman.
Connecticut Mutual Life Insurance, director.
Hartford National Bank & Trust, director.
Hartford Electric Light, director.
Aetna Insurance Co., director.
Southern New England Telephone Co., director.
Mechanics Saving Bank, director.
Burlington Industries, director.
99. Ballantine, Arthur A .:
Dewey, Ballantine, Bushby, Palmer & Wood, partner.
New York Trust Co., director.
Bowery Savings Bank, trustee.
New York Life Insurance Co., director.
General American Investors Co., director.
Springfield College, trustee.
Northeastern College, trustee.
United Hospital Fund of New York, honorary trustee.
100. Dunn, Kempton:
American Brake Shoe Co., president, director.
New York Trust Co., director.
Bucyrus Erie, director.
Franklin Savings Bank, trustee.
Dominion Brake Shoe Co., chairman.
101. Jennings, B. Brewster:
New York Trust Co., director.
Central Savings Bank of New York, trustee.
Massie, Adrian M. ( See Discount Corp.)
102. Paynter, Richard K., J r.:
New York Life Insurance Co., director; vice president; chairman,
finance committee
New York Trust Co., director.
Diocesan Investment Trust of Diocese of New Jersey, trustee.
Delaware & Bound Brook Railroad, director.
Employers’ Liability Assurance Corp., member, executive committee.
Otis Elevator Co., director.
Phoenix Assurance Co., director.
Seamen’s Bank for Savings, trustee.
General Cable Corp., director.
Colonial Williamsburg Insurance, trustee.
Pennsylvania-Reading Seashore Lines, director.
Princeton Inn, director.
103. Watson, Arthur K .:
IBM World Trade Corp., president, director.
New York Trust Co., director.
Niagara Fire Insurance Co., director.
American Brake Shoe Co., director.
Continental Insurance Co., director.
EM PLOYMENT,
M e m b e r s h ip
(1 )
J O IN T
E C O N O M IC
of
P O L IC Y
GROWTH, AND PRICE LEVELS
U.S.
T reasu ry
C O M M IT T E E
A d v is o r y
OF T H E
L IF E
1695
C o m m itte e s
IN S U R A N C E
A S S O C IA T IO N
OF
A M E R IC A A N D T H E A M E R IC A N L IF E C O N V E N T IO N -----M E M B E R S H IP A S OF J U L Y 9 , 1 9 5 0
O. K elley Anderson (ch airm an), president, New England M utual L ife Insurance
Co., Back B ay P ost Office B ox 338, Boston, M ass.
Claude L. Benner, president, C ontinental A m erican L ife Insurance Co., Rodney
Square, W ilm ington, Del.
H. W. Brower, president, O ccidental L ife Insurance Co. of C alifornia, B ox
2101 T erm inal Annex, Los A ngeles, Calif.
Paul F. Clark, chairm an of the board, John H ancock M utual L ife Insurance Co.,
P ost Office B ox 111, Boston, Mass.
Louis W. D aw son, president, M utual L ife Insurance Co. of N ew York, 1740
Broadw ay at 55th Street, N ew York, N.Y.
Frederic W. Ecker, president, M etropolitan L ife Ineurance Co., 1 M adison
Avenue, N ew York, N.Y.
Leland J. K alm bach, president, M assachusetts M utual L ife Insurance Co.,
1295 State Street, Springfield, M ass.
R. B. Richardson, president, W estern L ife Insurance Co., 600 Park Avenue,
H elena, Mont.
D onald C. Slichter, president, the N orthw estern M utual L ife Insurance Co.,
720 E ast W isconsin Avenue, M ilwaukee, W is.
Carrol M. Shanks, president, P rudential Insurance Co. of A m erica, N ew ark, N.J.
Frazar B. W ilde, president, C onnecticut General L ife Insurance Co., H artford,
Conn.
Jam es R alph W ood, president, Southw estern L ife Insurance Co., P ost Office
B ox 2699, D allas, Tex.
Staff m em bers:
Dr. Jam es J. O’Leary, director of econom ic research, L ife Insurance A sso
ciation of Am erica, 488 M adison Avenue, New York, N.Y.
Claris Adam s, execu tive vice president and general counsel, A m erican L ife
Convention, 1701 K Street NW ., W ashington, D.C.
Eugene M. Thore, vice president and general counsel, L ife Insurance A sso
ciation of A m erica, 1701 K Street, NW ., W ashington, D.C.
(2 )
MEMBERS
IN V E S T M E N T
BANKERS
OF G O V E R N M E N T A L
A S S O C IA T IO N
S E C U R IT IE S
OF A M E R IC A
C O M M IT T E E ,
19 59
Robert B. B lyth, chairm an, N ational City B ank of Cleveland, 623 Euclid A ve
nue, Cleveland, Ohio
Milton S. Bosley, N ational Bank of D etroit, W oodward at C adillac Square,
D etroit, Mich.
W endell T. Burns, N orthw estern N ational B ank of M inneapolis, 620 M arquette
Avenue, M inneapolis, Minn.
D w ight W. Chapman, Am erican T rust Co., 464 C alifornia Street, San Francisco,
Calif.
F. N ew ell Childs, C. F. Childs & Co., Inc., 141 W. Jackson B oulevard, Chicago.
111.
Jam es A. Cranford, The A tlan tic N ational Bank of Jacksonville, 121 W est For
syth Street, Jacksonville, Fla.
Stew art A. Dunn, C. J. D evine & Co., 48 W all Street, N ew York, N.Y.
W. W ayne Glover, C alifornia Bank, 625 South Spring Street, Los A ngeles, Calif.
Sheldon R. Green, Chase M anhattan Bank, 18 Pine Street, N ew York, N’.Y.
H. Lym an Greer, The F ifth Third Union T rust Co., Fourth and W alnut Streets,
Cincinnati, Ohio
A lfred H. H auser, Chem ical Corn E xchange Bank, 30 Broad Street, N ew York,
N.Y.
H ardin H. H aw es, H arris T rust & Savings Bank, 115 W est M onroe Street,
Chicago, 111.
R ussell A. K ent, B ank or Am erica N. T. & S. A., 300 M ontgom ery Street, San
Francisco, Calif.
George B. K neass, Philadelphia N ational Bank, 1416 C hestnut Street, P hilad el
phia, Pa.
Frederick G. Larkin, Jr., Security-First N ational Bank of Los A ngeles, Sixth
and Spring Streets, Los Angeles, Calif.
1696
EM PLOYM ENT, GROWTH, AND PRICE LEVELS
Kulpli F. Leach, Guaranty Trust Co. o f New York, 140 Broadway, New York, N.Y.
Pat G. Morris, The Northern Trust Co., 50 South La Salle Street, Chicago, 111.
Robert C. Morris, Bankers Trust Co., 16 W all Street, New York, N.Y.
Emil J. Pattberg, Jr., The First Boston Corp., 15 Broad Street, New York, N.Y.
John H. Perkins, Continental Illinois National Bank & Trust Co., 231 South
La Salle Street, Chicago, 111.
Lelmont K. Pfeffer, First National City Bank o f New York, 55 W all Street,
New York, N.Y.
L. Sumner Pruyne, The First National Bank of Boston, 67 Milk Street, Boston.
Mass.
Herbert N. Repp, Discount Corp. o f New York, 58 Pine Street, New York. N.Y.
Lockett Shelton, Republic National Bank o f Dallas, Dallas, Tex.
R u dolf Sinutny, R. W . Pressprich & Co., 48 W all Street, New York, N'.Y.
Girard L. Spencer, Salomon Bros. & Hutzler, 60 W all Street, New York, N.Y.
(3 ) GOVERNMENT SECURITIES AND TH E PUBLIC DEBT COMMITTEE OF TH E N ATIO N AL
ASSOCIATION OF M U T U A L SAVINGS B A N K S — M EM BERSH IP A S OF J U L Y 9 , 1 9 5 9
Carl G. Freese (chairm an ), president and treasurer, Connecticut Savings Bank
o f New Haven, 47 Church Street, New Haven, Conn.
Francis P. Burns, president, Beneficial Mutual Savings Bank, 1200 Chestnut
Street, Philadelphia, Pa.
Mr. C. Lane Goss, president, W orcester County Institution fo r Savings, 365 Main
Street, W orcester, Mass.
Mr. Henry S. Kingman, chairman o f the board. The Farmers & Mechanics Savings
Bank, 90 South Sixth Street, Minneapolis, Minn.
Mr. John W. Kress, executive vice president, The H ow ard Savings Institution,
768 Broad Street, Newark, N.J.
Mr. Charles J. Lyon, president, Society for Savings, 31 Pratt Street, H artford,
Conn.
Mr. W illiam A. Lyon, president, D ry D ock Savings Bank, 742 Lexington Avenue,
New York, N.Y.
Mr. K ilgore M acfarlane, Jr., president, Buffalo Savings Bank, 545 Main Street,
Buffalo, N.Y.
Mr. J. Reed Morss, president, The Boston Five Cents Savings Bank, 30 School
Street, Boston, Mass.
Mr. Barrett C. Nichols, treasury, Maine Savings Bank, 15 Casco Street, Portland,
Maine.
John M. Ohlenbusch, senior vice president, The Bow ery Savings Bank, 110
E. 42d Street, New York, N.Y.
Levi P. Smith, chairman o f the board, The Burlington Savings Bank, 148 College
Street, Burlington, Vt.
Mr. W illiam H. Smith, president, Holyoke Savings Bank, 143 Chestnut Street,
Holyoke, Mass..
Staff mem bers:
Dr. Grover W. Ensley, executive vice president, National Association of
Mutual Savings Banks, 60 East 42nd Street, New York, N.Y.
Saul B. Klaman, economist, National Association o f Mutual Savings Banks.
60 East 42nd Street, New York, N.Y.
(4 )
ADVISORY COMMITTEE OX GOVERNMENT SECURITIES OF THE SAVINGS AND LOAN
B USIN ESS— M EM BERSH IP A S OF J U L Y 9, 1 9 5 9
W. W. McAllister, Sr., (chairm an) chairman o f the board, San Antonio Savings
& Loan Association, 401 Navarro Street, San Antonio, Tex.
Edward C. Baltz, president, Perpetual Building Association, 500 11th Street NW.,
Washington, D.C.
W ilton T. Barney, president, Orital Savings & Loan Association, 326 Main
Street, Hackensack, N.J.
James E. Bent, president, H artford Federal Savings & Loan Association, 50
State Street, H artford, Conn.
A. J. Broomfield, president, Industrial Federal Savings & Loan Association,
1630 Stout Street, Denver, Colo.
Henry A. Bubb, president, Capitol Federal Savings & Loan Association, 534
Kansas Avenue, Topeka, Kans.
C. L. Clements, president, Chase Federal Savings & Loan Association, 1100
Lincoln Road, Miami Beach, Fla.
EMPLOYMENT,
GROWTH, AND PRICE LEVELS
1697
Carl D istelhorst, execu tive vice president, F lorida Savings & Loan League,
B ox 2246, Orlando, Fla.
W illiam J. D w yer, president, Franklin Society F ederal Savings & Loan, 217
B roadw ay, N ew York, N.Y.
G ustav Flexner, execu tive vice president, G reater L ouisville F irst F ederal
Savings & Loan A ssociation, 417 W est M arket Street, L ouisville, Ky.
H arold P. H alleen, senior vice president, B ell Savings & Loan A ssociation, 79
W est Monroe Street, Chicago, 111,
Raym ond P. Harold, president, W orcester F ederal Savings & Loan A ssociation,
22 Elm Street, Worcester, M ass.
H enry P. Irr, president, B altim ore Federal Savings & Loan A ssociation, F ay ette
and St. Paul Streets, Baltim ore, Md.
Roy W. Larsen, president, T w in City F ederal Savings & Loan A ssociation,
801 M arquette Avenue, M inneapolis, Minn.
E. C. Slierbourne, president. City F ederal Savings & Loan A ssociation, E ast
Jersey Street at Jefferson, E lizabeth, N.J.
A. D. Theobald, president, F irst Federal Savings & Loan A ssociation, 111
North Jefferson Avenue, Peoria, 111.
G errit Vander Ende. president, Pacific F irst F ederal Savings & Loan A ssociation,
204 South 11th Street, Tacoma, W ash.
Charles A. W ellm an, executive vice president, G lendale F ederal Savings & Loan
A ssociation, 122 W est Broadw ay, Glendale, Calif.
Paul W esterfield, president, H om e F ederal Savings & Loan A ssociation, 128
E ast Fourth Street, C incinnati, Ohio.
W. C. W arman, staff vice president (secretary to the com m ittee), U nited States
Savings & Loan League, 221 North La Salle Street, Chicago, 111.
(5 )
C O M M IT T E E
ON
GO VERNM ENT
B O R R O W IN G OF T H E
T IO N — M E M B E R S H IP A S OF J U L Y
A M E R IC A N
9,
BANKERS
A S SO C IA
1959
R obert V. F lem ing (chairm an) chairm an of the board, the R iggs N ational Bank,
W ashington, D.C.
H enry C. A lexander, chairm an of the board, M organ G uaranty T rust Co. of
N ew York, N ew York, N.Y.
B ruce Baird, president, N ational Savings & T rust Co., W ashington, D.C.
S. Clark B eise, president, B ank of Am erica N.T. & S.A., San F rancisco, Calif.
K enton R. Cravens, president, M ercantile T rust Co., St. Louis, Mo.
Fred F. Florence, chairm an, executive com m ittee, R epublic N ation al Bank of
D allas, D allas, Tex.
John M. Griffith, president, City N ational Bank, Taylor, Tex.
H. Frederick H agem ann, Jr., president, R ockland-Atlas N ational B ank of Boston,
Boston, Mass.
N. B axter Jackson, chairm an, executive com m ittee, C hem ical Corn E xchange
Bank, N ew York, N.Y.
D avid M. K ennedy, chairm an of the board, Continental Illinois N ational Bank
& Trust Co. of Chicago, Chicago, 111.
Hom er J. Livingston, president, the F irst N ational Bank of Chicago, Chicago, 111.
John J. McCloy, chairm an of the board, the Chase M anhattan Bank, N ew York,
N.Y.
Reno Odlin, president, P uget Sound N ational Bank, Tacom a, W ash.
F. Raym ond Peterson, chairm an of the board, F irst N ation al Bank & Trust
Co. of Paterson, Paterson, N.J.
D ietrich Schm itz, chairm an of the board, W ashington M utual Savings Bank,
Seattle, W ash.
E arl B. Schw ulst, president and chairm an of the board, the B ow ery Savings
Bank, N ew York, N.Y.
Jam es E. Shelton, chairm an of the board, Security-F irst N ation al B ank of
Los Angeles, Los Angeles, Calif.
N orfleet Turner, president, F irst N ational Bank of Memphis, M emphis, Tenn.
Joseph C. W elm an, president, Bank of K ennett, K ennett, Mo.
A. L. M. W iggins, chairm an of the board, the Bank of H artsville, H artsville, S.C.
Paul I. W ren, executive vice president, Old Colony T rust Co., 1 F ederal Street,
Boston, M ass.
Staff m em bers:
Eugene C. Zorn, Jr. (secretary of the com m ittee), deputy m anager and
director of research, Am erican Bankers A ssociation, 12 E ast 36th Street,
New York, N.Y.
FEDERAL ADVISORY COUNCIL
[o f the Federal Reserve System]
[December 31, 1958]
MEMBERS
District No. 1— L l o y d D.
ton, Massachusetts.
Brace,
President, The First National Bank of Boston, Bos
District No. 2— A d r i a n M . M a s s ie , Chairman of the Board, The New York Trust
Company, New York, New York.
District No. 3— C a s i m i r A . S i e n k i e w i c z , President, Central-Penn National Bank of
Philadelphia, Philadelphia, Pennsylvania.
District No. 4— F r a n k R. D e n t o n , Vice Chairman of the Board, Mellon National
Bank and Trust Company, Pittsburgh, Pennsylvania.
District No. 5 — J o h n S. A l f r i e n d , Chairman of the Board and President, National
Bank of Commerce, Norfolk, Virginia.
District No. 6 — J o h n A.
Atlanta, Georgia.
Si b l e y ,
District No. 7— H o m e r J.
cago, Chicago, Illinois.
Chairman of the Board, Trust Company of Georgia,
L iv in g s t o n ,
President, The First National Bank of Chi
District No. 8— W i l l i a m A . M c D o n n e l l , Chairman of the Board, First National
Bank in St. Louis, St. Louis, Missouri.
District No. 9— G o r d o n
Minneapolis, Minnesota.
M urray,
President, First National Bank of Minneapolis,
District No. 10 — R . C r o s b y K e m p e r , Chairman of the Board and President, The
City National Bank and Trust Company of Kansas City, Kansas City, Missouri.
District No. 11— W a l t e r B.
port, Shreveport, Louisiana.
District No. 12— F r a n k L.
J acobs,
K in g ,
President, The First National Bank of Shreve
President, California Bank, Los Angeles, California.
EXECUTIVE COMMITTEE
Fr a n k
R.
D enton,
ex officio
H om er
J.
L iv in g s t o n ,
ex officio
A d r i a n M . M a s s ie
L l o yd D . B race
C a s i m ir A . Si e n k i e w i c z
OFFICERS
President,
Fr a n k
1698
R.
Vice President, H o m e r J.
Secretary, H e r b e r t V. P r o c h n o w
Assistant Secretary, W i l l i a m J. K o r s v i k
D enton
L iv in g s t o n
FEDERAL RESERVE BANKS AND BRANCHES
[December 31, 1958J
CHAIRMEN AND DEPUTY CHAIRMEN OF BOARDS OF DIRECTORS
Federal Reserve Bank of—
Chairman and
Federal Reserve Agent
Deputy Chairman
B oston ........
Robert C. Sprague...............
Harvey P. Hood
New York .
John E. Bierwirth...............
Forrest F. Hill
Philadelphia
Henderson Supplee, Jr........
Lester V. Chandler
Cleveland
..
Arthur B. Van Buskirk___
Joseph H. Thompson
Richmond ..
John B. Woodward, Jr.. . .
Alonzo G. Decker, Jr.
Atlanta . . . .
Walter M. M itchell............
Harllee Branch, Jr.
Chicago . . . .
Bert R. Prall.........................
J. Stuart Russell
St. Louis . . .
Pierre B. McBride...............
J. H. Longwell
Minneapolis
Leslie N. Perrin...................
O. B. Jesness
Kansas City .
Raymond W . Hall...............
Joe W . Seacrest
Dallas ........
Robert J. Smith...................
Hal Bogle
San Francisco
A. H. Brawner...........
Y. Frank Freeman
CONFERENCE OF CHAIRMEN
The Chairmen of the Federal Reserve Banks are organized into a Conference of
Chairmen which meets from time to time to consider matters of common interest and
to consult and advise the Board of Governors. A meeting of the Conference of Chair
men was held on December 4-5, 1958, and was attended by members of the Board of
Governors, and also by the Deputy Chairmen of the Federal Reserve Banks.
Mr. Hall, Chairman of the Federal Reserve Bank of Kansas City, was elected Chair
man of the Conference and of the Executive Committee in December 1957. Mr. Smith,
Chairman of the Federal Reserve Bank of Dallas, and Mr. Mitchell, Chairman of the
Federal Reserve Bank of Atlanta, served with Mr. Hall as members of the Executive
Committee, Mr. Smith also serving as Vice Chairman of the Conference.
At the meeting held in December 1958, Mr. Smith was elected Chairman of the
Conference and of the Executive Committee. Mr. Mitchell was elected Vice Chairman
and a member of the Executive Committee, and Mr. Perrin, Chairman of the Federal
Reserve Bank of Minneapolis, was elected as the other member of the Executive
Committee.
1609
1700
EM PLOYMENT,
GROWTH, AND PRICE LEVELS
FEDERAL RESERVE BANKS AND B IANCHES, Dec. 31, 1958— Cont.
DIRECTORS
Class A and Class B directors are elected by the member banks of the district. Class
C directors are appointed by the Board of Governors of the Federal Reserve System.
The Class A directors are chosen as representatives of member banks and, as a matter
of practice, are active officers of member banks. The Class B directors may not, under
the law, be officers, directors, or employees of banks. At the time of their election they
must be actively engaged in their district in commerce, agriculture, or some other indus
trial pursuit.
The Class C directors may not, under the law, be officers, directors, employees, or
stockholders of banks. They are appointed by the Board of Governors as representa
tives not of any particular group or interest, but of the public interest as a whole.
Federal Reserve Bank branches have either five or seven directors, of whom a ma
jority are appointed by the Board of Directors of the parent Federal Reserve Bank and
the others are appointed by the Board of Governors of the Federal Reserve System.
District 1— Boston
DIRECTORS
Term
Expires
Dec. 31
Class A :
Oliver B. Ellsworth.................President, Riverside Trust Company, Hartford,
Conn..................................................................
William D. Ireland. . . . . . . . .President, Second Bank-State Street Trust Com
pany, Boston, Mass.........................................
Arthur F. Maxwell...................President, The First National Bank of Biddeford, Biddeford, Maine.................................
1958
1959
I960
Class B:
Harry E. Umphrey...................President, Aroostook Potato Growers, Inc.,
Presque Isle, Maine.......................................
Milton P. Higgins...................President, Norton Company, Worcester, Mass.
Stanley M. Cooper...................Chairman of the Board, The Fafnir Bearing
Company, New Britain, Conn......................
1958
1959
Class C:
Harvey P. H ood.......................President, H. P. Hood & Sons, Inc., Boston,
Mass...................................................................
Nils Y. Wessell.......................President, Tufts University, Medford, Mass...
Robert C. Sprague...................Chairman and Treasurer, Sprague Electric
Company, North Adams, Mass....................
1958
1959
District 2— New York
Class A :
Howard C. Sheperd.................Chairman of the Board, The First National
City Bank of New York, New York, N. Y.
Charles W . Bitzer.....................President, City Trust Company, Bridgeport,
Conn...................................................................
Cyrus M. Higley....................... President and Trust Officer, The Chenango
County National Bank and Trust Company
of Norwich, Norwich, N. Y .........................
I960
I960
1958
1959
I960
EM PLOYMENT,
GROWTH, AND PRICE LEVELS
1701
FEDERAL RESERVE BANKS AND BRANCHES, Dec. 31, 1958— Cont.
Term
Expires
Dec. 31
d irectors— Cont.
Class B:
Clarence Francis .....................Director, General Foods Corporation, New
York, N. Y .....................................................
Lansing P. Shield.....................President, The Grand Union Company, East
Paterson, N. J.................................................
Augustus C. Long.....................Chairman of the Board, The Texas Company,
New York, N. Y ...........................................
Class C:
Franz Schneider....................... Consultant to Newmont Mining Corporation,
New York, N. Y ...........................................
John E. Bierwirth..................... Chairman, National Distillers and Chemical
Corporation, New York, N. Y ....................
Forrest F. H ill......................... Vice President, The Ford Foundation, New
York, N. Y ......................................................
1958
1959
I960
1958
1959
I960
Buffalo Branch
Appointed by Federal Reserve Bank:
John W . Remington.................President, Lincoln Rochester Trust Company,
Rochester, N. Y .............................................
Leland B. Bryan....................... President, First National Bank and Trust Com
pany, Corning, N. Y .......................................
Vernon Alexander...................President, The National Bank of Geneva,
Geneva, N. Y .................................................
E. Perry Spink......................... President, Liberty Bank of Buffalo, Buffalo,
N. Y ..................................................................
Appointed by Board of Governors:
Ralph F. Peo............................. Chairman and President, Houdaille Industries,
Inc., Buffalo, N. Y .........................................
Raymond E. Olson...................President, Taylor Instrument Companies,
Rochester, N. Y .............................................
Daniel M. Dalrymple...............Partner and Manager, Pomona Fruit Farms,
Appleton, N. Y ............................................. ..
1958
1958
1959
1960
1958
1959
I960
District 3— Philadelphia
Class A :
Lindley S. Hurff.......................President and Trust Officer, The First National
Bank of Milton, Milton, Pa...........................
Geoffrey S. Smith.....................President, Girard Trust Corn Exchange Bank,
Philadelphia, Pa...............................................
William B. Brosius...................President, National Bank of Chester County
and Trust Company, West Chester, Pa........
Class B:
Charles E. Oakes..................... Chairman of the Board, Pennsylvania Power
and Light Company, Allentown, Pa............
R. Russell Pippin..................... Treasurer, E. I. du Pont de Nemours & Com
pany, Wilmington, Del...................................
1958
1959
I960
1958
1959
1702
EMPLOYMENT, GROWTH, AND PRICE LEVELS
FED ER AL RESERVE BANKS AND BRANCHES, D ec. 31, 1958— Cont.
Term
Expires
Dec. 31
d irectors— Cont.
Bayard L. England...................President, Atlantic City Electric Company, At
lantic City, N. J.............................................
Class C:
Henderson Supplee, Jr............President, The Atlantic Refining Company,
Philadelphia, Pa...............................................
Lester V. Chandler...................Professor of Economics, Princeton University,
Princeton, N. J...............................................
Walter E. Hoadley, Jr............Treasurer, Armstrong Cork Company, Lancas
ter, Pa................................................................
I960
1958
1959
I960
District 4— Cleveland
Class A :
King E. Fauver......................... Director, The Savings Deposit Bank and Trust
Company, Elyria, O hio....................................
John A. Byerly......................... President, Fidelity Trust Company, Pittsburgh,
Pa.......................................................................
Paul A. Warner....................... President, The Oberlin Savings Bank Com
pany, Oberlin, O hio........................................
Class B:
Charles Z. Hardwick...............Executive Vice President, The Ohio Oil Com
pany, Findlay, Ohio........................................
George P. MacNichol, Jr........President, Libbey •Owens •Ford Glass Com
pany, Toledo, O hio.......................................
Joseph B. Hall......................... President, The Kroger Co., Cincinnati, Ohio
Class C:
Arthur B. Van Buskirk...........Vice President and Governor, T. Mellon and
Sons, Pittsburgh, Pa.......................................
Joseph H. Thompson...............President, The M. A. Hanna Company, Cleve
land, Ohio ......................................................
Aubrey J. Brown.......................Professor of Agricultural Marketing and Head
of Department of Agricultural Economics,
University of Kentucky, Lexington, K y... .
1958
1959
I960
1958
1959
I960
1958
1959
I960
Cincinnati Branch
Appointed by Federal Reserve Bank:
William A. Mitchell.................President, The Central Trust Company, Cin
cinnati, O h i o ..................................................
Franklin A. McCracken.......... Executive Vice President and Trust Officer,
The Newport National Bank, Newport, Ky.
Roger Drackett ....................... President, The Drackett Company, Cincinnati,
Ohio ................................................................
Thomas M. W olfe...................President, The Athens National Bank, Athens,
Ohio .................................................................
Appointed by Board of Governors:
Ivan J e t t....................................Farmer, Georgetown, Ky.
1958
1959
1960
1960
1958
EMPLOYMENT,
1703
GROWTH, AND PRICE LEVELS
FED ER AL RESERVE BANKS AND BRANCHES, D ec. 31, 1958— Cont.
Term
Expires
Dec. 31
d irectors— Cont.
Anthony H asw ell..................... President, The Dayton Malleable Iron Com
pany, Dayton, O hio.......................................
W . Bay Irvine........................... President, Marietta College, Marietta, O h io ..
1959
I960
Pittsburgh Branch
Appointed by Federal Reserve Bank:
Sumner E. Nichols...................President, Security-Peoples Trust Company,
Erie, Pa....................................................... ..
Frank C. Irvine.........................President, First National Bank in Tarentum,
(
Tarentum, Pa............ .......................................
Lawrence O. Hotchkiss.......... President, The First National Bank of Mercer,
Mercer, Pa........................................................
Irving W . W ilson..................... Chairman of the Board, Aluminum Company
of America, Pittsburgh, Pa.............................
1958
1959
I960
I960
Appointed by Board of Governors:
Douglas M. Moorhead.............Farmer, North East, P a ......................................
John T. Ryan, Jr...................... President, Mine Safety Appliances Company,
Pittsburgh, Pa...................................................
John C. Warner....................... President, Carnegie Institute of Technology,
Pittsburgh, Pa..................................................
1958
1959
I960
District 5— Richmond
Class A :
(Vacancy)
Robert G a g e ............................. President, The Commercial Bank, Chester,
S. C....................................................................
Denver L. Morgan...................Executive Vice President and Cashier, The
Charleston National Bank, Charleston,
W . Va...............................................................
Class B:
L. Vinton Hershey...................President, Hagerstown Shoe Company, Hagers
town, Md..........................................................
Wm. A. L. Sibley.....................Vice President and Treasurer, Monarch Mills,
Union, S. C.....................................................
Robert O. Huffman...................President, Drexel Furniture Company, Drexel,
N. C..................................................................
1958
1959
I960
1958
1959
1960
Class C:
John B. Woodward, Jr............Chairman of the Board, Newport News Ship
building & Dry Dock Company, Newport
News, Va..........................................................
Alonzo G. Decker, Jr.............. Executive Vice President, The Black & Decker
Manufacturing Company, Towson, M d........
D. W . Colvard......................... Dean of Agriculture, North Carolina State
College of Agriculture and Engineering,
Raleigh, N. C.................................................
1958
1959
I960
1704
EM PLOYMENT,
GROWTH, AND PRICE LEVELS
FED ERAL RESERVE BANKS AND BRANCHES, D ec. 31, 1958— Cont.
Term
Expires
Dec. 31
d irectors— Cont.
Baltimore Branch
Appointed by Federal Reserve Bank:
Stanley B. Trott.......................President, Maryland Trust Company, Balti
more, Md..........................................................
John W . Stout........................President, The Parkersburg National Bank,
Parkersburg, W . Va.......................................
James W . McElroy...................President, First National Bank of Baltimore,
Baltimore, Md.................................................
J. N. Shumate........................... President, The Farmers National Bank of
Annapolis, Annapolis, Md.............................
Appointed by Board of Governors:
Wm. Purnell Hall...................President, Maryland Shipbuilding and Drydock Company, Inc., Baltimore, Md............
Gordon M. Cairns...................Dean of Agriculture, University of Maryland,
College Park, Md...........................................
Clarence R. Zarfoss...................Vice President, Western Maryland Railway
Company, Baltimore, Md...............................
1958
1958
1959
I960
1958
1959
I960
Charlotte Branch
Appointed by Federal Reserve Bank:
I. W . Stewart........................... Chairman of the Board, American Commercial
Bank, Charlotte, N. C.....................................
G. G. Watts............................. President, The Merchants & Planters National
Bank, Gaffney, S. C.......................................
Charles D. Parker..................... Vice Chairman of the Board and First Execu
tive Vice President, First Union Nadonal
Bank of North Carolina, Charlotte, N. C.. .
Ernest P atton........................... Chairman of the Board, The Peoples National
Bank of Greenville, Greenville, S. C............
Appointed by Board of Governors:
T. Henry W ilson.....................President and Treasurer, Henredon Furniture
Industries, Inc., Morganton, N. C................
William H. Grier.....................Executive Vice President, Rock Hill Printing
& Finishing Company, Rock Hill, S. C___
George H. A ull.......................Agricultural Economist, Clemson College,
Clemson, S. C.................................................
1958
1958
1959
I960
1958
1959
I960
District 6—Atlanta
Class A :
William C. Carter...................Chairman and President, Gulf National Bank,
Gulfport, Miss.................................................
Roland L. Adams.....................President, Bank of York, York, Ala.................
W . C. Bowman.........................Chairman of the Board, The First National
Bank of Montgomery, Montgomery, A la...
Class B:
Donald C om er......................... Chairman of the Board, Avondale Mills, Bir
mingham, Ala...................................................
Joseph T. Lykes....................... Chairman and Director, Lykes Bros. Steam
ship Company, Inc., Tampa, Fla..................
1958
1959
I960
1958
1959
EMPLOYMENT,
GROWTH, AND PRICE LEVELS
1705
FED ER AL RESERVE BANKS AND BRANCHES, D ec. 31, 1958— Cont.
Term
Expires
Dec. 31
d irectors— Cont.
Pollard Turm an.......................President, J. M. Tull Metal & Supply Com
pany, Inc., Atlanta, Ga...................................
Class C:
Walter M. Mitchell.................Vice President, The Draper Corporation, At
lanta, Ga...........................................................
Harllee Branch, Jr.................... President, The Southern Company, Atlanta,
Ga.......................................................................
Henry G. Chalkley, Jr............President, The Sweet Lake Land & Oil Com
pany, Lake Charles, La...................................
I960
1958
1959
I960
Birmingham Branch
Appointed by Federal Reserve Bank:
Robert M. Cleckler...................President, First National Bank of Childersburg, Childersburg, Ala.................................
E. W . McLeod..........................Chairman, First National Bank of Decatur,
Decatur, Ala.....................................................
R. J. Murphy............................. Vice President, Citizens-Farmers & Merchants
Bank, Brewton, Ala.........................................
John C. Persons....................... Chairman of the Board, The First National
Bank of Birmingham, Birmingham, A la.. . .
Appointed by Board of Governors:
John E. Urquhart.....................Chairman, Woodward Iron Company, W ood
ward, Ala..........................................................
Adolph Weil, Sr...................... President, Weil Brothers-Cotton, Inc., Mont
gomery, Ala......................................................
Selden Sheffield....................... Cattleman, Greensboro, Ala................................
1958
1958
1959
I960
1958
1959
I960
Jacksonville Branch
Appointed by Federal Reserve Bank:
Linton E. Allen......................... Chairman, The First National Bank at Or
lando, Orlando, Fla.........................................
W . E. Ellis............................... Chairman and President, The Commercial
Bank and Trust Company, Ocala, Fla..........
James G. Garner....................... President and Chairman, Little River Bank
and Trust Company, Miami, Fla..................
C. B. McLeod........................... President, Bank of Crestview, Crestview, Fla.
1958
1958
1959
I960
Appointed by Board of Governors:
Harry M. Smith....................... President and Manager, Winter Garden Orna
mental Nursery, Inc., Winter Garden, Fla.
McGregor Smith .....................Chairman of the Board, Florida Power and
Light Company, Miami, Fla...........................
J. Wayne Reitz......................... President, University of Florida, Gainesville,
Fla......................................................................
1958
1959
1960
Nashville Branch
Appointed by Federal Reserve Bank:
Stewart Campbell ...................President, The Harpeth National Bank of
Franklin, Franklin, Tenn...............................
38563 0 — 59— pt. 6B------- 14
1958
1706
EM PLOYMENT,
GROWTH, AND PRICE LEVELS
FED ERAL RESERVE RANKS AND BRANCHES, D ec. 31, 1958— Cont.
Term
Expires
Dec.31
d irectors— Cont.
C. L. W ilson............................. Chairman and President, The Cleveland Na
tional Bank, Cleveland, Tenn.........................
Jo H. Anderson....................... President, Park National Bank of Knoxville,
Knoxville, Tenn...............................................
P. D. Houston, Jr.................... President, First American National Bank,
Nashville, Tenn...............................................
Appointed by Board of Governors:
V. S. Johnson, Jr...................... Chairman of the Board and President, Alad
din Industries, Inc., Nashville, Tenn..........
Frank B. W ard......................... Dean, College of Business Administration,
University of Tennessee, Knoxville, Tenn.
W . N. Krauth........................... President and General Manager, Colonial Bak
ing Company of Nashville, Nashville, Tenn.
1958
1959
I960
1958
1959
I960
New Orleans Branch
Appointed by Federal Reserve Bank:
H. A. Pharr............................... President, The First National Bank of Mobile,
Mobile, Ala......................................................
1958
(Vacancy)
1958
J. Spencer Jones....................... President, The Citizens National Bank in
Hammond, Hammond, La............................. 1959
D. U. Maddox......................... President, The Commercial National Bank and
Trust Company of Laurel, Laurel, Miss..........I960
Appointed by Board of Governors:
G. H. King, Jr.......................... President, King Lumber Industries, Canton,
Miss....................................................................
E. E. W ild ............................... Rice grower, Midland, La..................................
Frank A. Godchaux, III.......... Vice President, Louisiana State Rice Milling
Company, Inc., Abbeville, La........................
1958
1959
I960
District 7— Chicago
Class A:
Nugent R. Oberwortmann. . . .President, The North Shore National Bank of
Chicago, Chicago, III.....................................
Vivian W . Johnson.................President, First National Bank, Cedar Falls,
Iowa .................................................................
Walter J. Cummings...............Chairman, Continental Illinois National Bank
and Trust Company of Chicago, Chicago,
111........................................................................
Class B:
William J. Grede.....................President, Grede Foundries, Inc., Milwaukee,
W is....................................................................
William A. Hanley...................Director, Eli Lilly and Company, Indianap
olis, Ind............................................................
G. F. Langenohl....................... Treasurer and Assistant Secretary, AllisChalmers Manufacturing Company, Milwau
kee, W is............................................................
1958
1959
1960
1958
1959
I960
EM PLOYMENT,
GROWTH, AND PRICE LEVELS
1707
FED ER AL RESERVE BANKS AND BRANCHES, D ec. 31, 1958— Cont.
Term
Expires
Dec. 31
d irectors— Cont.
Class C:
Robert P. Briggs....................... Executive Vice President, Consumers Power
Company, Jackson, Mich...............................
J. Stuart Russell.......................Farm Editor, The Des Moines Register &
Tribune, Des Moines, Iowa...........................
Bert R. Prall............................. Winnetka, 111.........................................................
1958
1959
I960
Detroit Branch
Appointed by Federal Reserve Bank:
Raymond T. Perring.................President, The Detroit Bank and Trust Com
pany, Detroit, Mich.........................................
Ira A. Moore........................... General Vice President, Old Kent Bank and
Trust Company, Grand Rapids, Mich..........
William A. Mayberry...............President, Manufacturers National Bank of
Detroit, Detroit, Mich...................................
Ernest W . Potter....................... President, Citizens Commercial & Savings
Bank, Flint, Mich...........................................
Appointed by Board of Governors:
C. V. Patterson......................... Executive Vice President, The Upjohn Com
pany, Kalamazoo, Mich.................................
J. Thomas Smith....................... President, Detroit Harvester Company, Detroit,
Mich...................................................................
John A. Hannah....................... President, Michigan State University, East
Lansing, Mich..................................................
1958
1959
I960
I960
1958
1959
I960
District 8— St. Louis
Class A :
J. E. Etherton........................... President, The Carbondale National Bank,
Carbondale, 111.................................................
Kenton R. Cravens...................President, Mercantile Trust Company, St.
Louis, M o.........................................................
H. Lee Cooper..................... President, Ohio Valley National Bank of Hen
derson, Henderson, Ky...................................
Class B:
S. J. Beauchamp, Jr.................. President, Terminal Warehouse Co., Little
Rock, Ark..........................................................
Harold O. McCutchan........... Executive Vice President, Mead Johnson &
Company, Evansville, Ind...............................
Leo J. W ieck............................. Vice President and Treasurer, The May De
partment Stores Co., St. Louis, M o............
Class C:
J. H. Longwell......................... Director, D i. ision of Agricultural Sciences,
University of Missouri, Columbia, M o........
Pierre B. McBride...................President, Porcelain Metals Corporation, Louis
ville, Ky............................................................
Jesse D. Wooten....................... Executive Vice President, Mid-South Chemical
Corporation, Memphis, Tenn........................
1958
1959
I960
1958
1959
I960
1958
1959
I960
1708
EM PLOYMENT,
GROWTH, AND PRICE LEVELS
FEDERAL RESERVE BANKS AND BRANCHES, Dec. 31, 1958— Cont.
Term
Expires
D ec. 31
d irectors— Cont.
Little Rock Branch
Appointed by Federal Reserve Bank:
J. V. Satterfield, Jr.................. Chairman of the Board, The First National
Bank in Little Rock, Little Rock, Ark........
Donald B arger......................... President, Peoples Exchange Bank, Russell
ville, Ark..........................................................
J. W . Bellamy, Jr.................... President, National Bank of Commerce of Pine
Bluff, Pine Bluff, Ark.....................................
E. C. Benton............................. President, Fordyce Bank and Trust Company,
Fordyce, Ark....................................................
1958
1959
I960
I960
Appointed by Board of Governors:
Waldo E. Tiller.......................President, Tiller Tie and Lumber Company,
Inc., Little Rock, Ark.................... ................
T. Winfred Bell.......................President, Bush-Caldwell Company, Little
Rock, Ark.........................................................
Robert H. Alexander...............Owner-operator, Land's End Plantation, Scott,
Ark.....................................................................
1958
1959
1960
Louisville Branch
Appointed by Federal Reserve Bank:
Magnus J. Kreisle.....................President, The Tell City National Bank, Tell
City, Ind............................................................
Merle E. Robertson...................Chairman of the Board and President, Liberty
National Bank and Trust Company of Louis
ville, Louisville, Ky.......................................
W . Scott McIntosh...................President, State Bank of Hardinsburg, Hardinsburg, Ind..........................................................
John G. Russell.......................President, The Peoples First National Bank &
Trust Company of Paducah, Paducah, Ky.. .
Appointed by Board of Governors:
J. D. Monin, Jr........................ Farmer, Oakland, Ky..........................................
David F. Cocks......................... Vice President and Treasurer, Standard Oil
Company (Kentucky), Louisville, Ky..........
Philip D avidson.......................President, University of Louisville, Louisville,
Ky.......................................................................
1958
1959
I960
I960
1958
1959
I960
Memphis Branch
Appointed by Federal Reserve Bank:
J. H. Harris............................. President, The First National Bank of Wynne,
Wynne, Ark.....................................................
John K. W ilson.......................President, The First National Bank of West
Point, West Point, Miss.................................
John E. Brown......................... President, Union Planters National Bank of
Memphis, Memphis, Tenn.............................
Simpson Russell....................... President, The National Bank of Commerce of
Jackson, Jackson, Tenn.................................
1958
1959
I960
I960
EM PLOYMENT,
1709
GROWTH, AND PRICE LEVELS
FED ERAL RESERVE BANKS AND BRANCHES, D ec. 31, 1958— Cont.
Term
Expires
Dec.31
d irectors— Cont.
Appointed by Board of Governors:
Frank Lee Wesson...................President, Wesson Farms, Inc., Victoria, Ark. 1958
John D. Williams..................... Chancellor, The University of Mississippi,
University, Miss...............................................
1959
S. L. Kopald, Jr........................ Executive Vice President, HumKo Division,
National Dairy Products Corporation, Mem
I960
phis, Tenn.......................................................
District 9— Minneapolis
Class A :
John A. Moorhead...................President, Northwestern National Bank of
Minneapolis, Minneapolis, Minn..................
Harold N. Thomson.................Vice President, Farmers & Merchants Bank,
Presho, S. D .....................................................
Harold C. Refling.....................Cashier, First National Bank in Bottineau,
Bottineau, N. D .............................................
1958
1959
I960
Class B:
T. G. Harrison......................... Chairman of the Board, Super Valu Stores,
Inc., Hopkins, Minn.......................................
J. E. Corette............................. President and General Manager, Montana
Power Company, Butte, Mont......................
Ray C. Lange........................... President, Chippewa Canning Company, Inc.,
Chippewa Falls, W is.....................................
1958
1959
I960
Class C:
John H. Warden....................... President, Upper Peninsula Power Company,
Houghton, Mich..............................................
Leslie N. Perrin....................... Director, General Mills, Inc., Minneapolis,
Minn..................................................................
O. B. Jesness............................. Agricultural Economist, St. Paul, Minn.............
1958
1959
I960
Helena Branch
Appointed by Federal Reserve Bank:
J. Willard Johnson...................Financial Vice President and Treasurer, West
ern Life Insurance Company, Helena,
Mont..................................................................
Geo. N. Lund........................... Chairman of the Board and President, The
First National Bank of Reserve, Reserve,
Mont..................................................................
O. M. Jorgenson....................... Chairman, Security Trust and Savings Bank,
Billings, Mont..................................................
1958
1958
1959
Appointed by Board of Governors:
Carl M cFarland....................... Missoula, Mont.....................................................
1958
John M. Otten......................... Farmer and rancher, Lewistown, Mont.............
1959
1710
EMPLOYMENT,
GROW TH, AND PRICE LEVELS
FED ERAL RESERVE BANKS AND BRANCHES, D ec. 31, 1958— Cont.
Term
Expires
Dec. 31
directors— Cont.
District 10— Kansas City
Class A :
W . S. Kennedy......................... President and Chairman of the Board, The
First National Bank of Junction City, Junc
tion City, Kans...............................................
W . L. Bunten........................... President, Goodland State Bank, Goodland,
Kans...................................................................
Harold K ountze....................... Chairman of the Board, The Colorado Na
tional Bank of Denver, Denver, Colo........
Class B:
E. M. Dodds............................. Chairman of the Board, United States Cold
Storage Corporation, Kansas City, M o........
K. S. Adams............................. Chairman of the Board, Phillips Petroleum
Company, Bartlesville, Okla..........................
Max A. Miller........................... Livestock rancher, Omaha, Neb.........................
Class C:
Raymond W . Hall...................Counsel, Gage, Hillix, Moore & Park, Attor
neys, Kansas City, M o...................................
Oliver S. Willham...................President, Oklahoma State University, Still
water, Okla......................................................
Joe W . Seacrest....................... President, State Journal Company, Lincoln,
Neb....................................................................
1958
1959
I960
1958
1959
I960
1958
1959
I960
Denver Branch
Appointed by Federal Reserve Bank:
Ralph S. Newcomer.................Executive Vice President, First National Bank
in Boulder, Boulder, Colo.............................
Arthur Johnson.......................President, First National Bank in Raton, Raton,
N. Mex..............................................................
Stewart C osgriff....................... President, The Denver National Bank, Denver,
Colo...................... .............................................
Appointed by Board of Governors:
Ray Reynolds........................... Cattle feeder and farmer, Longmont, Colo.........
Aksel Nielsen ...... .................. President, The Title Guaranty Company, Den
ver, Colo...........................................................
1958
1958
1959
1958
1959
Oklahoma City Branch
Appointed by Federal Reserve Bank:
R. Otis McClintock...................Chairman of the Board, The First National
Bank and Trust Company of Tulsa, Tulsa,
Okla...................................................................
C. L. Priddy............................... President, The National Bank of McAlester,
McAlester, Okla...............................................
C. P. Stuart............................... President, The Fidelity National Bank & Trust
Company, Oklahoma City, Okla....................
1958
1958
1959
EMPLOYMENT,
1711
GROWTH, AND PRICE LEVELS
FED ER AL RESERVE BANKS AND BRANCHES, D ec. 31, 1958— Cont.
directors— Cont.
Term
Expires
Dec. 31
Appointed by Board of Governors:
Phil H. Lowery......................... Owner, Lowery Hereford Ranch, Loco, O kla...
Davis D. Bovaird.....................President, The Bovaird Supply Company, Tulsa,
O k la ..................................................................
Omaha Branch
Appointed by Federal Reserve Bank:
William N. Mitten...................Chairman of the Board, First National Bank of
Fremont, Fremont, Neb...................................
George J. Forbes....................... Chairman of the Board and President, Bank of
Laramie, Laramie, W yo...................................
C. Wheaton Battey...................President, The Continental National Bank of
Lincoln, Lincoln, Neb.....................................
Appointed by Board of Governors:
Manville Kendrick...................Rancher, Sheridan, W yo......................................
James L. Paxton, Jr.................. President, Paxton-Mitchell Company, Omaha,
Neb....................................................................
District 11— Dallas
Class A :
J. Edd McLaughlin...................President, Security State Bank & Trust Com
pany, Ralls, Tex...............................................
John M. Griffith....................... President, The City National Bank of Taylor,
Taylor, Tex.......................................................
Sam D. Young........................... President, El Paso National Bank, El Paso, Tex.
Class B:
J. B. Thomas............................. President and General Manager and Director,
Texas Electric Service Company, Fort Worth,
Tex.....................................................................
John R. A lford......................... Industrialist and farmer, Henderson, Tex.........
D. A. Hulcy............................... Chairman of the Board, Lone Star Gas Com
pany, Dallas, Tex.............................................
Class C:
Lamar Fleming, Jr.................... Chairman of the Board, Anderson, Clayton &
Co., Inc., Houston, Tex...................................
Hal B o g le ..................................Rancher and feeder, Dexter, N. Mex.................
Robert J. Smith......................... President, Pioneer Hydrotex Industries, Inc.,
Dallas, Tex.......................................................
El Paso Branch
Appointed by Federal Reserve Bank:
Thomas C. Patterson.................Vice President, El Paso National Bank, El Paso,
Tex.....................................................................
F. W . Barton............................. President, The Marfa National Bank, Marfa,
Tex.....................................................................
John P. Butler........................... President, The First National Bank of Midland,
Midland, Tex...................................................
Floyd Childress....................... Vice President, The First National Bank of Ros
well, Roswell, N. Mex.....................................
1958
1959
1958
1959
1959
1958
1959
1958
1959
I960
1958
1959
I960
1958
1959
I960
1958
1959
I960
I960
1712
EM PLOYMENT,
GROWTH, AND PRICE LEVELS
FEDERAL RESERVE BANKS AND BRANCHES, Dec. 31, 1958— Cont.
Term
Expires
Dec. 31
d irectors— Cont.
Appointed by Board of Governors:
E. J. Workman......................... President, and Director of Research and Devel
opment Division, New Mexico Institute of
Mining and Technology, Socorro, N. Mex.. .
D. F. Stahmann......................... Chairman of the Board and Treasurer, Stahmann Farms, Inc., Las Cruces, N. Mex........
William R. Mathews.................Editor and Publisher, The Arizona Daily Star,
Tucson, Ariz...................................................
1958
1959
I960
Houston Branch
Appointed by Federal Reserve Bank:
S. Marcus Greer.......................Vice Chairman of the Board, First City Na
tional Bank of Houston, Houston, Tex........
I. F. Betts................................... President, The American National Bank of
Beaumont, Beaumont, Tex.............................
W . B. Callan............................. President, The Victoria National Bank, Vic
toria, Tex..........................................................
L. R. Bryan, Jr...........................Vice Chairman of the Board and Chairman of
the Executive Committee, Bank of the South
west National Association, Houston, Hous
ton, Tex............................................................
1958
1959
I960
I960
Appointed by Board of Governors:
Tyrus R. Timm......................... Head, Department of Agricultural Economics
and Sociology, A. & M. College of Texas,
College Station, Tex.......................................
A. E. Cudlipp........................... Vice President and Director, Lufkin Foundry
and Machine Company, Lufkin, Tex............
John C. Flanagan.....................Vice President and General Manager, Texas
Distribution Division, United Gas Corpora
tion, Houston, Tex.........................................
1958
1959
I960
San Antonio Branch
Appointed by Federal Reserve Bank:
Burton D u n n ........................... Chairman of the Executive Committee, Corpus
Christi State National Bank, Corpus Chris#,
Tex.....................................................................
E. C. Breedlove.........................President, The First National Bank of Harlin
gen, Harlingen, Tex.........................................
J. W . Beretta............................. President, First National Bank of San Antonio,
San Antonio, Tex.............................................
Donald D. James.......................Vice President, The Austin National Bank, Aus
tin, Tex.............................................................
1958
1959
I960
I960
Appointed by Board of Governors:
Harold V agtborg.....................President, Southwest Research Institute, San
Antonio, Tex....................................................
Clarence E. Ayres..................... Professor of Economics, The University of
Texas, Austin, Tex.........................................
1958
1959
EMPLOYMENT,
1713
GROWTH, AND PRICE LEVELS
FED ERAL RESERVE BANKS AND BRANCHES, D ec. 31, 1958— Cont.
directors— Cont.
Term
Expires
Dec. 31
Alex R. Thomas....................... Vice President, Geo. C. Vaughan & Sons, San
Antonio, Tex........................................... ........
I960
District 12— San Francisco
Class A :
John A. Schoonover.................President, The Idaho First National Bank, Boise,
Idaho ..............................................................
1958
M. Vilas Hubbard.....................President and Chairman of the Board, Citizens
Commercial Trust and Savings Bank of Pasa
dena, Pasadena, Calif.....................................
1959
Carroll F. Byrd......................... Chairman of the Board and President, The First
National Bank of Willows, Willows, Calif. I960
Class B:
Walter S. Johnson...................Chairman of the Board, American Forest Prod
ucts Corporation, San Francisco, Calif..........
1958
N. Loyall McLaren...................Partner, Haskins & Sells, San Francisco, Calif. 1959
Reese H. Taylor......................... Chairman of the Board, Union Oil Company
of California, Los Angeles, Calif..................
I960
Class C:
Y. Frank Freeman..................... Vice President, Paramount Pictures Corpora
tion, Hollywood, Calif................................... 1958
A. H. Brawner........................... Chairman of the Board, W . P. Fuller & Co.,
San Francisco, Calif.........................................
1959
Philip I. W elk........................... Vice President, Centennial Mills, Inc., Port
land, Ore...........................................................
I960
Los Angeles Branch
Appointed by Federal Reserve Bank:
Anderson Borthw ick...............President, The First National Trust and Sav
ings Bank of San Diego, San Diego, C a lif...
James E. Shelton.......................Chairman, Security-First National Bank of Los
Angeles, Los Angeles, Calif...........................
Joe D. Paxton........................... Chairman of the Board, County National Bank
and Trust Company of Santa Barbara, Santa
Barbara, Calif...................................................
Appointed by Board of Governors:
Leonard K. Firestone...............President, Firestone Tire and Rubber Company
of California, Los Angeles, Calif..................
Robert J. Cannon..................... President, Cannon Electric Company, Los An
geles, Calif.......................................................
Portland Branch
Appointed by Federal Reserve Bank:
John B. Rogers......................... President, The First National Bank of Baker,
Baker, Ore........................................................
J. H. McNally........................... President, The First National Bank of Bonners
Ferry, Bonners Ferry, Idaho...........................
C. B. Stephenson....................... President, The First National Bank of Oregon,
Portland, Portland, Ore.................................
1958
1958
1959
1958
1959
1958
1958
1959
1714
EMPLOYMENT, GROWTH, AND PRICE LEVELS
FED ERAL RESERVE BANKS AND BRANCHES, D ec. 31, 1958— Cont.
Term
Expires
Dec. 31
directors— Cont.
Appointed by Board of Governors:
William H. Steiwer, Sr............ Livestock and farming, Fossil, Ore......................
Warren W . Braley...................Partner, Braley and Graham Buick, Portland,
Ore.....................................................................
1958
1959
Salt Lake City Branch
Appointed by Federal Reserve Bank:
Russell S. Hanson..................... Executive Vice President, The First National
Bank of Logan, Logan, Utah.........................
George S. Eccles....................... President, First Security Bank of Utah, Na
tional Association, Salt Lake City, Utah___
Oscar H ille r ............................. President, Butte County Bank, Arco, Idaho.. . .
1958
1958
1959
Appointed by Board of Governors:
Geo. W . Watkins.....................President, Snake River Equipment Company,
Idaho Falls, Idaho..........................................
Joseph Rosenblatt.....................President, The Eimco Corporation, Salt Lake
City, U tah ........................................................
1958
1959
Seattle Branch
Appointed by Federal Reserve Bank:
S. B. Lafromboise.....................President, The First National Bank of Enumclaw, Enumclaw, Wash...................................
James Brennan......................... President, First National Bank in Spokane, Spo
kane, Wash.......................................................
Joshua Green, Jr...................... President, Peoples National Bank of Washing
ton, Seattle, Wash...........................................
1958
1958
1959
Appointed by Board of Governors:
Lyman J. Bunting.....................President, Rainier Fruit Company, Yakima,
Wash.................................................................
Henry N. Anderson.................President, Twin Harbors Lumber Company,
Aberdeen, Wash...............................................
1958
1959
EM PLOYMENT,
GROWTH, AND PRICE LEVELS
1715
Representative P a t m a n . Are there any other questions by members
of the committee ?
Representative W i d n a l l . I would like to ask a question of you,
because you are submitting the statement. All through the statement
it says “ the Discount Corp. and the seven owners are reported.”
Where reported?
Representative P a t m a n . That is the recognized directors of 1959.
All this information is based upon the official record.
Representative W i d n a l l . H o w was it reported that there were seven
who jointly owned the Discount Corp., when there are actually five?
Representative P a t m a n . Because the seven have directors on the
Discount Corp. board. Mr. Repp’s testimony is that the tw7o directors
of the two banks he says are not part owners, the directors are part
owners because they own shares of stocks as directors.
Mr. R e p p . May I interrupt just a minute ?
Representative P a t m a n . Certainly you may.
Mr. R e p p . May I say, Mr. Chairman, that I think I would have to
consult the shareholders.
Representative P a t m a n . Y o u may correct that, or anything else,
because all we want is a correct record. We don’t want anything to go
in that is not explained satisfactorily.
Mr. R e p p . Thank y o u .
Representative R e u s s . Mr. Repp, in answer to a question put to you
by Senator Bush as to any overall recommendations you might have
with respect to the Government securities market, I think you said that
in certain instances you could use fuller information. Did I hear
you right ? I f I didn’t, you can spell it out.
Mr. R e p p . What I attempted to convey, Mr. Reuss, was that it
seemed to me that one lesson to be learned from last year’s episode was
that there was not an awareness, or data available, w7hich showed the
extent to which lending was taking place, and that a broadening of
this information to include more of the banks of the country, the
leading corporations, and also reports to the stock exchange, should
put the Federal Reserve bank in a very good position to be more
aw^are of the situation in the future.
Representative R e u s s . Thank you. I gather that as long as this
information is somehow made available it doesn’t matter drastically
whether it be made available by the Federal Reserve or the Securities
and Exchange Commission or by voluntary action of the dealers con
cerned, as long as there is some central place. Do you have a
preference ?
Mr. R e p p . I have a preference, yes, sir. If I may just think out
loud for a minute, I wyould say that the proper place to center this
would be the Federal Reserve bank. We as dealers report to the
Federal Reserve bank our positions and things of that nature. I am
suggesting the broadening of this information beyond that now
received from dealers. There is one thing that has to be borne in
mind in your consideration of this. The objective should be to gather
meaningful information which, after careful interpretation, could be
put to proper use. After study, I am quite sure that objective could
be reached.
The point I have in mind is that if this information is gathered,
and it is of interest to the public, fine. However, I am not sure that
1716
EM PLOYMENT,
GROWTH, AND PRICE LEVELS
the public would be interested in it. It could be subject to misinter
pretation because of the timelag between the date of receiving and
reporting. I f a certain dollar amount were to be published on a given
date, the turnover in the market could make the published figure
wholly misleading. Such misinterpretation could have undesirable
market reaction. I think the data should be lodged in a place where
tliev can be properly interpreted and put to beneficial use.
Representative R e u s s . Namely, the Federal Reserve?
Mr. R e p p . Yes, sir.
Representative R e t ts s . However, the Federal Reserve collates that
information and makes it available so it is in a sense public informa
tion. I suppose we have to rely upon the clarifying activities of the
Federal Reserve to keep it from being misused.
Mr. R e p p . Whatever information is secured should be studied.
How it is used should be a matter of discussion.
Representative R ettss . Certainly it would need to be disclosed to
the dealers to be of value.
Mr. R e p p . N o . I see no reason for that, Mr. Reuss. My thought
on it is this: I f the information were in the hands of those who are
charged with credit conditions and they in turn passed it on to the
Treasury, it could be used in a broader sense to aid both the Treasury
and the Federal Reserve in their operations. It need not be related
back to the dealers or the marketplace in any way.
Representative R e u s s . Would you say that this information avail
able to the Federal Reserve and the Treasury should include a state
ment of the short positions maintained for various issues of securities?
Mr. R e p p . I t h i n k w e a r e t a l k i n g a b o u t t w o t h i n g s . May I a n s w e r
y o u r la s t q u e s t io n ?
Representative R e u s s . I think we are. I was adding the short
position to what you were talking about.
Mr. R e p p . I was not talking about trading positions before, but if
we can revert to your last question, may I say that wre now report all
our positions to the Federal and they have that information.
Representative R e u s s . Y o u report it to the Federal Reserve?
Mr. R e p p . Yes, sir; daily.
Representative R e u s s . Are you required to do so or do you do it
voluntarily ?
Mr. R e p p . N o , we do it voluntarily. We can do it or not as we
see fit.
Representative R e u s s . I am under the impression that all other
dealers do not so report.
Mr. R e p p . I have no basis of knowing who does or who does not.
I am under the impression most do. We do.
Representative R e u s s . Turning to the information available to your
own institution, do you get reports on free reserves from the five
banking institutions which own your corporation ?
Mr. R e p p . N o , sir. When it comes to a question of free reserves, it
is a matter of statistical record every Friday morning in the published
Federal Reserve statement.
Representative R e u s s . Y o u rely on the Federal Reserve figures?
Mr. R e p p . Yes, on the published figures. We follow very carefully
all pertinent information to our business. Free reserves are an im
portant indicator.
EMPLOYMENT,
GROWTH, AND PRICE LEVELS
1717
Mr. C a r s o n . May I make a suggestion concerning procedure ? I am
Ralph M. Carson. I have been sitting here. I am associated with
Mr. Repp here.
Representative P a t m a n . Y o u are an attorney ?
Mr. C a r s o n . Yes. Solely in regard to this chart which has been
referred to, and your committee’s procedure, may I respectfully sug
gest that since the validity and propriety of this chart is still under
review, and the witness has not completed his statement, the commit
tee might suspend judgment as to whether to receive the chart in the
record until the evidence is completed and take a vote on it ?
I respectfully suggest the chart is so misleading that it will only
confuse the deliberations of the committee and not assist it.
Representative P a t m a n . Thank y o u , sir.
Mr. Repp, do you have any other statement to make in connection
with the proceedings of our committee that would enlighten us on
matters that we are going into ?
Mr. R e p p . I have no further statement except to reiterate
Mr. Carson’s request.
Representative P a t m a n . Senator Bush?
Senator B u s h . I would like to observe that I think the request by
counsel for Mr. Repp is a very reasonable one and I hope that the
chairman will either order that this will be held in abeyance until we
get Mr. Repp’s written statement, or it be referred to the committee
so that the committee can have a chance to decide whether this should
go in the record or not.
(Subsequently it w^as decided that the chart as revised, a revised
statement and exhibits by Congressman Patman and a statement sub
mitted by Mr. Repp would be published in the record. (See pp. 1672-
m s .)
Senator B u s h . I think it is the most astonishing exhibit I have ever
seen. You can practically take any one of these hundreds of com
panies, Continental Casualty or Metropolitan Life Insurance, and
put them in the center of the web and come out with this kind of a
picture showing interlocking of interests and so forth.
You could continue it all through the United States from New York
to California. You could do that very easily without changing any
of the names. I do feel that counsel’s suggestion is very appropriate
and I hope it will be honored by the chairman of this committee, the
acting chairman.
Representative P a t m a n . The acting chairman does not desire to
pass on it. The whole committee should pass on it.
Senator B u s h . Then we have that assurance ?
Representative P a t m a n . Certainly. Everything that comes up.
We do not want to take advantage of anybody. We have no intention.
I do not consider this an advantage. I think the Senator’s statement
is not a little bit exaggerated, but I do not think all of them would
have that many connections.
Senator B u s h . I do not think it is exaggerated.
Representative P a t m a n . I am not saying because people are con
nected together they are doing something wrong or in violation of
law or entering into an unlawful c,v -piracy. There is no charge like
that at all.
The charge speaks for itself and anybody can interpret it and we
will include every remark Mr. Repp has made or will make and even
1718
EMPLOYMENT, GROWTH, AND PRICE LEVELS
counsel is invited to submit briefs if he desires to do so. In the
spirit of democracy we would not like to argue about it now.
Mr. C a r s o n . Mr. Chairman, in the spirit of democracy, I certainly
do not want to submit a brief, but it would be very helpful to us in
trying to guide the committee if the chairman will be so kind as to
say what the charge is which you have just said speaks for itself.
Representative P a t m a n . I meant the chart.
Mr. C a r s o n . I do not think it does speak for itself.
Representative W i d n a l l . Mr. Chairman, I would like to second
what Senator Bush has suggested, and also interpose this remark.
I think if you carried this chart, which I think was ably charac
terized by Mr. Repp as meaningless, to its logical conclusions, with
circles and lines, you would include practically every bank, every
corporation, every institution, every great labor union in this country.
Labor unions have directorates that are interlocking with banks and
things like that. There would not be any part of our economy that
wasn’t included. I just hope that this chart eventually will not get
into the record unless it is clearly shown by way of charge and not by
chart what is intended by offering it for the record.
Senator B u s h . Mr. Chairman, further to what Mr. Widnall said,
there has been no statement by the chairman, who offered this thing,
as to what the purpose of offering it is.
Representative P a t m a n . It speaks for itself.
Senator B u s h . No, it doesn’t, I object to that; it doesn’t speak
for itself at all.
Representative P a t m a n . As far as I am concerned, any person can
make his own interpretation of it, with his knowledge of the different
concerns, and I am not interpreting it here now. I am not making
any statements that would be considered inflammatory or obnoxious
or dramatic or anything else. I am trying to submit it as bare facts
and if they are not the facts we want it changed. If there are too many
changes we will certainly not want to put it in the record.
It is customary for members to put in the record things that they
consider to be helpful in what they are investigating. It is not un
usual at all. If somebody wants a different chart, it is perfectly all
right.
I f there is any other person in the audience that would like to be
considered for a statement or brief comment, you may stand up and
give your name and address and identify y o u ^ lf.
We are carrying this out, as Senator Bush said, in a spirit of
democracy this morning.
Are there any other questions of the
ss?
I f not, without objection, the committee will stand in recess, subject
to the call of the chairman,
(Whereupon, at 12:10 p.m., the committee recessed, to reconvene at
the call of the Chair.)
@FedFRASER