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V-VTS*. "vjf u»tir«ti'>a Uloj l"ii boXuro AUA, H.CC iA c nuary 26., 1948) Tig B A M SJF5RVIS2M r, v C2z.i Z m g Q M • I Mr. Bodge and Fellow Bankers: — It is a privilege for me to present to this gathering the viewpoint of the Federal bank supervisory agencies with respect to the IB A program. Vhilo I can11 speak for the various State super- viaoiy. authorities> 1 have mot recently with the President and the Chairman of tho Executive Committee of their National Association. £nd I can assure you that the official attitude of that Association is one ox vholenearted approval of this campaign* "o one could have reasonably expected that any supervisor - Federal or State - could do other then approve and support this organised effort to restrain by voluntary means further expansion in hank loans. In fact, this program of tho ABA goes hand in hand vith the joint statement issued last Hoverib.or by the three Federal agencies and the National Association of Supervisors of State Banks* That appeal by the supervisory authorities inas addressed to bank Management through their boards of directors, because there was at the time no agency of private banking organised for a campaign of restraint to which the bank supervisors could address themselves• Happily, that leek has new been filled by the American lanhcrs Association through the announcement of this program by President I>e%s and its implementation through the series of pilot meetings now under way throughout the country. All of us who share asy measure of responsibility for bank credit policy must have a real concern in the success of this program. Indeed, we have an anxious concern, It is now almost universally recognised that the inflation has progressed to a point of ^reat danger. ISM iS 7 9 0 4 G f . ,«• Our* econcrjy, upon being released from, the harness of ccn&xx&s inpossd during the wiv extort^ has net been able to jasintain stability in spite of a moat successful reconversion to civilian production foXXowed by an l^press-iv© increase in the veluute of physical production. But tide instability ia no reflection upon the inherent superiority, of our sywtesi of free enterprise. Ho system gov bo c:cpectad.'.t6 perfora perfectly unaar wholly abnornal conditions, There never i-as a chance that our physical production could in a year or two increase sufficiently to accomodate the volume of spendable funds accumulated by individuals and businesses during nearly five years of all-out production for v;ar. Whether poster oconoiaic stability could have been achieved by different conduct on the part of Government or business or labor,' acting separately or in consort, v&XX rearin a subject of debate for a long time to couo, One point I do vrish to 3tress at tM,s tii-so is that there is no inclination by the public or any responsible source to blarae the bankers for the in nation as it has developed thus far. The bankers, along vrith irdXlions of others, have been victims — and not the instigators — of the inflation. However, in view of aoro recent events, or£anir.cd banking has recognised a responsibility for future inflationary developments in the benldn* field, Therefore, their actions henceforth, especially in vicar of the assumption by thos of a loading role in coxibatting the inflation on the credit front, rcusfc bean* the spotlight of public appraisal, The severity of the inflationary situation indicates the great responsibility the bankers of the country are shouldering in this ear*- 'xr.no COPY; ;xero COPY -3- palgn. It would bo vastly easier if there vera sojro assurance that tha "climate" in the money market vould- bo conducive to restraint. If bank reserves could bo kept relatively tight, bankerc could restrain loon expansion vith less criticism froa their borrowing customers, The most difficult task for you bankers, but one that in all likelihood smst be faced, will be to forego increased loans or investments at the vary tine that you find your,selves vith excess reserves, or vith the maans to obtain additional reserves readily, Without doraLoping this point further, it serves to indicate the decree of self-discipline which vill bo required. But forewarned is forearmed, The educational phase of this campaign should impress upon bankers tho necessity for restraint by all banks, rejardleo3 of the relative liquidity of .individual institutions • The results vo all hope for cannot be attained if a substantial proportion of bankers feel that, because their own institutions are not overextended, it is tho other fellow who must exercise the restraint. It is indeed a oitu.at.ion that calls for constructive bank- ing, so aptly defined by your president in an article published last October, scon after ho assumed his present high office. This is the quotations "Constructive banking includes talcing certain that loan & are good for tho borrower over the longer term ivs we'll us in coating toediato needs or wants; taping borrowers from o-b.rkins on speculative transactions and assuming oossihle prepayable debt) measuring the effect ox our individual acta on the national ecocony and banking as a whole; not orogreslively weakening assot investment standards \yr a mistaken belief it is necessary to equal or exceed the terms of oth^r lenders whose policies are not sovnd or who have a different ty?© of obligation or rosponsibility to moot; and beir.f vropared to fulfill our essontial functions of paying oat de;:;osit3 and making new loans at the time of greatest jmo<Un XERO COPY Ychile all of the above precepts arc praiseworthy, I think the foundation upon lvbicn this campaign must be built is contained in the one phrase which calls upon bankers to measure the effect of their individual acta on the national economy and banking- as a whole. In one respect, the position of the Federal Reserve System with regard to this prolan, calls for a word of clarification. As is well known to bankers, the Federal Reserve has two distinct, though closely related, functions in the banking field. Like the Office of the Comptroller of the Currency, tho Federal Deposit Insurance Corooration, and tho various State Bank Cccsniesionors, the System has bank supervisory functions. These functions are n^nsallj implemented thru the Fed oral Reserve lanks and are conccmed with the credit policies and. practices o'C tho member banks. It should be equally well known to bankers, however, that the Federal Reserve System has responsibilities for national nsnotary and crcdit conditions that lie - partly at least - outside and beyond the function of bank supervision, At tho time of the release of the joint statement by the Federal and State supervisory agencies already referred to,, the Board issued a separate statement, as follows, and I ouote: -Tho statement by th.e Federal and State bank supervisory authorities, entitled »£ank Credit Policy During the Inflation1, was participated in by the Board of Governors of the Federal Reserve System on tho basis of its bank supervisory responsibilities. The statement obviously doos not concern Itself with the Systems functions in the a,.notary field nor its joint responsibilities with the Treasury respecting debt management," Un :uote» The successful management of the public debt and the XCRO : COPY » ' *ERO I COPV rol«t©a open market operations present problems that jsoy veil bscone crit-ical oven though tha coa-.srclal banking systea accomplishes a substantial restraint of bank credit expansion. It is pertinent to point out hsra tkat "other investors" hold a greater aggregate of r.c.rke table goY®ma»nt securities ton do the corar.ercisl banks, end of ouch holding, bonds maturing or callable after five years are natrly three times the amount of like mturities held by the cowsercial banks. Sale? of sueU bonds by "other investor?.,B notably insurance compcmiss, do not, under present conditions, attract purchases by private-investors* Concocuentlr the Reserve Systeri steps in as buyer and this unfortunately adds to member bsnlc reserves just the sozia as though the bonds had been sold by consaercial bsnks. Should such a development attain'lar -e proportions, the Reserve Syntax vould have no other alternative then to ask for legislation* There is no present nead rnd ve hope that this pre^rsa of the ABA vill be sufficiently effective th.-t the Hoard vould not find i it necessary to use of any additional powers. I am in formed that in addition to the thirteen pilot meetings being conducted '07 the ABA, otherrasetingsvill be held at other points by the I v-.rious State associations, in order to insure that the progr-m in fully iiqaleraonted in ev^rr part of the country. I as sure the Federal Reserve Bnnks and their Branches vould be happy to assist in any vny they e n in connection vith those nesting or any other pha.se of your program. In such activities, they '-'ill hava the fullest approval of the fo-rd of Governors in Washington, And 1 om sure, also., that the regional representatives of X E R O ': COPY . XERO I COPY 1 the Comptroller of the Currency and the Fad err, 1 tepo.it I n s u r e torpor: tion have tho suae desire to assist in this campaign, G*ntlan*m, the thought Dal presentations by tho procadin^ .papers have impressed me greatly. There has been no attest to niui^se the problem and helpful s u c t i o n * have been offered. In the main, it is a problem of subordinating the taediata to the looS vie* and tho individual advantage to the welfare of banking ae a whole. Vhilo the taelr. is e hoavy one, the opportunity is correspondingly great. It is the opportunity of private banking to shot/ leadership, during * critical osriad in our count it'3 economic end financial history. 'COPY XERO i (XERO icopy;
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