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e^c ^ ' r ^ ' - , •**-»• * o -j,< g <x->ti < I it*. *£ February S, 1935 Governor Marriner S, Eccles of the Federal Reserve Board at his regular Friday press conference on February S, in reply to inquiries, gave out the following statement: The chief purposes of the proposals for changes in our banking laws, in so r& ? as they relate to the Federal Eeserve System, are the following: 1. To accelerate the rate of economic recovery, 2. To make our banking and monetary system, which was designed under the conditions prevailing prior to the World ^ar, more responsive to our present and future economic needs. 3. To prevent a recurrence of conditions that led to the collapse of our entire banking structure in the spring of 1933- The banking system of this country has been put to a severe test and has not st °od that test. It has not been able to stand up under the strain of the de- pression or to lend effective support in the fight against it. On the contrary, tile banking system has proved to be an element of weakness in our economic struc- *'•• that has aggravated and prolonged the worst phases of the depression. And l * still impedes the rate of recovery. The explanation of this is not to be found only in the excesses and abuses ''hat characterized our banking practices in the recent past, nor in the present ^lative inertia of the banking system, nor by an assumption that bankers are less eager than other men to hasten the progress of recovery. The fact that the tanking system has proved to be inadequate is to be explained, in large part, v °y the fact that our banking structure has remained essentially unchanged throughout an epoch of far-reaching economic changes both in this country and in the c:. The principal measures contemplated in the proposed legislation, therefore, are designed to remedy deficiencies now inherent in the banking structure itself. •In this connection it is proposed to make the Federal Reserve System, which is the cornerstone of the banking structure, more responsive to our national economic ne eds. he It is also proposed to make our commercial banks better adapted to meeting credit requirements of industry, commerce, and agriculture under the changes that have taken place in our economic system since most of our present banking laws were enacted/ Underlying the proposed changes in the banking laws are fundamental economic n d monetary considerations, the widespread influence of which has not been ade- quately understood. In fact, the lack of an adequate understanding of these undamental considerations was an important factor in bringing about the disastrous collapse of our economy which culminated in the closing of all th« banks in the spring of 1933, ^ Fluctuations in production and employment, and in the national income, are conditioned upon changes in the available supply of cash and deposit currency, and upon the rate and character of monetary expenditures. The effect of an in- creased rate of spending may be modified by decreasing the supply of money, and intensified by increasing the supply of money. Experience shows that, without conscious control, the supply of money tends to expand when the rate of spending increases and to contract when the rate of spending diminishes.' During the depression the supply of money did not expand and thus moderate 1x6 effect of decreased rates of spending, but contracted rapidly and so intensified the depression. e This is one part of the economy in which automatic adjustments ^d to have an intensifying rather than a moderating effect. If the monetary Mechanism is to be used as an instrument for the promotion of business stability, conscious control and management are essential. I At the present stage of economic developments, main reliance for bringing ^ibout a rise in the national income must be placed upon increased governmental aid private expenditures. The most important role of monetary control at the lament, therefore, is assuring that adequate support is available whenever needed Wv promoting and accelerating recovery." 3 I - Iwo supremely important duties are likely to devolve upon the reserve admi nistration in the future. The first is assuring that a recovery does not re- ^It in an undesirable inflation. °Howed by a depression. 8 ; The second is assuring that a recovery is not If recovery is allowed to develop into inflation, it certain ultimately to lead to another depression. To regain prosperity without Xc ©sses, and thereafter to maintain business stability, are the two immediate ob Jectives of monetary policy, 'In order that the reserve administration may endeavor, with some prospect of success, to render prompt support for emergency financing in case of need, to Prevent the recovery from getting out if hand, and to prevent the recurrence of sastrous depressions in the future, it is essential that the authority of the : e <leral Reserve Board be strengthened,' As matters now stand, the Board is charged • ^ h responsibility for monetary developments in this country, but lacks the clear i ^o- explicit authority for determining the country's monetary policies, An essential step in giving the Board this authority is to give it a controln 08 S influence over the System's open-market operations, for these are by far the t important instrument of Reserve policy. By these operations reserves may be se V Q n to or taken away from member banlcs; and it is on these reserves that deposits re based. It is not too much to say that the power to control open-market opera- nt! °ns is the power to control the expansion and contraction of bank credit, and Us in large measure to control the country's supply of money.' In the present ^ugh the Federal r ket policy rests fche Federal Reserve fch: administrative organization, the power to initiate openOpen Market Committee established by the Banking Act of 1933. with the twelve Federal Reserve banks, which act jointly Board has no representation on this Committee. It is given y the power to approve or disapprove open-market policies recommended by the 'toraittee,and to prescribe the regulations under which the open-market operations r e to be carried out. However much the Board may desire an energetic buying selling policy it has no authority under the law to initiate such a policy. On the other hand, the ability of the Open Market Committee to give effect Policies that it recommends is dependent both on the approval of the Board and the willingness of the Reserve banks individually to participate in the http://fraser.stlouisfed.org/ N a tReserve i o n sBank . of St. Louis Federal ! u. The existing arrangement is cumbersome and unwieldly. To what extent it i ^ s prevented the proper functioning of the Federal Reserve System, it is im| Possible to tell. But it is clear that, if it is retained, there is no reason ' t o suppose that the System will in the future be more effective in bringing | aoout business stability than it has been in the past. ! It is, therefore, obviously necessary to concentrate the authority and re- i ! sPonsibility for open-market operations in a body representing a national point ! °f view. This is provided for in the proposed legislation without in any way impairing the autonomy of the Federal Reserve banks in matters of local or re gional concern. Another anomaly in the present administrative organization of the Federal Reserve System is the arrangement in respect of the Reserve bank Governors. The Governors are the principal executive officers of the Reserve banks, and their Positions are of major importance in the System; yet they are not even mentioned in the Federal Reserve Act, nor is their appointment subject to the approval of the Federal Reserve Board. It is, therefore, proposed to recognize the office of Governor in the law, to combine this office with that of Chairman of the Board of Directors, and to make the appointment subject to the approval of the Federal Reserve Board.' To facilitate the carrying out of national policies, it is proposed to remove Certain of the restrictions that are now imposed on the Federal Reserve System the Federal Reserve Act, but that experience has shown to be detrimental and impracticable. These restrictions are largely predicated on conditions that 1 5. t Prevailed when the Federal Reserve Act was adopted in 1913» an<i w e r e wisely ^Posed on a system that was new and untried; but in the course of time the ircumstances that gave rise to them have diminished in importance or greatly Altered. •A. conspicuous example in this respect is the rigid definition of the kinds -'Of ' l Paper that the Federal Reserve banks are permitted to discount. 'Changes in ; "6 country's economic life, notably in the methods of financing business enter: p r i s e , have materially reduced the volume of short-term, self-liquidating paper the classes to which the discount privileges of the Reserve banks are largely ' estricted by law. In times of stress, therefore, when the help of the Federal ! eserve System has been most urgently needed, many banks, though holding sound j ssets in their portfolios, have been devoid of the particular kinds available l^der the law for borrowing at the Reserve banks.' The undue severity of the limitations on eligible paper was finally recog• ized, and they were removed temporarily by emergency legislation; but this action : a s not taken until much harm had been done to the business of the country and unt I Granted hardship and loss suffered by bank depositors. Furthermore, there is |at Present considerable evidence that these limitations are proving an impediment 0 recovery. New loans of a type that commercial banks have customarily made in i ; he past are now refused, not because the applicants do not possess sound assets, °ut because the sound assets that they do possess are technically ineligible for e discount. There is also still a tendency among many banks to remove from their Portfolios paper that cannot be immediately liquefied by recourse to the Federal Reserve banks. For these reasons it is proposed that the legal limitations on eligibility ie re moved and authority be given to the Federal Reserve Board to determine by • e§ulation the character of paper that shall be eligible for discount at the Reserve banks, Another of the proposed changes in the Federal Reserve Act would dispense r^ *h the requirement for segregation of collateral behind Federal Reserve notes, hout in any way altering the present requirement of M-0 per cent reserve of 6. k Sold certificates. When there was a foreign drain on the country's gold in 1931; 1932, the requirement for segregation of collateral caused serious difficulty by tying up gold over and above the Uo per cent required reserve. The situation was •met for the emergency by permitting the pledge of United States G-overnment obliga: "-ions as collateral against Federal Reserve notes; but the authority of the Reserve ba nks in this matter is only temporary. Since Federal Reserve notes are prior liens on all the assets of the issuing ;' «98or*e bank, and are in addition obligations of the United States G-overnment, • the requirement for segregation of collateral serves no useful purpose and adds Nothing to the safety of the notes. It has been erroneously asserted that to dispense with the requirement for i8e€regation would give the Reserve banks power to issue notes without adequate Peking, This is not the case. The Reserve banks have two principal classes of iiabilities: deposits and notes. Back of these, in addition to gold and lawful : m°ney, are the Reserve banks' bills and securities. Either notes or deposits can e I increased through the acquisition by the Reserve banks of an acceptable asset, ! Thelr total can be increased in no other way, Jt is at the time the asset is ac- "JU-ired that the determination is made that it is good enough to be held by the •Federal Reserve bank; and this determination is made without reference to whether he asset is ultimately to become backing for a deposit liability or for a note liability. The deposits of the Federal Reserve banks are the reserves back of all deposits of member banks. Assets that are good enough to constitute the backing f or deposits of the Reserve banks are also good enough to back Federal Reserve ^otes. Furthermore, a holder of a deposit with a Federal Reserve bank has the right to Withdraw it in notes at any time, and consequently the Federal Reserve bank should le in a position to use the asset acquired at the time the deposit was created as backing for the notes into which this deposit is convertible. Neither the elasticity of our currency supply nor the safety of Federal Reserve f^rency is in any way affected by the proposed change in the law. Its only prac- Vi . lcal effect is to eliminate the cumbersome and useless requirement that certain Pecific collateral be segregated, and held at considerable expense and in a Alleged position, as backing exclusively for Federal Reserve notes. 7. The proposals relating directly to member banks of the Federal Reserve System a **e few in number, but vital to speeding recovery. Their purpose is to make it more feasible for banks to meet the present requirements of mortgage borrowers and to Participate more aggressively in a revival of activity and employment in the construction industry. 'The changes proposed would authorize banks to use a larger Proportion of their assets for mortgage loans than is permitted by existing law, t0 lend up to 75 P6*" cent of the property value and for a term up to twenty years ° n Properly amortized first mortgages, and to make such loans without regard to the local geographical limits to which the existing law confines them.• Member banks of the Federal Reserve System hold nearly ten billion dollars of time deposits that represent in large part the people's savings. These are long-time funds. Their use for long-time purposes is proper from every point of view. The release of member bank long-time funds for use in the mortgage market wi aw H help the banks to meet the local needs of their communities and will do ay with the necessity of having other institutions take over a service that the banks are equipped to render. The problem of finding profitable use for their funds i« a vital one with n e banks at the present time, and a relaxation of restrictions on real estate loans will provide such a use without impairing the soundness of the banks' condition. It should be noted that long-time mortgages, with provision for ^ortization, are sounder than short-time mortgages without amortization, and that the introduction of amortized mortgages into the holdings of member banks wl H contribute to the stability of the mortgage market. These changes would put an end to restrictions in the existing law that prac- !cal experience has plainly shown to be injurious to banks and mortgage borrowers like. n The effect of these proposed changes would enable commercial banks to take effective part in the reopening of the mortgage market, and to give their • Stinted support, in a manner not now possible for them, to that branch of ind "^stry in which the opportunity for meeting both a social and an economic need is now greatest.