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AMEND THE FEDERAL RESERVE ACT
HEARINGS
BEFORE THE
COMMITTEE ON BANKING AND CURRENCY
HOUSE OF REPRESENTATIVES
SEVENTY-SEVENTH CONGRESS
FIRST SESSION
ON
S. 1471
AN ACT TO EXTEND THE PERIOD DURING WHICH
DIRECT OBLIGATIONS OF THE UNITED STATES
MAY BE USED AS COLLATERAL SECURITY
FOR FEDERAL RESERVE NOTES
J
J
JUNE 21, 23, 24, AND 25, 1941
Printed for the use of the Committee on Banking and Currency
o2J16
UNITED STATES
GOVERNMENT PRINTING OFFICE
WASHINGTON : 1941
C O M M I T T E E ON B A N K I N G A N D
CURRENCY
H E N R Y B. S T E A G A L L , Alabama, Chairman
C L Y D E W I L L I A M S , Missouri
B R E N T S P E N C E , Kentucky
T H O M A S F. FORD, California
P A U L B R O W N , Georgia
W R I G H T P A T M A N , Texas
W I L L I A M B. B A R R Y , New York
L E O N S A C K S Pennsylvania
A L B E R T G O R E , Tennessee
W I L B U R D. M I L L S , Arkansas
A . S. M I K E M O N R O N E Y , Oklahoma
W A L T E R A . L Y N C H , New York
H E R M A N P. K O P P L E M A N N , Connecticut
H A L E BOGGS, Louisiana
M E R L I N H U L L , Wisconsin
II
JESSE P. W O L C O T T , Michigan
C H A R L E S L. G I F F O R D , MassachusettsF R E D L. C R A W F O R D , Michigan
R A L P H A. G A M B L E , New York
R O B E R T W . K E A N , New Jersey
JESSIE S U M N E R , Illinois
F R E D E R I C K C. S M I T H , Ohio
J O H N C. K U N K E L , Pennsylvania
T H O M A S R O L P H , California
C H A R L E S S. D E W E Y , Illinois
JAMES DOUGLAS B R O W N ,
Clerk
CONTENTS
Statement o f —
Page
Daniel W . Bell, Under Secretary of the Treasury
2
Marriner S. Eccles, Chairman of the Board of Governors of the Federal
Reserve System
41, 55, 73
in
AMEND THE FEDERAL RESERVE ACT
S A T U B D A Y , JUNE 21,
HOUSE
COMMITTEE
OF
1941
REPRESENTATIVES,
ON B A N K I N G A N D
CURRENCY,
Washington, D. C;
The committee met at 10:30 a.m., Hon. Henry B. Steagall (chairman)
presiding.
The CHAIRMAN. The committee will come to order.
We have for consideration this morning S. 1471.
(The bill referred to is as follows:)
[S. 1471, 77th Cong., 1st sess.]
A N A C T To extend the period during which direct obligations of the United States may be used as collateral
security for Federal Reserve notes
Be it enacted by the Senate and House of Representatives of the United States of
America in Congress assembledt That the second paragraph of section 16 of the
Federal Reserve Act, as amended, is hereby amended by striking therefrom the
words "until June 30, 1941" and by inserting in lieu thereof the words "until
June 30, 1943".
Passed the Senate June 16 (legislative day, June 10), 1941.
Attest:
EDWIN
A . HALSEY,
Secretary.
The CHAIRMAN. We have with us this morning Mr. Bell, the Under
Secretary of the Treasury. Mr. Crawford desires to ask Mr. Bell
some questions, and he may proceed at this time.
Mr. CRAWFORD-. Before interrogating Mr. Bell, I would like to
make this brief statement, for the benefit of Mr. Bell and his associates,
as well as the other members of the committee.
When I found that hearings were to be held on this bill I felt that
the Treasury was as much interested in this matter, generally, as the
Board of Governors of the Federal Reserve banks, or the Federal
Reserve System could possibly be, because as I understand this
proposed legislation, Federal Reserve notes under it are to be issued,
if they are issued at all, in connection with the direct obligations of the
United States Treasury which it may issue for any purpose to meet
authorizations and appropriations by the Congress.
Then, going back to the January 1941, statement of the Secretary
of the Treasury before the Ways and Means Committee, and subsequent statements which he has made, I felt the Treasury officials could
greatly assist the committee, when this bill is considered on the floor
of the House, if you gave us some general information along the lines
which I shall refer to.
Going back to the presentation which you and your associates made
before the Ways and Means Committee at the time you asked for an
increase in the direct debt limit up to $65,000,000,000, would you mind
telling the committee this morning what the Treasury now considers
its obligations will be in the way of disbursements for the fiscal year
ending June 30, 1942?
1
AMEND THE FEDERAL HE SERVE ACT 2
I raise tliat quest-ion because of the very significant developments
that have occurred since the Budget was prepared in November or
December and since the Secretary's presentation to the Ways and
Means Committee to which I have referred. If you will give us the
best answer you can in the light of present circumstances, considering
the increased appropriations that have been made by the Congress
and the prospective total revenues that may flow from present tax
laws, plus anticipated tax laws, as best you can measure it, giving us
the information as definitely as you can give it, under the present
circumstances, I shall appreciate it.
STATEMENT OF DANIEL W. BELL, THE UNDER SECRETARY OF
THE TREASURY, ACCOMPANIED BY DR. GEORGE C. HAAS,
DIRECTOR OF RESEARCH AND STATISTICS, TREASURY DEPARTMENT
Mr. B E L L . I will be glad to.
According to the latest Budget estimates, which were made public
about June 1, the total expenditures for the fiscal year 1942 are now
estimated at $22,169,000,000, and the anticipated revenues under the
tax laws now in force—and this excludes the social security and other
trust funds—amount to $9,402,000,000. That leaves a deficit of
$12,767,000,000, which represents what the Treasury will have to
borrow next year, reduced, of course, by whatever additional taxes
this Congress provides.
Under the program before the Ways and Means Committee under
which the Secretary recommended, Z){ billion dollars of new taxes,
we estimate we will get approximately $2,600,000,000 in the fiscal
year 1942. That would bring the net deficit to approximately
$10,000,000,000, which we would have to finance through the sale of
public-debt obligations.
Mr. C R A W F O R D . Mr. Bell, may I ask you a question in this manner:
When you speak of the potential revenue under present laws of
$9,402,000,000, you have in mind, have you, the increased revenue
that would flow from present laws as applied against the anticipated
increase in national income?
Mr. B E L L . Yes, sir; in our estimates we took into consideration
some increase.
Mr. C R A W F O R D . If the Congress does give you a new revenue bill
which is applied against the anticipated increase in national income for
the next fiscal year ending June 30, 1942, if I understood you correctly, approximately two billion six hundred million will flow to the
Treasury by June 30, 1942, as a result of present laws, plus the new
law we are now working on, instead of the full Z% billions.
Mr. B E L L . NO; the two billion six hundred million will come out
of the new revenue measure only; not under the present law. Under
the present law we estimated the amount would be nine billion four
hundred million, and that the new tax bill would amount to two
Tbillion six hundred million. This latter figure is a rough estimate.
Mr. C R A W F O R D . I understand. So we should bear in mind that
even if we do enact a 3% billion-dollar revenue bill during the present
session, by the end of the next fiscal year, June 30, 1942, the mechanics
AMEND THE FEDERAL HE SERVE ACT
3
of the thing will bring the revenue to approximately $1,000,000,000
less than the act would call for?
Mr. B E L L . That is right; there is a lag in the collection of taxes.
This bill cannot go through by July 1, and every month of delay causes
us a loss of one hundred to one hundred and fifty million dollars.
Mr. C R A W F O R D . T O bring us up to date, based on these estimates,
and based upon your experience, as far as you can see, in the month
of June, looking a month ahead, would you mind giving the committee
a rough estimate as to how the $10,000,000,000 of securities which
you shall probably have to issue, based on this estimate, will be distributed, as between commercial banks and all others?
I may have asked a question as to which it is impossible to estimate
and give a figure which is satisfactory to you or to the committee;
but if you cannot do it, all right.
Mr. B E L L . Of course, it is impossible to answer that question, Mr.
Crawford. Of the $10,000,000,000 of public-debt obligations we expect to sell to finance the deficit, about a billion and a half dollars will
be sold to Social Security and other trust funds. The balance of
8% billion dollars we will have to sell to the general public which will,
of course, include banks, banking institutions, insurance companies,
individuals, and so forth.
To the extent that wre sell United States savings bonds—and we have
no estimate as to what we can sell in the fiscal year 1942—but to the
extent that we do sell them that relieves us of the burden of financing
in the open market.
Mr. C R A W F O R D . D O you happen to have with you the figures
showing the increase in the holdings of direct Government obligations
and indirect Government obligations of commercial banks in the 101
leading cities, say, since January 1, 1941, up to June 1, 1941?
Mr. B E L L . I have not got it with me, but I think I can put that
in the record.
Mr. C R A W F O R D . Would you mind doing that?
Mr. B E L L . I will be glad to do that.
Mr. C R A W F O R D . If you can obtain the figures, I will be glad if you
will put in the record along with that information a statement showing
the increase in the commercial loans of the banks in the 101 leading
cities, on whatever classification you happen to have, for the first 5
months of the year, and then show the comparison of the total increase
in these direct obligations held by the same group of banks between
January 1, 1940, and December 31, 1940, giving us a year's operations;
and then the increase in both Government and commercial loans between January 1, 1941, and May 31, 1941, so we will get the 5-month
comparison with the previous year's performance.
Mr. B E L L . We will be glad to do that.
(The statement referred to is as follows:)
Government
securities1
.
Dec. 27,1939.
Dec. 31,1940.
M a y 28, 1941
Net change:
Dec. 27, 1939 to
ojiju.
tu Dec.
jjeu. 31,1940.
oi,
Dec. 31,1940 to M a y 28, 1941
i Direct and guaranteed.
$11,162,000,000
12,462,000,000
13,996,000,000
+1,300,000,000
+1,534,000,000
Commercial
loans
$4,400,000,000
5,018,000,000
5,673,000,000
+618,000,000
TO
ID, UUU, UUU
+655,000,000
+655,000,000
AMEND THE FEDERAL HE SERVE ACT 4
Mr. D E W E Y . I would like to find out what Mr. Bell meant in the
steatment in which he stated that every month that passed without
the enactment of a new tax law there is a loss of $150,000,000. Do
you mean that the new tax law will not be retroactive to 1941?
Mr. B E L L . It will as to income taxes but not as to excise taxes.
Mr. D E W E Y . It will not be retroactive as to estate and gift taxes?
Mr. B E L L . It will depend upon the act, but I assume they would
be the same as other excise taxes.
Mr. G I F F O R D . Y O U mentioned the figures nine billion and twentytwo billion. Have you any bonds coming due as to which you will
have to raise new money to pay them?
Mr. B E L L . We have maturing securities, but we will refund those.
Mr. G I F F O R D . All of them?
Mr. B E L L . Yes; except for a small amount. Whenever we have
maturing securities we always offer an exchange privilege to the holders
of those maturing securities. They do not have to accept the exchange
offering; they can turn in the securities and get cash. But usually
the ones who want cash represent a very small amount of the outstanding securities.
For instance, on the August 1 maturities of $834,000,000, approximately $45,000,000 remains outstanding, to be paid in cash. As to
the $790,000,000, the holders exchanged them for other securities.
Mr. M O N R O N E Y . Will the tax-exempt feature which we changed in
the law we passed awhile ago make these Government bonds subj ect
to taxes?
Mr. B E L L . Yes. All Government securities issued after March 1,
1941, are subject to taxes.
Mr. M O N R O N E Y . It changed the buying policy of those who refused
to exchange their old obligations for new obligations?
Mr. B E L L . It did not affect our policy, but the securities we offer
in exchange are taxable under the new law.
Mr. M O N R O N E Y . About the same as before?
Mr. B E L L . We have no difficulty in marketing the taxable securities.
Mr. C R A W F O R D . Proceeding with the rough estimate of $}{ billion
dollars to be disposed of, I would like to submit a question in this
manner, and if you do not care to answer it, just say so.
Press reports this morning indicate tliat the President may ask for
an additional $10,000,000,000 to assist in financing the Lend Lease Act.
Let me ask the question in this way: Should that develop in the
near future, and with other additional appropriations which we may
make during the current fiscal year, the new figures will have to be
added to the old figures, will they not?
Mr. B E L L . There may have to be added some new expenditures out
of such appropriations, but whatever the amount of the additional
appropriations, they cannot all be spent during the year. If further appropriations are requested under the Lend-Lease Act there might be a
reduction in expenditures under other appropriations because the
capacity of the country is not sufficient to provide all those materials
in 1 year. But I have seen no reference to an additional $10,000,000,000 for the Lend-Lease Act.
Mr. C R A W F O R D . The press reports appeared in the Wall Street
Journal and in the Journal of Commerce, I believe.
Mr. B E L L . I have not heard any such thing from the White House.
AMEND THE FEDERAL HE SERVE ACT
5
Mr. C R A W F O R D . If by chance we should need material to accelerate
the defense program in the way of delivery of actual equipment, invoicing it, and provide for making the payment necessary, that is
also a factor which may enter into a material step-up in these figures
you have given us. Is that within the realm of reason?
Mr. B E L L . If that occurs the 8% billion will be increased, unless
Congress provides taxes over and above the 2.6 billion; yes, sir.
Mr. C R A W F O R D . Do you happen to have a rough figure which you
could give us which compares with this figure used by the Secretary in
his April 24, 1941, statement, wherein he said that now we have a
program of about $39,000,000,000 for defense expenditures, including
the lend-lease appropriation? That was made on April 24, 1941.
Have you a comparable figure to that which you could give us?
Mr. B E L L . Yes, sir. The Budget statement of June 1 now estimates that figure at 43 billion.
Mr. GIFFORD. As to the figures of 9 billion and 22 billion, and also
the social security figure of a billion and a half, do you not figure that
in the 22 billion?
Mr. B E L L . No, sir; this 9 billion 4 0 0 million of revenue is exclusive
of any taxes we would collect under the Social Security Act. The
billion and a half of funds coming into the Treasury under the Social
Security Act, which will be invested in Government securities, is a net
figure after deducting payments that might go out under those accounts.
Mr. G I F F O R D . Do you mean to say we collect a billion and a half
more than we pay out?
Mr. B E L L . About that; yes, sir.
Mr. C R A W F O R D . Mr. Bell, are you prepared to give the committee a
statement of your sales of series E, F, and G bonds since the campaign
opened on May 1?
Mr. B E L L . We can furnish for the record, Mr. Crawford, a complete
break-down of that.
Roughly, we sold $438,000,000 of defense savings bonds in the month
of May, and as I recall we have sold approximately $185,000,000
worth thus far in the month of June. I shall be glad to put into the
record a break-down as to the various series.
(The statement referred to is as follows:)
Sales of savings bonds
M a y 1941
Series E
Series F__
Series G
Total
-
June 1-21, 1941
$114,895,000
45,521,000
277,872,000
$70,899,000
15,967,000
' 98,924,000
438,288,000
185,790,000
Mr. C R A W F O R D . Could you also give us a break-down, not in
detail, as to all purchases, as between individuals and commercial
banks? Did the commercial banks buy any of those?
Mr. B E L L . No, sir. Banks which carry demand deposits are not
permitted to buy defense savings bonds.
Mr. C R A W F O R D . And other lending institutions?
AMEND THE FEDERAL HE SERVE ACT 6
Mr. B E L L . All other institutions and individuals may buy them.
We are getting the statistics on holdings, but they will not be available
for another month or so.
Mr. P A T M A N . Can commercial banks buy those E, F, and G bonds?
Mr. B E L L . They cannot.
Mr. G I F F O R D . Can they take them as security?
M r . BELL. NO, sir.
Mr. G I F F O R D . D O you
Mr. B E L L . N O , sir; the
mean to say that they cannot offer them?
owners cannot use them as collateral security
for loans, but under certain conditions the owners can submit them to
the Treasury and get their cash.
Mr. C R A W F O R D . Series G is a 12-year issue at 2% percent, payable
semiannually?
Mr. B E L L . That is right.
Mr. C R A W F O R D . Even those cannot be hypothecated?
Mr. B E L L . They cannot; no, sir.
Mr. C R A W F O R D . If, in your judgment, it is appropriate to do so—
otherwise I would not ask you to do it at this particular time—would
you mind giving the committee as brief a statement as you care to
with reference to the plans for disposing of these three series? That
may be something you should not discuss too much. I will leave it
to your judgment.
Mr. B E L L . I do not know just what you mean by plans. You
mean our plan of advertising or sales?
Mr. C R A W F O R D . Yes; to get the public absolutely conscious of the
enormous monthly recurring job that is before them in taking these
issues if they are to be kept out of commercial banks.
Let us take the figure of 8% billion dollars, or, for an easy figure,
let us make it 9 billion dollars.
That is approximately $750,000,000 a month that somebody must
purchase.
My whole approach on this is to the effect—and this is the only
approach I have—that we should not under any circumstances permit
these issues to go into the commercial banks. And I think in that
approach I have the full backing, so far as word of mouth is concerned,
of the Secretary of the Treasury and the spokesman for the Federal
Reserve Board, and many others of what I might call the independent,
intelligent officials, Dr. Goldenweiser, for instance. I do not know
what your position might be.
So 1 go to the extreme, to the effect that we should not under any
circumstances leave anything undone which opens the door of the
commercial banks to purchase the defense issues and thereby add to
inflation of prices?
Dr. Goldenweiser in speaking before a bankers' association at Hot
Springs the other day made this observation. He was discussing
The Role of Credit in Defense, and he declared that private banking
is among the institutions which must be preserved. He said that
the Government's policy is to avoid selling securities to the banks
as much as possible.
Dr. Goldenweiser cautioned banks against speculating in Government bonds. They should be carried to maturity, he said. He
continued:
D o not dump them at the first sign of alarm. The Federal Reserve always
stands ready to make advances to the banks on their Governments at par, and
at low rates.
AMEND THE FEDERAL HE SERVE ACT
7
I can fully appreciate, especially when you are handling such an
enormous volume, that the commercial banks may have a very
important function, a temporary function to perform in handling the
securities. But I should like to be better satisfied, in connection with
this explanation I have asked for, that the Treasury is doing everything humanly possible, to see that this $750,000,000 per month shall
be sold to individuals and institutions other than the commercial
banks, to be paid for out of our earnings and our accumulated savings,
the demand deposits we have to rnir credit, and so forth, rather than
to be sold to commercial banks, not only temporarily, but permanently.
Talking with some commercial bankers, I got the impression from
them that they are anticipating they will have an opportunity to
materially increase their portfolios with new bonds.
If there is anything you can say to the committee that will relieve
my mind, at least, so far as that proposition is concerned, I will
appreciate it.
If you are outlining an approach to the public which in your opinion
will dispose of this $750,000,000 per month, I should not want to
interfere with your plans.
But when I think in terms of the May and June performance, and
what the July performance is likely to be—and I have in mind that
you probably will hot exceed $250,000,000 for June on series E, F,
and G—I am trying to get encouragement from some source to the
effect that this $750,000,000 of new issues will be sold to individuals
and lending institutions and not to commercial banks. Any assurance
you can give us, I will appreciate.
Mr. B E L L . We are doing everything we can to push the sales
program of defense savings bonds. I think we have done exceedingly
well in the first 2 months of the operation. You must bear in mind
that it is just started. As to the program, Mr. Harold N. Graves,
who is in charge of the campaign, gave a complete statement of it to
the Appropriations Committee only this week. To summarize it
briefly, as you may know, we have asked the banks and other institutions to qualify as selling agents for these securities, and more than
10,000 banks and other institutions have so qualified. Also, we have
some 16,000 post offices that have qualified to sell them. We have radio
programs every day, and speakers going out over the country. They
give out news items in aid of the campaign. I can say that everything is being done, short of coercion, to further the campaign.
The Secretary has stated on many occasions that he certainly does
not want coercion used in the sale of these bonds. It is to be entirely
voluntary. Further, we have been developing State organizations,
with many States organized with State chairmen and a number of
subcommittees for the work. It is going forward very rapidly. The
radio people have donated their services, and at almost every hour
of the day you can hear something about savings bonds. We feel it
is very important that we keep as much of this new public debt out
of the hands of the banks as possible, and not expand bank deposits,
but we cannot estimate at any time how much we will sell to the general
public. The fact that we have to make public bond offerings every
so often in addition to the defense bonds does not mean that all those
securities go into the hands of the banks. They handle them as distributing agencies, but individuals take many of those securities and
corporations take many of them. The insurance companies buy
AMEND THE FEDERAL HE SERVE ACT 8
many of them. Even if we have to offer securities in the next 12
months totaling four, five, or six billion dollars, it does not mean that
they will all go into the hands of the banks. Some will go into the hands
of individuals and nonbanking institutions. We are doing everything
we can to sell them to the general public and not to the banks. We
are also working on a tax-anticipation security which should be very
helpful in this connection.
Mr. C R A W F O R D . Are there any institutions that are.handling commercial paper that are weaving tbis program in any volume in their
daily advertising in the newspapers?
Mr. B E L L . Many banks are advertising savings bonds in the daily
newspapers.
Mr. G I F F O R D . When business conditions impove, or when business
becomes good, and money is needed in business, investments in
business paper will be much more productive than an investment in a
1 y2 percent bond. When that occurs, do you have any fear that these
people may dump back on the Treasury these low interest bearing
bonds? In your opinion, is there any danger of that when business
gets good and people can realize a return of more than l)i percent on
their money?
Mr. B E L L . That presents a problem, and I think it is a serious one.
In the World War, when we sold Liberty bonds through a selling
campaign, many people bought bonds who should not have bought
them. As soon as the war was over, these people were thrown out of
employment and they needed their money. Under those circumstances, there was nothing for them to do but dump the bonds on the
market.
Mr. G I F F O R D . N O W you would have to take them back.
Mr. B E L L . They were thrown on the market at that time, and there
was a drop in the market price of those securities of some 18 or 20
points. Many people received only 82 or 83 cents on the dollar.
Under the present program, if they need the money, they can come to
the Treasury with their bonds and get cash. The Government
would have to borrow the money at the market rate at that time, so it
would represent, in effect, a continuous refunding program to meet
the situation as it then might exist. We think that many people who
invest in these securities now may have to get their money back before
maturity because of circumstances over which they will have no control, and for that reason we put a provision in the bonds that they
can present them at any time and get the cash. They are not subject
to market fluctuations which, from the standpoint of the individual,
is ideal.
Mr. G I F F O R D . I wanted to get on record your opinion as to whether
there was any danger of having the people who buy these bonds coming back for the money. They may buy them and banks would take
them as collateral for loans, and then they would come back on you.
Mr. B E L L . It presents a problem, but I do not think it is a dangerous one. If the rates for example go to
percent, we would have
to borrow money at 4J£ percent and pay off the savings bonds. Our
authority to issue securities is very flexible, so we can issue the type
of security best suited to the market.
Mr. G I F F O R D . In my opinion, it would be better if all United
States bonds paid 4-percent interest, rather than these low rates.
Mr. B E L L . It would make our problem a little worse.
AMEND THE FEDERAL HE SERVE ACT
9
Mr. GIFFORD. I have always contended that if the country issued
bonds paying at least 4-percent interest, it would be better because
the people would hold them longer. There would not be the temptation to dump them on the market. I think well of your job. I
think it has been done wonderfully well, but I also believe that the
day will come later on when you would be glad if you had done it in
the way I suggest.
Mr. FATMAN. Of course, they can always pay more.
Mr. GIFFORD. I am doubtful of the policy of issuing these lowinterest securities.
Mr. B E L L . Of course, we take into consideration the market conditions at the time we have to do our public financing.
Mr. GIFFORD. I think it is a dangerous method of procedure.
Mr. SPENCE. By the act of March 6 , 1 9 3 4 , it was made permissible
to use direct obligations of the United States as collateral security for
Federal Reserve notes. This provision was to extend for a period of
2 years. On March 6, 1936, Congress extended it to June 30, 1939,
and on June 30, 1939, it was extended to June 30, 1941. Now, what
was the fundamental reason for that?
Mr. B E L L . Under the Federal Reserve Act, there must be 1 0 0 percent collateral security for all Federal Reserve notes issued. The act
provides that not less than 40 percent of such collateral must be in
gold certificates and the balance, or 60 percent, in commercial paper
as defined in the act. When we had a falling off in business, commercial paper declined to an extent where the Federal Reserve banks did
not hold a sufficient amount of commercial paper to cover that margin
between 40 and 100 percent. Therefore, the Federal Reserve System
recommended that Congress provide that direct Government securities be used for that purpose. That provision has been extended from
time to time. It has always seemed to me a reasonable thing to do.
There is only 1% million dollars of commercial paper at the present
time as collateral for Federal Reserve notes, and the balance or
$7,000,000,000 is represented by gold certificates.
Mr. SPENCE. What was the condition of commercial paper in the
banks at that time, or why were they not able to use commercial
paper at that time?
Mr. B E L L . The commercial banks did not have so much commercial
paper discounted with the Federal Reserve banks at that time, and,
therefore, the Federal Reserve banks did not hold any large volume of
commercial paper. Some of the banks did not have sufficient commercial paper or gold to cover the notes outstanding, so it was necessary to make provision for other types of collateral.
Mr. SPENCE. What was the condition of commercial paper on
March 6, 1934, at the time of the passage of the first act?
Mr. B E L L . On March 7 , 1 9 3 4 , the date of the first published statement of the Federal Reserve banks after the first extension of the act,
the Federal Reserve banks held total commercial paper of only about
$105,000,000. The amount of Federal Reserve notes in circulation
at the close of the preceding month was about $ 3 , 2 2 5 , 0 0 0 , 0 0 0 .
Mr. SPENCE. IS it not true that the volume of commercial paper
had been increased in the hands of the commercial banks, but not in
the hands of the Federal Reserve banks, because the commercial banks
had not discounted or borrowed on their commercial paper? In your
opinion, do they hold any more commercial paper now than then?
AMEND THE FEDERAL HE SERVE ACT 10
Mr. B E L L . The Federal Reserve banks probably hold less now than
then. I can look that up. I am not familiar with what the Federal
Reserve banks hold. I am under the impression that they hold very
little commercial paper. It has not been necessary for the commercial
banks to discount their paper with the System.
Mr. SPENCE. D O you think it advisable to extend this proviso at
this time?
Mr.
Mr.
Mr.
BELL.
Yes,
SPENCE. D O
BELL.
Yes,
sir.
you think it necessary to continue it at this time?
sir.
Mr. C R A W F O R D . Since many of these commercial banks have enormous excess reserves, they will certainly not be calling on the Federal
Reserve banks for any loans of consequence. They will not do that
so long as they have those excess reserves.
Mr. B E L L . Generally speaking, that is right.
Mr. C R A W F O R D . N O W , coming directly to this bill, S . 1 4 7 1 , did the
Treasury recently make a survey of many of the banks as to their
holdings of Government securities, directly or indirectly?
Mr. B E L L . We asked about 6 , 5 0 0 banks in the country, which held
about 95 percent of all Government securities held by commercial
banks, and about 900 insurance companies and other institutions of
that kind, to report to us once a month their holdings of Government
securities, or what they held at the end of the previous month, the
purpose being to let us know just who owned our securities. We
would know just who held our securities, and that information is
useful to us in our financing programs. In refunding the August
maturities of $800,000,000 about a month ago we found out from these
reports just held the maturing securities. We had representatives of
the institutions which held large amounts come in so we could discuss
with them the market conditions, and the types of securities they
would like to see the Treasury issue first from their standpoint and
second from the Treasury standpoint. That information as to the
type of securities and where held has proven very valuable to us. If
you would like to have it, I will put in the record a copy of the last
report received, showing the holdings of Federal securities, and the
different types of institutions.
Mr. C R A W F O R D . I would like to have it.
(The report referred to is as follows:)
SUMMARY D A T A F R O M T R E A S U R Y S U R V E Y OF O W N E R S H I P OF SECURITIES ISSUED
OR G U A R A N T E E D BY THE U N I T E D STATES, A P R I L 3 0 , 1 9 4 1
Extract from the Treasury Bulletin June 1941
TREASURY SURVEY OF OWNERSHIP OF SECURITIES ISSUED OR GUARANTEED BY THE
UNITED STATES, APRIL 30, 1941, COVERING THE HOLDINGS OF LARGE BANKS AND
INSURANCE COMPANIES
Some of the more important data obtained in the Treasury survey, as of April
30, 1941, of the ownership by large banks and insurance companies of securities
issued or guaranteed by the Federal Government, are presented in the following
tables. Similar information was presented in the M a y Bulletin of the Treasury
Department covering the Treasury survey as of March 31, 1941.
TABLE I.—Summary of ownershi-p by type of security, by call classes, and by tax-exemption provisions
P A R T A — P A R V A L U E S I N M I L L I O N S OF D O L L A R S
Public marketable interest-bearing securities1
Held by institutions covered in Treasury survey
Classification
Total
amount
outstanding
Total
5,846 com- 491 mutumercial al savings
banks
banks
Total
1. By type of security:
Securities issued by United States:
Bills
—
Notes.
Bonds
Guaranteed issues3
Total
—
-
2. By call classes:
Due or first becoming callable:
Within 1 year
1 to 5 years
5 to 10 years
10 to 15 years
IS to 20 years
After 20 years
Total...
Total
Sea footnotes at end of table..
877
3,088
13,440
4,432
2,879
10,642
4,172
29
209
2,798
260
23
270
5,807
609
178
i,695
505
92
1,112
105
43,608
28,546
21,837
18,541
3,296
6,709
5,377
1,332
10,548
7,138
5,137
2,285
3,042
8,771
5,385
3,649
989
2,847
7,927
4,286
2,699
782
195
844
1,100
950
207
394
1,778
1,753
1,488
1,297
283
1,386
1,411
1,237
1,061
<3)
111
392
342
251
236
<s)
709
5,377
1,332
2,564
603
209
6,135
365
124
4,946
307
85
1,188
58
3,296
6,709
5,377
8,540
3,386
50
—.
583'flre,
202 life- casualty,
insurance and macompanies rine insurance
companies
3,358
19,247
5,041
10,168
3. By tax-exemption provisions:
Wholly exempt from Federal income taxes
Partially exempt from Federal income taxes s.
Subject to Federal income taxes
Total
1,603
5,721
29,750
6,533
5,080
16,384
-
785 insurance companies
6,337 banks
1
1
43,608
1
28,546
21,837
18,541
5,088
33,304
5,217
2,474
22,115
3,957
2,265
15,980
3,592
2,137
13,416
2,988
43,608
28,546
21,837
128
TABLE I.—Summary of ownership by type of security, by call classes, and by tax-exemption provisions—Continued
to
F A R T B . — P E R C E N T A G E D I S T R I B U T I O N B Y CLASSES OF SECURITIES
Public marketable interest-bearing securities1
Held by institutions covered in Treasury survey
Classification
Total
amount
outstanding
6,337 banks
Total
Total
1. By type of security:
Securities issued by United States:
Bills
Notes
Bonds
Guaranteed issues *
Total..
2. By call classes;
Due or first becoming callable:
Within 1 year
1 to 5 years
5 to 10 years
10 to 15 years
15 to 20 years
After 20 years
Total..
3. By tax-exemption provisions:
Wholly exempt from Federal income taxes . .
Partially exempt from Federal income taxes
Subject to Federal income taxes
Total..
785 insurance companies
5,846 com- 491 mutumercial
savings
banks
banks
Total
3.7
13.1
68.2
15.0
3.1
11.8
67.4
17.7
4.0
14.1
61.5
20.3
4.6
15.5
57.4
22.5
0.9
6.3
84.9
7.9
0.3
4.0
86.6
9.1
100.0
100.0
100.0
100.0
100.0
11.6
37.6
23.3
19.6
7.8
.1
12.0
37.0
25.0
18.0
8.0
(3>
13.9
40.2
24.7
16.7
4.5
<3)
15.4
42.8
23.1
14.6
4.2
<3)
100.0
100.0
100.0
m o
11.7
76.4
12.0
8.7
77.5
13.9
10.4
73.2
16.4
100.0
100.0
100.0
Held by
583 fire, all other
investors
202 life- casualty,
insurance and macompanies rine insurance
companies
3.3
87.3
9.4
1.7
6.9
83.5
7.9
4.7
15.7
69.7
9.9
100.0
100.0
100.0
100.0
5.9
25.6
33.4
28.8
6.3
5.9
26.5
26.1
22.2
19.3
(a)
5.3
25.8
26.2
23.0
19.7
(?)
8.3
29.4
25.7
18.8
17.7
<3)
10.9
38.7
20.1
22.6
7.3
.3
100.0
100.0
100.0
100.0
100.0
11.5
72.4
16.1
3.9
77.8
18.3
3.1
91.4
5.4
2.3
92.0
5.7
6.4
89.2
4.4
17.4
74.3
8.4
100.0
100.0
100.0
100.0
100.0
100.0
a
o
B
m
H
O
H
W
$
W
W
W
H
§
H
>
a
H
P A R T C . — P E R C E N T A G E DISTRIBUTION B Y GROUPS OF INVESTORS
1. B y type of security:
Securities issued b y United States:
Bills
Notes
Bonds
Guaranteed issues *
Total
2. B y call classes:
Due or first becoming callable:
Within 1 year
1 to fi years
5 to 10 years
10 to 15 years
15 to 20 years
After 20 years
.
.
_
Total
3. B y tax-exemption provisions:
Wholly exempt from Federal income taxes . .
Partially exempt from Federal income taxes
Subject to Federal income taxes
Total
_
100.0
100.0
100.0
100.0
56.1
58.7
64.7
77.2
54.7
54.0
45.2
67.8
52.9
50.3
35.8
63.6
1.8
3.7
9.4
4.0
1.4
4.7
19.5
9.3
3.1
15.8
7.7
1.4
1.6
3.7
1.6
43.9
41.3
35.3
22.8
100.0
65.5
50.1
42.5
7.6
15.4
12.3
3.1
34.5
100.0
100.0
100.0
100.0
100.0
100.0
67.6
64.4
70.2
60.2
67.5
2.0
59.9
53.5
53.0
42.7
29.2
2.0
56.0
48.4
42.2
31.6
23.1
2.0
3.8
5.2
10.8
11.1
6.1
7.8
10.9
17.2
17.4
38.3
5.6
8.5
13.9
14.5
31.3
2.2
2.4
3.4
2.9
7.0
32.4
35.6
29.8
39.8
32.5
98.0
100.0
65.5
50.1
42.5
7.6
15.4
12.3
3.1
34.5
100.0
100.0
100.0
48.6
66.4
75.8
44.5
48.0
68.9
42.0
40.3
57.3
2.5
7.7
11.6
4.1
18.4
7.0
2.4
14.9
5.9
1.7
3.6
1.1
51.4
33.6
24.2
100.0
65.5
50.1
42.5
7.6
15.4
12.3
3.1
34.5
(3)
(3)
(3)
NOTE—Figures are rounded to the nearest one-tenth of 1 percent and will not necessarily add to totals.
i Public marketable securities include all securities issued except (1) special issues to Government agencies and trust funds (2) adjusted-service bonds, and (3) United States savings
bonds. The amount of United States savings bonds reported by the banks and insurance companies covered was $184,000,000, maturity value. These were divided as follows: Commercial banks, $169,000,000; mutual savings banks, $5,000,000; and insurance companies, $10,000,000.
a Excludes (1) Federal Housing Administration debentures, (2) securities issued on the credit of the United States, and (3) obligations sold directly to the Treasury.
a Less than $500,000 or less than 0.05 percent.
* Securities the income from which is exempt from both the normal rates and surtax rates of the Federal income tax.
4 Securities the income from which is exempt only from the normal rates of the Federal income tax.
Treasury bonds are classified as partially tax-exempt securities although, by
statutory provision, interest derived from $5,000 of principal amount of these securities owned by any single holder is exempt from the surtax rates as well as the normal rates of the
Federal income tax.
H
K
C?
H
I
W
H
CD
w
td
«
o
CO
TABLE II.—Detail of ownership for each issue outstanding, classified by tax-exemption provisions
P A R T A.—PAR V A L U E S I N M I L L I O N S OF D O L L A R S
Public marketable interest-bearing securities '
Held by institutions covered in Treasury survey
Issue, classified by tax-exemption provision
Total
amount
outstanding
5,337 banks
Total
Total
I. Wholly exempt from Federal income taxes:2
Bills: May 1941 maturities
Notes:
1% percent, June 1941
1% percent, December 1941
percent, March 1942
2 percent September 1942
I K Percent, December 1942
1J4 percent, June 1943
1 percent, September 1943
percent, December 1943
1 percent, March 1944
% percent June 1944
1 percent, September 1944
% percent, March 1945
Total notes
Bonds:
Postal savings
Panama Canal
Conversion
Total bonds
Total wholly exempt from Federal income taxes
785 insurance companies
5,846 com- 491 mutumercial al savings
banks
banks
Total
583 fire,
202 life- casualty,
and'
mainsurance :
companies rine insurance
companies
113
102
324
198
193
294
261
29
490
285
254
28
454
4,491
2,344
2,145
(3)
<3)
2,474
2,265
117
50
29
196
91
233
12fi
(3)
3
75
210
95
86
307
192
24
204
426
342
232
(529
280
421
515
416
283
718
15G
0)
1
14
199
(?)
2,137
<3>
7
7
9
13
3
8
G
4
(3)
17
(3)
185
79
77
288
185
144
276
247
27
447
<3>
128
(33)
()
124
(3)
(3)
(3)
124
II. Partially exempt from Federal income taxes:*
Treasury bonds:
ZM percent, August 1941...
3V% percent, June 1943-47
3K percent, October, 1943-45
3K percent, April 1944-46
4 percent, December 1944-54
2 % percent, September 1945-47
2 p e r c e n t , December 1945
3% percent, March 1946-56
3 percent, June 1946-48
W* percent, June 1946-49
percent, October 1947-52
2 percent December 1947
2% percent, March 1948-51
2V2 percent, September 1948
2 percent, December 1948-50.
3H percent, December 1949-52
2)4 percent, December 1949-53
percent, September 1950-52
2% percent, June 1951-51
3 percent, September 1951-55
2}i percent, December 1951-53
2 percent, Juno 1953-55
2M percent, June 1951-56
2% percent, March 1955-60
2% percent, September 1956-59
2% percent, June 1958-63
2% percent, December 1960-65
Total Treasury bonds
See footnotes at end of table.
291
788
592
526
1,058
582
671
1,032
190
588
664
422
558
322
196
431
326
237
485
664
284
385
229
926
661
693
199
713
561
390
490
311
263
414
374
136
517
582
351
471
290
140
332
234
149
454
521
260
371
147
738
500
454
114
630
532
334
315
238
205
339
56
99
91
88
31
143
24
14
83
188
161
239
85
83
29
56
175
73
58
75
145
62
183
238
205
226
93
118
202
157
172
75
246
77
65
146
262
218
474
91
75
31
136
567
272
408
617
17,623
12,062
9,728
2,334
5,561
605
252
770
902
627
784
416
314
632
482
409
560
910
362
451
376
1,188
879
1,166
85
54
71
82
72
109
49
138
188
158
178
66
100
168
132
112
53
209
66
44
109
218
178
414
73
58
16
109
463
231
340
13
45
50
47
47
27
18
34
24
60
22
38
11
22
37
44
40
59
18
17
15
28
104
41
67
128
230
203
630
617
409
431
125
175
404
336
350
141
313
89
121
116
598
307
461
465
331
132
155
1,554
399
248
454
1,092
9,792
H
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§©
IS
W
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t*
w
H
Ul
M
W
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>
a
Oi
TABLE II.—Detail of ownership for each issue outstandingt classified by tax-exemption provisions—Continued
P A R T A — P A R V A L U E S I N M I L L I O N S OF DOLLARS—Continued
Public marketable interest-bearing securities 1
Held by institutions covered in Treasury survey
Classification
Total
amount
outstand
ing
Total
Total
II. Partially exempt from Federal income taxes—Continued.
Guaranteed issues:5
Commodity Credit Corporation:
H percent, August 1941
—
1 percent, November 1941
H percent, May 1943
Federal Farm Mortgage Corporation:
3 percent, January 1942-47
2H percent, March 1942-47
3H percent, March 1944-64
3 percent, May 1914-49
Home Owners' Loan Corporation:
^percent May 1941.
2}4 percent, July 1942-44
3 percent, May 1944-52
1H percent, June 1945-^7
Reconstruction Finance Corporation:
% percent, July 1941
% percent, November 1941
H percent, January 1942_.
1 percent, July 1942
United States Housing Authority:
^percent, November 1941
\%A percent, February 1944
Total guaranteed issues
--
Total partially exempt from Federal income taxes
—
—
785 insurance companies
5,337 banks
5,846 com- 49 lmutumercial al savings
banks
banks
583 fire,
^ l i f e - casualty,
insurance and macompanies rine insurance
companies
Total
20
203
204
289
174
178
256
14f>
170
247
141
168
245
28
9
4
4
236
103
95
835
151
90
59
511
100
71
27
352
87
61
321
51
18
32
159
47
17
30
146
191
875
779
755
177
728
362
657
156
704
267
606
153
676
194
578
21
25
95
51
85
43
212
299
310
27f>
188
250
284
230
185
209
271
217
179
207
261
212
3
41
13
13
] 12
114
96
101
95
96
95
94
5
5,888
4,492
3,918
3,688
15,980
13,416
33,304
22,115
S
16
4
1
2
13
1
20
n
13
10
1
2
15
3
4
27
11
1
2,564
5
4
(3)
574
477
6,135
4,946
1,188
III. Subject to Federal income taxes:
Bills:
June 1941 maturities
July 1941 maturities
Total bills
Note:
U percent, March 1943
% percent, September 1944
% perccnt, December 1945
Total notes.
Treasury bonds:
2 percent, March 1948-50
2H percent, March 1952-54
Total Treasury bonds
Guaranteed issues: 4
Reconstruction Finance Corporation:
V% percent, October 1942..
percent, July 1943.
Total guaranteed issues
Total subject to Federal income taxes.
I V . Grand total
See footnotes at end of table.
701
501
477
310
467
306
451
302
191
1,203
787
773
753
416
65
635
531
17
539
459
15
507
422
13
457
383
48
96
71
1,231
1,015
944
1,115
1,024
890
716
758
603
2,139
1,607
1,361
320
324
273
276
254
259
578
319
90
71
180
284
133
113
122
104
225
307
533
463
47
48
243
241
644
549
514
484
5,217
3,957
3,592
2,988
43,608
28,546
21,837
18,541
27
30
1,2
307
6,709
5,377
1,332
15,062
TABLE II.—Detail of ownership for each issue outstandingt classified by tax-exemption provisions—Continued
00
P A R T B . — P E R C E N T A G E D I S T R I B U T I O N B Y GROUPS OF INVESTORS
Public marketable interest-bearing securities 1
Held by institutions covered in Treasury survey
Classification
Total
amount
outstanding
6,337 banks
Total
Total
I. Wholly exempt from Federal income taxes: !
Bills: May 1941 maturities
Notes:
1% percent, June 1941
1M percent, December 1941.
1% percont, March 1942
2 percent, September 1942
IH percent, December 1942
percent, June 1943
1 percent, September 1943
m percent, December 1943
1 pcrcont, March 1944
% percent, June 1944
1 percent, September 1944
$4 percent, March 1945
100.0
100.0
-
Total notes
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100,0
100.0
100.0
100.0
100.0
100.0
Total bonds
100.0
Total wholly exempt from Federal income taxes.
100.0
5,846 com- 491 mutumercial al savings
banks
banks
28.2
25.7
10.9
44.6
517
36.8
44.0
51.5
70.7
45.8
57.1
62.7
10.2
68.2
10.5
36.8
49.3
27.8
37.1
48.8
68.8
37.1
55.3
61.1
9.9
63.2
10.1
33.8
43.4
23.1
33.2
45.8
66.1
34.2
53.6
59.4
9.5
62.3
47.8
45.1
100.0
Bonds:
Postal savings
Panama Canal
Conversion
14.5
2.0
(?)
13.7
2.0
(?)
13.7
2.0
(3)
44.5
.4
2.9
5.6
4.7
4.3
3.0
2.5
2.9
1.9
1.7
.4
1.1
Total
.4
7.8
5.4
9.1
6.9
2.7
(3>
5.4
3.8
7.0
3.4
.6
9.0
1.6
1.7
.4
5.0
7.1
.4
.7
2.1
4.4
(3)
583 fire,
casualty,
202 life- and mainsurance rine incompanies surance
companies
(3)
(3)
.4
2.9
1.1
2.0
3.9
2.1
1.1
1.9
1.2
1.0
1.1
.4
1.9
3.1
2.8
(33)
()
(3)
(?)
.4
8.5
48.6
785 insurance companies
42.0
1.7
II. Partially exempt from Federal income taxes:
Treasury bonds*
3% percent, August 1941
3% percent, June 1943-47
3H percent, October 1943-45
3M percent, April 1944-46.„.
4 percent, December 1944-54
2% percent, September 1945-47
2H percent, December 1945
3% percent, March 1946-56
3 percent, June 1946-48
3H percent, June 1946-49
A% percent, October 1947-52
2 percent, December 1947...
2H percent, March 1948-51
2}4 percent, September 1948
2 percent, December 1948-50
3% percent, December 1949-52
2)4 percent, December 1949-53
2K percent, September 1950-52
2VX pcrcent, June 1951-54
3 percent, September 1951-55
2H percent, December 1951-53
2 percent, June 1953-55
2% percent, June 1954-56
2% percent, March 1955-60
2H percent, September 1956-59
2H percent, June 1958-63
2% percent, December 1960-65
Total Treasury bonds.
72.5
5 5.5
55.0
59.4
60.5
64.6
76.9
64.2
61.0
58.9
53.9
79.9
74.3
80.3
79.0
76.6
66.5
74.1
71.7
38.5
70.5
81.7
77.2
40.5
59.3
73.0
69.5
55.0
41.9
42.0
43.7
40.7
46.0
59.5
40.1
41.6
39.8
31.2
69.2
54.2
63.0
67.4
46.6
51.8
55.7
42.6
26.4
63.8
77.4
57.3
18.8
31.7
28.6
27.9
44.8
30.0
36.9
38.3
33.8
38.8
53.6
28.6
32.0
28.6
19.6
64.8
42.6
57.6
65.0
29.9
41.3
42.2
27.9
15.1
56.4
73.4
49.0
12.1
24.2
22.3
22.8
10.2
11.9
5.1
5.4
6.9
7.2
5.9
11.5
9.6
11.1
11.6
4.4
11.7
5.3
2.5
16.9
10.5
13.6
14.7
11.3
7.4
4.0
61.3
44.0
35.5
6.7
7.4
6.3
5.1
17.4
13.7
13.1
15.7
19.8
18.6
17.2
24.1
19.5
19.2
22.7
10.7
20.1
17.1
11.4
29.7
14.7
18.4
29.1
12.1
6.7
4.3
20.0
21.7
27.7
44.4
41.5
16.0
17.7
23.5
37.0
32.9
8.6
8.5
20.3
16.3
4.0
8.2
13.1
10.8
9.9
12.4
15.2
14.7
12.2
20.4
16.2
16.1
14.8
7.6
17.1
14.6
7.7
22.2
12.2
15.0
25.4
9.7
5.2
2.2
4.3
2.9
3.2
3.3
4.5
3.9
5.0
3.7
3.3
2.9
7.9
3.1
3.1
2.4
3.9
7.5
2.5
3.4
3.6
2.4
1.5
2.1
4.1
4.0
4.2
7.3
See footnoies at end of table.
>
O
CO
TABLE II.—Detail of ownership for each issue outstandingt classified by tax-exemption
provisions—Continued
PART B.—PERCENTAGE DISTRIBUTION BY GROUPS OF INVESTORS—Continued
Public marketable interest-bearing securities1
Held by institutions covered in Treasury survey
Classification
Total
amount
outstanding
Total
Total
II. Partially exempt from Federal income taxes—Continued.
Guaranteed issues:5
Commodity Credit Corporation:
H percent, August 1941
1 percent, November 1941
% percent, May 1943
Federal Farm Mortgage Corporation:
3 percent, January 1942^17—
2H percent, March 1942-47
3H percent, March 1944-64
3 percent, May 1944-49
Home Owners' Loan Corporation:
Yi percent, May 1941
2H percent, July 1942-44
3 percent, May 1944-52
1% percent, June 1945-47
Reconstruction Finance Corporation:
percent, July 1941
—
% percent, November 1941
% percent, January 1942
1 percent, July 1942
United States Housing Authority:
percent, November 1941
1% percent, February 1944
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
5,846 com- 491 mutumercial al savings
banks
banks
Total
583 fire,
casualty,
202 life- and mainsurance rine incompanies surance
companies
85.7
87.3
88.6
71.9
83.3
85.6
69.5
82.4
84.8
2.5
1.0
1.0
13.8
3.9
3.1
9.9
2.0
4.4
2.5
1.4
64.0
87.4
62.1
61.2
42.4
68.9
28.4
42.2
36.9
59.2
16.8
38.4
5.5
9.7
10.5
3.7
21.6
17.5
33.7
19.0
19.9
16.5
31.6
17.5
1.7
1.0
92.7
83.2
46.5
87.0
81.7
80.5
34.3
80.3
80.1
77. S
24.9
76.6
2.9
12.2
10.5
1.3
10.9
5.7
1.5
88.7
83.6
91.6
83.3
87.3
69.9
87.4
78.6
84.4
69.2
84.2
76.8
.7
3.2
2.2
1.4
13.7
4.2
4.7
.5
9.0
3.5
3.3
85.7
84.8
84.2
84.8
82.5
1.8
.9
4.4
40.3
7.7
88.6
Total guaranteed issues.
100.0
66.5
Total partially exempt from Federal income taxes.
100.0
48.0
785 insurance companies
6,337 banks
1.6
9.4
3.1
3.7
2.8
11.0
1.4
18.4
.5
1.3
1.1
5.0
1.0
1.4
(s)
8.1
5.9
2.1
1.6
III. Subject to Federal income taxes:
Bills:
June 1041 maturities
July 1941 maturities
100.0
100.0
68.0
61.9
66.6
61.1
64.3
60.3
2.3
.8
1.4
.8
1.4
.8
32.0
38.1
100.0
65.4
64.3
62.6
1.7
1.2
1.2
34.6
100.0
100.0
100.0
26.2
84.9
86.4
23.1
79.8
79.5
20.0
72.0
72.1
3.1
7.9
7.3
3.1
5.0
7.2
3.1
3.8
5.3
1.1
1.9
73.8
15.1
13.4
100.0
82.5
76.7
69.3
7.3
5.8
4.4
1.4
17.5
100.0
100.0
79.8
69.9
68.0
58.9
51.8
31.2
16.1
27.7
11.9
11.0
10.9
10.2
.9
.9
20.2
30.0
100.0
75.1
63.6
41.9
21.6
11.5
10.6
.9
24.9
100.0
100.0
85.3
85.2
79.4
79.9
75.9
74.4
3.4
5.6
5.9
5.2
5.3
3.1
.3
2.2
14.7
14.8
Total guaranteed issues
100.0
85.2
79.8
75.2
4.7
5.4
4.2
1.2
14.8
Total subject to Federal income taxes.
100.0
75.8
68.9
57.3
11.6
7.0
5.9
1.1
24.2
100.0
65.5
50.1
42.5
7.6
15.4
J2.3
3.1
34.5
Total bills..
Notes:
percent, March 1943
H percent, September 1944.
% percent, December 1945..
Total notes-
Treasury bonds:
2 percent, March 1948-50...
2 % percent, March 1952-54.
Total Treasury bonds..
Guaranteed issues:*
Reconstruction Finance Corporation:
% percent, October 1942
I H percent, July 1943...
I V . Grand total.
(3)
NOTE—Figures are rounded to the nearest million or the nearest H o of 1 percent and will not necessarily add to totals.
* Public marketable securities include all securities issued except 0 ) special issues to Government agencies and trust funds, (2) adjusted service bonds, and (3) United States savings bonds. The amount of United States savings bonds reported by the banks and insurance companies covered was $184,000,000, maturity value. These were divided as follows:
Commercial banks, $169,000,000; mutual savings banks, $6,000,000; and insurance companies, $10,000,000.
a Securities the income from which is exempt from both the normal rates and surtax rates of the Federal income tax.
» Less than $500,000 or less than 0.05 percent.
* Securities the income from which is exempt only from the normal rates of the Federal income tax. Treasury bonds are classified as partially tax-exempt securities although, by
statutory provision, interest derived from $5,000 of principal amount of these securities owned by any single holder is exempt from the surtax rates as well as the normal rates of the
Federal income tax.
* Excludes (1) Federal Housing Administration debentures, (2) securities issued on the credit of the United States, and (3) obligations sold directly to the Treasury.
a
%
H
w
m
§
o
H
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f
W
H
Ui
H
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g
to
AMEND T H E FEDERAL HE SERVE ACT 22
Mr. C R A W F O R D . Does this move on the part of the Treasury, as
you have had time to study and analyze it, have a tendency to stabilize prices and to eliminate the erratic fluctuations that have occurred
in the past in connection with these obligations?
Mr. B E L L . D O you mean this reporting system?
M r . CRAWFORD.
Yes.
Mr. B E L L . I do not think it has had any effect whatever on prices.
Mr. C R A W F O R D . Perhaps I did not make my question clear: Has
the price quoted for these direct obligation^ fluctuated as erratically
since this information has been filed as it did before?
Mr. B E L L . I have not looked at the fluctuations with that in mind,
but whatever they have been I am sure these reports were not a cause
or a cure.
Mr. C R A W F O R D . I will tell you what is in my mind: Of course, I
think this is one of the smartest moves that the Treasury Department
ever made, or one of the soundest moves. I do not mean that it is
tricky, but I mean that it is good horse sense, because it places you,
as I comprehend it, in the position of knowing exactly who holds
these issues of securities. You know the portfolios of your customers.
It will also probably save many millions of dollars to the taxpayers
because of your putting out issues at lower rates. It seems to me that
the very fact that you are having 6,500 banks, plus more than 900
insurance companies, giving you a report every 30 days of their holdings, will tend to prevent losses in securities, or taldng chances in
loading and unloading securities.
Mr. B E L L . The purpose of it was to get better information for use
in our determination of the types of securities we should offer. Of
course, we are always for that type which best fits into our debt
program and that suits the market conditions existing at the time.
Mr. G I F F O R D . As a matter of fact, it was stated that the entire new
issues in the year 1939 were absorbed in a very large amount, at least,
by New York City banks alone, while the banks in the rest of the
country did not increase their holdings at all. That was the testimony
at a bankers' meeting which I attended.
Mr. B E L L . I have not the statistics for that particular year that you
mention.
Mr. G I F F O R D . I think the public would like to have that information.
Mr. B E L L . I can put that in the record.
(The total direct and guaranteed debt increased by $3,163,000,000
during the calendar year 1939. During the same period, the holdings
of member banks in New York City increased by $914,000,000.)
Mr. G I F F O R D . The testimony at that meeting was that the whole
new issue for that year was absorbed entirely by New York City
banks. It was stated that they absorbed the entire increase for that
year.
Mr. P A T M A N . What year was that?
Mr. G I F F O R D . It must have been 1939. This meeting was held in
May 1940. Reporters were not present, but that wTas the testimony
given.
Mr. B E L L . The information is available, but I do not have it with
me.
Mr. P A T M A N . The New York banks hold two-thirds of the reserves.
Perhaps they had to absorb it.
AMEND THE FEDERAL HE SERVE ACT
23
Mr. GIFFORD. They absorbed it. Would you say that they had
to absorb it?
Mr. B E L L . The New York banks were not asked to take it, and
no other banks are asked to take it. No banks in the country are
asked to take the securities.
Mr. P A T M A N . It has been frequently stated that the banks have
been compelled to take them. Is there any truth in that?
M r . BELL. N O , sir.
Mr. GIFFORD. I know better than that.
Mr. B E L L . They are not compelled to take them.
Mr. GIFFORD. D O you not know that they call up the banks and
tell them that the}7 ought to subscribe to the loans?
Mr. B E L L . N O , sir; there is nothing to that, I know.
Mr. GIFFORD. The director of a bank told me that.
Mr. B E L L . Will you be kind enough to send whoever made that
statement to the Treasury? I shall be glad to talk to him.
Miss SUMNER. I am the one who made that statement. I was in
a directors' meeting, and the bank examiner said "you must take more
Government bonds."
Mr. B E L L . Was that a national bank examiner?
Miss SUMNER. Yes.
Mr. B E L L . N O bank examiner -would have authority from the
Treasury to make any such statement.
Miss SUMNER. I am the director, and I was there.
Mr. P A T M A N . What was the examiner's name?
Miss SUMNER. I do not know.
Mr. P A T M A N . Could you give the name of the bank and the date?
Miss SUMNER. That was last year. The name of the bank is the
Sumner National Bank, of Sumner, 111.
Mr. P A T M A N . That was last year?
M r . SUMNER. Y e s .
Mr. GIFFORD. D O you
not know that they have that feeling, even
if they are not told, that they must purchase United States bonds? I
am sure that that is their feeling.
Mr. B E L L . They have not gotten that feeling from the Treasury.
They just have not gotten them from the Treasury, I will tell you
that. I think the large uninvested funds of the banks have something
to do with it.
Mr. P A T M A N . It is in their self-interest?
Mr. B E L L . Yes; in order to make some money.
Mr. GIFFORD; Take the Eiggs National Bank here in Washington:
Do they speculate in Government bonds?
Inasmuch as they now hold about 66 percent of their assets in Government bonds, do they speculate with them?
Mr. B E L L . I do not know.
Mr. G I F F O R D . Y O U do not know?
Mr. B E L L . No, sir; I cannot tell you of any individual bank that is
speculating in Government bonds.
Mr. SMITH. Mr. Bell, I notice from the currency statement that
there has been a continuous increase in the amount of currency in the
hands of the public, running—I do not recall exactly, but close onto
about 10 billions, I think, now.
Mr. B E L L . $9,300,000,000.
Mr. SMITH. It is over nine?
AMEND THE FEDERAL HE SERVE ACT 24
M r . BELL. Y e s .
Mr. SMITH. What
do you ascribe that to? Is there any way of
knowing? Is the public using more currency; is it just the normal
growth of pay rolls, or how is that accounted for? It is a very large
increase—more than 4 billion since 1932.
Mr. B E L L . It is rather difficult, Mr. Smith, to say exactly the reason
for it. There may be many factors in the situation. One is that the
substantial increase in business requires more currency for pay-roll
purposes, pocket cash, till money, and so forth. We have found that
the ratio between outstanding currency and demand deposits has
about maintained its level over a period of 4 or 5 years. Of course,
some of that increase goes back, probably, to the banking holiday,
where the communities lost their banks, and people have to carry
more cash in their pockets. No doubt there is some hoarding, particularly among the foreign element.
Mr. SMITH. You notice there is a marked increase in the larger
denominations.
M r . BELL. Y e s .
Mr. SMITH. And I
was just wondering if that may not be partly
caused by foreign hoarders, who have taken out our currency as a
means of investing and hiding some of their assets that they had over
here and disposed of?
Mr. B E L L . Probably some of it is in that form. We have no way
of checking it.
Mr. SMITH. It does not mean anything particularly to you, one
way or the other?
Mr. B E L L . Not at this time, when your ratio is being maintained
between demand deposits and outstanding currency, and there is a
direct relationship.
Mr. C R A W F O R D . Referring to the bill, now, would you state exactly
what banks—I mean as a group—are entitled to resort to this privilege? Is it only members of the Federal Reserve System, or does this
apply to all commercial banks, members and nonmembers, or all
banks covered bv the Federal Deposit Insurance Corporation?
Mr. B E L L . You mean H . R . 4 7 0 2 ?
Mr. C R A W F O R D . Yes; H. R . 4702.
Mr. B E L L . That only applies to Federal Reserve banks.
Mr. C R A W F O R D . N O W , does the schedule which you are going to
put into the record cover all Federal Reserve member banks?
Mr. B E L L . You mean as to the Government security holdings?
Mr. C R A W F O R D . N O ; you have a schedule there of over 6 , 0 0 0 banks
and nine-hundred-and-some-odd insurance companies. Are all those
banks members of the Federal Reserve?
Mr. B E L L . We picked the largest banks located generally throughout the United States.
Mr. C R A W F O R D . Here is what I am trying to arrive at—if you took
the present holdings as the basis you have used—the present holdings
of direct obligations referred to in this bill—of all of the banks that
can feed them up to the Federal Reserve banks, so as to come under
this privilege, what would that total volume amount to? Do I make
myself clear?
Mr. B E L L . I assume you mean if all the commercial banks which
own Government securities should turn those Government securities
over to the Federal Reserve banks for borrowings or discount pur-
AMEND T H E FEDERAL HE SERVE ACT
25
poses, then the Federal Reserve banks could put those securities up
against Federal Reserve notes?
Mr. C R A W F O R D . Yes. What would that volume be?
Mr. B E L L . I do not remember what the total bank holdings are.
The total Government securities held by all commercial banks are
about $19,000,000,000. I cannot conceive all the banks borrowing
against Government securities. Of course, in that case, when they
borrow, they might borrow on commercial paper and put up Government securities as collateral and, in that case, the Federal Reserve
banks would only use the commercial paper and not the Government
securities.
Mr. C R A W F O R D . Has this privilege been used to any extent since
1934?
Mr. B E L L . There was some use of it, yes; from 1 9 3 4 to 1 9 3 8 .
Mr. C R A W F O R D . But, as far as you recall, none since 1939?
Mr. B E L L . No; not since 1938.
Mr. C R A W F O R D . D O you know whether or not the total of the increase in commercial loans and the total increase in holdings of direct
obligations by the commercial banks have, during the past 4 or 5
months, pushed up the sum of demand deposits to about the same extent that the gold imports did during the year 1940, for the same relative period? I think in 1940 our gold imports were a little over 4%
billion, probably $4,700,000,000?
Mr. B E L L . I think so.
Mr. C R A W F O R D . N O W , the gold imports have dropped very, very
considerably—tremendously as compared to last year—and my question is: Are the commercial banks through the extension of commercial loans and the acquisitipn of direct obligations now pushing up
their demand deposits at about the same rate as they did last year
with gold imports, as against the average gold imports today?
Mr. B E L L . I have not the figures, but I think we can get them.
I do not know.
Mr. S M I T H . Have not your excess reserves decreased?
Mr. B E L L . They have decreased about $1,600,000,000 since the
high point last fall.
Mr. C R A W F O R D . Do you feel that the extension of this time is
absolutely necessary to help you in handling your financial program?
Mr. B E L L . N O , sir; it has no connection.
Mr. C R A W F O R D . It has no connection?
Mr. B E L L . N O , sir; it has no bearing on it whatever.
Mr. C R A W F O R D . Taking this indicated deficit, which you indicate
you will have to finance, of 8}i billion, what is the total refunding
issues in addition to those you probably will have to deal with during
the next 12 months?
Mr. B E L L . In the calendar year 1 9 4 2 , we have $ 1 , 0 0 0 , 0 0 0 , 0 0 0 of
refunding to do, exclusive of Treasury bills, which are rolled over
every 90 days; the balance of the calendar year 1941, there is only
about $200,000,000 to do, in December. So a billion and a quarter
for the next 18 months of refunding, in the direct obligations, is all
we have.
Mr. C R A W F O R D . How much is your direct obligations? I mean how
much is your roll-over in the direct obligations?
Mr. B E L L . $ 1 , 6 0 0 , 0 0 0 , 0 0 0 in Treasury bills are rolled over every 9 0
days. Is that what you mean?
AMEND T H E
FEDERAL HE SERVE ACT 26
Mr. C R A W F O R D . That will be about
000,000, roughly?
$2,800,000,000,
plus
$8,500,-
M r . BELL. Y e s , sir.
Mr. C R A W F O R D . About $ 1 1 , 0 0 0 , 0 0 0 , 0 0 0 ?
M r . BELL. Y e s , sir.
Mr. P A T M A N . What do you mean by "rolled over"?
Mr. B E L L . Refunded. We offer Treasury bills every
week and we
just refund, in effect, maturing Treasury bills in the same amount.
We did raise $300,000,000 in the last 2 months through the issuance
of additional Treasury bills.
Mr. P A T M A N . What is the rate of interest you are paying?
Mr. B E L L . It was running around one-twentieth. On the extra
issue it was up to around one-tenth; but it has settled somewhere
between a twentieth and an eighth.
Mr. P A T M A N . Of 1 percent?
Mr. B E L L . Yes, sir. That is on a per annum basis, Mr. Patman.
Mr. W I L L I A M S . Y O U say the rate you gave is on an annual basis?
M r . BELL. Y e s , sir.
Mr. W I L L I A M S . One-twentieth of 1 percent per annum?
Mr. B E L L . Yes, sir—for 90 days, that is.
Mr. W I L L I A M S . One-twentieth of 1 percent for 9 0 days?
Mr. P A T M A N . That is on the basis of 1 year, though?
Mr. B E L L . That is on the basis of 1 year.
Mr. C R A W F O R D . Taking your total interest-bearing debt outstanding, what percentage of that is represented by your total roll-over
paper, or Treasury short-term paper? You mature in the next 18
months, roughly, $1,600,000,000, but what is the paper?
Mr. B E L L . We had outstanding about $48,796,000,000 as of the
close of business June 19, 1941. I do not think I have it broken
down into 5-year periods, or anything like that, but we do have outstanding marketable Treasury notes which mature in 5 years and less
of $5,700,000,000, and we have Treasury bills, which I just talked
about, of $1,600,000,000, and then we have a little over $4,000,000,000
in United States savings bonds, and $29,550,000,000 of Treasury bonds.
Mr. C R A W F O R D . SO your roll-over operations are no serious problem, or they might not be, until the time comes when you have to
convert them into long-term paper. You might have a serious
problem then; but, until the time you do have to convert them into
long-term paper, there is no problem there at all, is there?
Mr. B E L L . N O , sir. I can give you some indication, in the next 4
or 5 years, of what we would have to do in case the Secretary would
take advantage in certain cases of the call provisions.
As I told vou, in 1942 he would have to refund $1,000,000,000; in
1943. it wouM be $3,250,000,000; in 1944, it is $4,400,000,000; in
1945, it is $3,000,000,000; and in 1946 it is $2,300,000,000.
Mr. C R A W F O R D . Just one other question: Are you and your
associates in the Treasury Department comfortable to the effect
that you will be able to dispose of this new financing without putting
it in the commercial banks, or do you feel there is something up here
we have to do about it?
Mr. B E L L . I do not feel there is anything at this time that Congress
has to do about it, other than to give us additional taxes which will
cut down our problem.
AMEND THE FEDERAL HE SERVE ACT
27
Mr. C R A W F O R D . I am in favor of that.
Mr. B E L L . We realize we have a very serious problem and are
constantly studying and looking at the situation. Whether or not
we can get by without eventually putting some of it in the commercial
banks, I cannot answer at this time, Mr. Crawford. We will do our
best, and that is all we can do.
Mr. C R A W F O R D . I keep coming back to that, because I am so
absolutely fearful of this run-away price situation, which is going up
at a staggering rate, and I refer now to the last 3 or 4 days7 issues of
the Wall Street Journal and the New York Journal of Commerce for
my figures, which I think are perhaps absolutely authentic. If we
are to continue piling up demand deposits through the placing of these
securities in commercial banks, and in the absence of price ceiling
machinery—and it is not effective, because it is not operating except
in isolated cases—it seems to me we are simply building the most
chaotic condition imaginable and, personally, I am opposed to it.
And I want to see the Treasury and the Congress do the thing that is
necessary to keep this new paper out of the commercial banks. That
is my present interest in it.
Mr. B E L L . Of course, that is only one of the factors in this situation. Congress did not help it any when it provided for parity loans.
Of course, that was one of the large factors in the price situation.
Mr. P A T M A N . Mr. Bell, I want to ask you about two or three things.
First, about the interest rates: How do you get this short-term money
for one-twentieth of 1 percent and one-eighth of 1 percent—by competitive bids?
M r . B E L L . Y e s , sir.
Mr. P A T M A N . Why
cannot you use that method on long-term
money?
Mr. B E L L . Well, we tried it at one time, 4 or 5 years ago, and it
worked very well on a few issues of $100,000,000 or $200,000,000, but
there was some objection to it from the market; but when we had to
float large issues of seven or eight hundred million dollars, or even a
billion dollars, it would not have worked so well, because it would be
disadvantageous to the majority of those who want to invest in
Government securities, as they do not follow the market sufficiently
to know how to bid scientifically. In other words, the smart boys
would bid on a high-rate basis; whereas, if we offer them by putting
on a definite coupon rate, the small, inexperienced fellow gets the
same advantage as the smart fellow.
Mr. P A T M A N . Have interest rates stiffened any since the removal
of the Government securities from the payment of the tax on income
from Federal securities?
Mr. B E L L . We probably had to put a little higher rate on the
taxable securities than we would have to put on the tax-exempt
securities.
Mr. P A T M A N . Can you estimate about what that is?
Mr. B E L L . It is awfully hard to figure, because you have so many
changes in the situation.
Mr. P A T M A N . Will-you estimate it for the record when you revise
your remarks?
Mr. B E L L . My guess would be about one-eighth of 1 percent on
long-term Treasury bonds.
AMEND THE FEDERAL HE SERVE ACT 28
Mr. P A T M A N . N O W , about postal savings. Have postal savings decreased any by reason of the campaign to sell defense bonds?
Mr. B E L L . N O , sir; they have not; they are still about a billion and
a quarter.
Mr. P A T M A N . In fact, postal savings are just about as attractive as
the defense bonds, are they not?
Mr. B E L L . Postal savings pays 2 percent.
Mr. P A T M A N . And they can get the money any time they want it?
M r . BELL.
Yes.
Mr. P A T M A N . H O W are you arranging for the redemption of defense
bonds for one who is in distress* if he wants his money, how soon can
he get his money—in 30 days, 60 days, or 6 months?
Mr. B E L L . He can get it very promptly on defense bonds.
Mr. P A T M A N . He can get it promptly on defense bonds?
Mr. B E L L . Yes, sir. As a matter of fact, we have waived the regulations in distress cases and have given the man his money immediately, regardless of time requirements.
Air. P A T M A N . But, regardless of the reason, or the excuse, if he
wants the money, you will give it to him, as you say?
Mr. B E L L . Yes, sir; at any time after 60 days, and in special
emergency cases, at any time.
Mr. P A T M A N . And I am glad you are doing that; because it will
save this country from the scandal we had after the World War,
which was the scandalous way those bonds were forced on the market
at a loss.
In the Social Security fund, how much is the interest rate you pay
on those bonds that you place in the Social Security fund?
Mr. B E L L . The original act provided the fund should be on an
actuarial basis of 3 percent, so the obligations we sold to that fund
at that time bore 3 percent interest. The amendment of 1939 provided that the rate should compare more favorably with the average
rate which the Government pays on its total public debt, so that the
securities we are now issuing bear an interest rate of 2% percent.
Mr. P A T M A N . Two and a half percent?
M r . BELL.
Yes.
Mr. P A T M A N . What is the average interest rate paid by the Government at this time on all of its long-term bonds?
Mr. B E L L . 2.53, on the total interest-bearing debt. On the longterm bonds, taking all of the bonds outstanding, it is 2.85.
Mr. P A T M A N . How does that compare to a year ago?
Mr. B E L L . In July 1940, it was 2.92, and the average interest on
the total interest-bearing debt was 2.58.
Mr. P A T M A N . It is about 30 points up, then?
Mr. B E L L . N O ; it has dropped 7 points on the long-term bonds, and
5 points on the average.
Mr. P A T M A N . Y O U mean you are paying less now on the long-term
bonds?
M r . B E L L . Y e s , sir.
Mr. P A T M A N . Why
being so low?
is that—on account of the short-term paper
M r . BELL. NO.
Mr. P A T M A N . You had that last year
Mr. B E L L . That is right. We have
bonds at lower rates.
just about the same?
refunded some high-coupon
AMEND T H E FEDERAL HE SERVE ACT
29
Mr.-PATMAN. NOW on the dollar index: I presume you watch that
closely, do you not?
Mr. B E L L . Production?
Mr. P A T M A N . The purchasing power of the dollar.
Mr. B E L L . Mr. Haas here follows the Federal Reserve index and
other business indices.
Dr. H A A S . Prices have been going up and production has been
going up. I do not know which index you have in mind.
Mr. P A T M A N . I have reference to the purchasing powder index, what
the dollar would purchase.
Dr. H A A S . The price index has gone up. The price index of the
Bureau of Labor Statistics was about 75 at the outbreak of the war,
and now it is about 85.
Mr. P A T M A N . I would like to ask you one question, Mr. Bell, either
as an individual or as an official, and if you want to answer it, all right.
If you do not want to answer it, all right, but I would like to have
you answer it.
Do you think it would be desirable if the Federal Reserve Bank
System was owned and controlled by the Government?
Mr. B E L L . I do not think I can answer that, Mr. Patman. I have
not given any thought to that, and I do not know what the advantages
or disadvantages would be. But I do think the Government controls
it now, because the members of the Board are appointed by the
President and confirmed by the Senate. It is already, in effect, a
Government institution.
Mr. P A T M A N . I would have a big argument with you about that.
Mr. B E L L . I do not want to get irito that argument.
Mr. P A T M A N . I realize that it is a question that possibly I should
not ask you, and I will not insist upon an answer.
Mr. G I F F O R D . Y O U gave the figures of 9 billion and 22 billion for
the coming year, with an income of 9 billion.
Mr. B E L L . Nine billion four hundred million.
Mr. G I F F O R D . What is your picture for the next year, briefly?
*M r . BELL. F o r 1943?
M r . GIFFORD. Y e s .
Mr. B E L L . I have no estimates.
Mr. G I F F O R D . Y O U must be looking forward.
Mr. B E L L . I am sorry, but that is looking a
little too far into the
future. It all depends on what Congress does in the tax bill and
what business conditions are. I think it is hard enough to look forward for 12 months, without attempting to look forward for 24 months.
Mr, G I F F O R D . You must look forward; we have to look forward.
Mr. B E L L . But the world changes pretty fast in 30 days.
Mr. G I F F O R D . If it is $750,000,000 per month now, will it be
$2,000,000,000 in 1943?
Mr. B E L L . I cannot tell you that
Mr. G I F F O R D . Y O U cannot estimate it?
Mr. B E L L . I am sorry, but that is impossible at this time.
Mr. G I F F O R D . Y O U know what we are appropriating.
Mr. B E L L . But there might not be a direct relation between what
you are appropriating and what we will have to spend in a given period.
0211C—41
3
30
AMEND THE FEDERAL HE SERVE ACT 30
Mr. G I F F O R D . Y O U mean your experience is that we have been
appropriating more than could possibly be spent? Is not that the
usual result right along?
Mr. B E L L . We have never spent in a fiscal year the full amount of
money appropriated for that year. There has always been a carryover to the next fiscal year.
Mr. G I F F O R D . I recall that has not been true in the case of the
W. P. A.
Mr. B E L L . Of course, Congress appropriates on the basis of a program to be carried out. But expenditures under that program may be
made 2 or 3 years hence.
Mr. P A T M A N . There is one question I did not ask you, Mr. Bell.
What are the reasons for the passage of this bill? That is what I am
thinking about. What are your reasons for that, Mr. Bell?
. Mr. B E L L . One reason is that the authority expires on June 30,
1941.
Mr. P A T M A N . But that is no reason for the continuance of it.
Mr. B E L L . Yes; I think it is.
Mr. P A T M A N . Unless it is justified. If it is needed, why is it needed?
Mr. B E L L . It may not be needed within the next few months. I do
not know what the situation is within the Federal Reserve System.
But I assume the Federal Reserve System wants to have the authority
in case it is suddenly necessary to use it.
Mr. P A T M A N . It is not needed in your program at all?
Mr. B E L L . It is not a part of our program.
Mr. P A T M A N . Y O U are considering that you will need it?
Mr. B E L L . N O , sir; it is not our problem. It is a problem of the
Federal reserve entirely, and the Treasury has nothing to do with it.
Mr. P A T M A N . It will not require a law for the banks to be permitted to buy these bonds, if you want them to buy the bonds? You
have the right, under existing law, to permit commercial banks to
buy the defense bonds?
M r . B E L L . Y e s , sir.
Mr. P A T M A N . In other
words, it is your regulation that prohibits
them from doing it, and not the law?
Mr. B E L L . That is right; that ties in with Mr. Crawford's question.
Mr. M O N R O N E Y . IS it not a fact that this, in effect, gives a guarantee
of a par figure on loans or of Government bonds outstanding, and if
the Federal Reserve bank can issue Federal Reserve notes against
Federal bonds, then they are never going below par, no matter what
the financing requirements of the Government are?
Mr. B E L L . Not necessarily. That is effected through open market
operations. They have rules whereby they can buy and sell Federal
securities in the open market, which have no connection with the
authority contained in this bill.
The C H A I R M A N . Let me interrupt you at that point. As a matter
of fact, we had this matter up yesterday. I did not insist that my
understanding was right, although I knew it was and I have verified
it since.
These bonds are not the equivalent of an equal amount of Federal
Eeserve notes. This bill was an amendment to the original Federal
Reserve Act, the section which enumerates the kind of collateral
which may be put up as collateral for Federal Reserve notes, but the
amendment added to direct Government obligations a list of col-
AMEND THE FEDERAL HE SERVE ACT
31
lateral securities that might be used by Federal Reserve banks, but
in this case, where Federal Reserve notes were issued, they have to
be backed with gold.
Mr. P A T M A N . But the member bank puts up bonds.
The CHAIRMAN. I understand the bank puts up bonds, but it must
carry gold back of the Federal Reserve notes, just the same.
The situation that existed at the time the act was passed was that
the Federal Reserve banks found themselves without commercial
paper, so they were carrying something like 80 percent of gold against
each Federal Reserve note. That is what necessitated this legislation.
Nobody knows what the future holds. It is the worst time there
has every been since the world began for any man to attempt to
predict anything. We do not know what conditions will exist in the
future, or what time this might be needed.
This is one way by which you give support to your Government
obligations by treating them on a basis of equality with a bunch of
commercial notes that certainly could not be classed as better securities than Government bonds. It has been amazing to me that anybody would ever attempt to make a bunch of commercial paper
gathered out of commercial institutions from the public at large as
eligible as Government bonds.
Mr. W I L L I A M S . It is a fact, is it not, that banks take the Federal
Reserve notes and offer to buy the bonds?
Mr. P A T M A N . Every bank does.
Mr. W I L L I A M S . That is true, is it not?
Mr. B E L L . I think banks have two ways of getting currency.
They can draw on their reserve account with the Federal Reserve
bank, or they can borrow of the Federal Reserve bank and get currency. For that borrowing they have to put up collateral security,
and that security may be in different forms, as provided in the Federal Reserve Act. It does not have to be on a 100 percent basis. It
is according to the regulations of the Federal Reserve Board. But the
Federal Reserve banks are required under the law to have at least
40 percent in gold behind every Federal Reserve note outstanding
and the difference between the gold collateral and 100 percent required
must be in eligible commercial paper or Government securities under
the present law which expires June 30, 1941. A bank does not have
to have currency to buy bonds. It can draw on its correspondent bank
or on its reserve account with its Federal Reserve bank.
Mr. P A T M A N . If a Federal Reserve bank puts up a thousand dollars
in Government bonds it can get that thousand dollars and make a
check for it if they have a reserve.
Mr. B E L L . If they have 40 percent gold reserve it can acquire a
thousand dollars in Federal Reserve notes against the $1,000 Government bond pledged with the Federal Reserve agent.
Mr. P A T M A N . But with the $20,000,000,000 in gold reserve
Mr. B E L L . There might be a shortage in some particular Federal
Reserve bank.
Mr. PATMAN. There is not, is there?
Mr. B E L L . Some bank has put up today a million and a half dollars
of commercial paper. The records show a million and a half put up as
collateral for Federal Reserve notes, and the rest is in gold.
AMEND THE FEDERAL HE SERVE ACT 32
Mr. C R A W F O R D . In connection with the price level, I want to read
this statement appearing in the Journal of Commerce of New York of
Wednesday, June 18, 1941. It says:
The wholesale price index of the Bureau of Labor Statistics advanced from 75.0
to 77.4, an increase of only 3 percent, during the first year of the war. By last
week, however, the index had risen to 85.9, at which point it is almost back to the
peak for the last decade reached in 1937. The advance since the beginning of the
war now equals almost 15 percent.
The index of the Bureau of Labor Statistics is based upon the prices of almost
900 commodities, including many which seldom fluctuate. The Journal of Commerce weekly index of 110 commodity prices, which is considerably more sensitive,
has risen from 74.0 in August, 1939, to 91.5 at the present time, a rise of approximately 23 percent.
Mr. D E W E Y . What was that based on, the prices in 1 9 2 6 ?
Mr. C R A W F O R D . I believe so.
Mr. D E W E Y . Was the 1 9 2 6 figure 1 0 0 ? Does it state?
Mr. C R A W F O R D . N O ; it does not.
Mr. SMITH. Mr. Bell, what is the total amount of reserve in the
Federal Reserve banks?
Mr. B E L L . It is $ 1 3 , 1 0 0 , 0 0 0 , 0 0 0 , of which 7 . 8 billion is required
and $ 5 , 3 0 0 , 0 0 0 , 0 0 0 is excess.
Mr. SMITH. Y O U are here representing the Treasury and you are
recommending the passage of this measure. But you have not stated
your reasons for this recommendation. Your mere recommendation
carries a great deal of weight in connection with the passage of this
bill.
I feel that you should give us some reason why you believe this
should be passed, other than that the Federal Reserve bank wants it
passed.
Let me preface this question with a few factual statements.
Up until 1929 the largest amount of excess reserve which was held
annually in the Federal Reserve banks was $ 9 9 , 0 0 0 , 0 0 0 , which was in
1921. The largest amount of required reserve up to 1929 was in
1 9 2 7 , when the amount was $ 2 , 4 8 7 , 0 0 0 , 0 0 0 .
You have at the present time 5 billions of excess reserves, and in all,
roundly, 13 % billions of reserves. The commercial banks have done
practically no new lending since 1931, up to 1940, with a little taking
place now, but very little.
Can you conceive any condition that would require the use of the
authority under this act, in view of this enormous pile of excess
reserves and required reserves, taking into consideration the fact also
that the Federal Reserve Board still has the power to reduce the
amount of required reserves?
Will you tell me what condition you can envision that would place
banks in a position where the use of this authority might be required?
Mr. B E L L . Y O U have given excellent reasons, Mr. Smith, yourself
when you say that until 1 9 2 9 you only had $ 9 9 , 0 0 0 , 0 0 0 of excess
reserves. That indicated clearly that the member banks were borrowing from the Federal Reserve bank, so they had plenty of commercial
paper they could use as collateral for Federal Reserve notes. Today
there is no commercial paper in the hands of Federal Reserve banks,
which they can put up as collateral for Federal Reserve notes.
If the Federal Reserve banks do not have commercial paper, what
will they put up as collateral for Federal Reserve notes, if the gold
coverage is not sufficient and as long as there is a requirement that
the collateral must be 100 percent?
AMEND T H E FEDERAL HE SERVE ACT
33
Mr. S M I T H . They have a borrowing power of over $ 5 , 0 0 0 , 0 0 0 , 0 0 0
without any collateral.
Mr. B E L L . Y O U are talking about member banks, and you have to
distinguish between member banks and Federal Reserve banks for
this purpose.
Mr. S M I T H . Just a moment. Is it incumbent upon member banks
to furnish any collateral for the 5 billion excess reserves?
Mr. B E L L . N O , sir. That is their money.
Mr. S M I T H . SO they may use their borrowing capacity of four or
five billion dollars, yet you maintain this authority is needed, in view
of the situation.
Mr. B E L L . I do not know how I can make it clearer, that when the
member banks have on deposit with the Federal Reserve banks
$5,000,000,000 of excess reserves, can you not see that they will not
borrow from the Federal Reserve banks? They do not have to borrow, and therefore the Federal Reserve banks will not acquire any
commercial paper as long as the excess reserves are retained.
Mr. S M I T H . Therefore, they can avail themselves of this provision?
Mr. B E L L . Yes, sir. The Federal Reserve bank has to pay out
Federal Reserve notes to meet a demand for currency and it must
find the 100 percent collateral to pledge for those notes regardless of
whether or not the commercial banks borrow from the Federal Reserve
bank.
Mr. SMITH. D O you mean that if I , as a member bank, have, for
instance, $100,000,000 of excess reserves in my particular Federal
Reserve bank, there will be any occasion for me to discount paper,
since I have $100,000,000 already available as my own and I do not
need to borrow any money from the Federal Reserve bank?
Mr. B E L L . That is the point. Suppose all of these banks called
upon the Federal Reserve banks for these excess reserves of $5,000,000,000 in currency tomorrow. That would increase the currency to
$14,000,000,000. Suppose that the Federal Reserve has only $7,000,000,000 of gold which they can put against that currency. So they
have to find collateral security of $7,000,000,000 some place else.
They have no commercial paper, so the only place they can go is to
their Government portfolio. If you do not give them this authority,
they would not have the collateral, and they could not issue the currency notes without violating the law.
Mr. S M I T H . They are not going to avail themselves of the provision
of this act until they have exhausted the $5,300,000,000.
Mr. D E W E Y . Y O U are confusing the situation.
Mr. S M I T H . This is currency; it is credit.
Mr. D E W E Y . The 5 billion is the credit.
Mr. B E L L . That is the basis for credit.
Mr. S M I T H . But still that belongs to these banks; they can use it?
M r . B E L L . Y e s , sir.
Mr. S M I T H . A bank
check is currency. What difference does it
make which they use?
Mr. D E W E Y . If I ask for a $ 1 0 0 , 0 0 0 cashier's check, or if I ask for
$ 1 0 0 , 0 0 0 in currency, there is considerable difference.
Mr. S M I T H . D O you agree with Mr. Dewey?
Mr. B E L L . If you walk into your bank and say you want to borrow
$100,000, and if the bank gives you a Federal Reserve draft, they have
drawn on their credit. They have drawn down their reserve with the
Federal Reserve bank.
AMEND THE FEDERAL HE SERVE ACT 34
If you say I want $100,000 in currency, they will say we will have
to get it from the Federal Reserve bank, and then they ask the Federal
Reserve bank to charge their reserve account, and to ship them
$100,000 in Federal Reserve notes, but the Federal Reserve bank must
have collateral to put up against the currency issue. If they do not
have the collateral they cannot comply with the request for $100,000
in currency.
Mr. SMITH. Then, coming down to date, the total amount of currency is almost double what it was in 1929.
Mr. B E L L . I believe so.
Mr. SMITH. YOU are maintaining that the condition may arise
when this country will need more circulating currency.
Mr. B E L L . It has risen since 1929. You have admitted that it has
doubled.
Mr. SMITH. I am not admitting there has been a need for it. I say
that it has taken place, but I do not say there is a need for it. You
come for an extension of the law, and I am saying there is no need for it.
Miss SUMNER. It seems apparent to me, that we would be making
currency like Germany. Is that the right thing to do? I have heard
several statements about inflation. Do we need that kind of currency?
Mr. B E L L . Let us hope we will not reach that point.
Miss SUMNER. They thought that would be the right thing to do.
Mr. B E L L . Let us hope we will not reach that point, that we will
never reach the point where we will issue currency to pay our bills
and start an inflationary spiral. Let us keep it based more on the
demands of business, as a medium of exchange. I think that is what
our currency is for.
Mr. SMITH. I was just looking ahead to see what might happen in
an inflationary period.
Miss SUMNER. I think they could easily estimate what the demand
would be for currency. Right now, do you find any evidence of
hoarding?
Mr. B E L L . I do not think there is a great deal. There may be
some hoarding, but we do not consider it serious. Anyway that is
deflationary.
Mr. SMITH. I cannot see that it means anything further, according
to your statement, than that we might reach a time when more
currency might be required. Can you envision any other reason for
extending this act?
Mr. BELL*. This is primarily a Federal Reserve Board function,
and it does not belong to the Treasury at all. We have reported on
the bill, and we have no objection to it. It is the recommendation
of the Treasury that it go through. It may not be needed in July
or August, but there may be a time within the next few months when
it will be needed. The conditions might change in the course of a
month so that it would be needed. As I see it, there would be absolutely no harm in extending it for the additional period.
Mr. SMITH. Y O U are simply recommending it because the Federal
Reserve Board wishes it?
Mr. B E L L . They see a need for it. I think that is a good reason,
plus the fact that there might arise a situation wherein they would
require the use of this power.
Miss SUMNER. There might be an inflationary situation?
AMEND THE FEDERAL HE SERVE ACT
35
Mr. B E L L . I cannot undertake to say what might happen within 1
month or 6 months. I do not know what will happen.
Mr. SMITH. You agree with this, that it finally resolves itself into
the production or creation of more currency than we have at the
present time?
M r . B E L L . N O , sir.
Mr. SMITH. If you
would not create more currency, what is the
purpose? You say it would not increase the amount of currency or
expand it?
Mr. B E L L . No, sir, I say that at the present time some Federal
Reserve banks have commercial paper up with the Federal Reserve
agent in the amount of only $1,500,000 to secure Federal Reserve
notes. If this bill does not pass, and the commercial paper is paid off,
and their gold is insufficient the banks might find that they have no
collateral which can be pledged. If they do not have the commercial
paper or gold, they might have to call in some of their Federal Reserve
notes.
Mr. SMITH. They knew that this would expire this year, did they
not?
Mr. B E L L . I suppose they did, but I take it that they assumed
Congress would extend the authority. I do not see what objection
there could be to extending it.
Mr. SMITH. Y O U are not prepared now to give any idea of the
amount of new obligations that will be put out in 1943?
Mr. B E L L . N O , sir; I have no budget estimates of expenditures or
estimates of what we might get in receipts in that year.
Mr. SMITH. Y O U say that the Federal Reserve banks are virtually
under the control of the Federal Government?
Mr. B E L L . I think that they are under the supervision of the
Federal Government.
Mr. SMITH. Can you tell me approximately what the average rate
of interest is that the Government pays on direct obligations in commercial banks at the present time?
Mr. B E L L . The average rate of interest on the indebtedness of the
Federal Government was 2.53 percent on May 31, 1941. I cannot
give you the average rate on Government obligations held by commercial banks.
Mr. SMITH. Of course, commercial banks hold different kinds of
obligations. A considerable percentage would be held by insurance
companies and private individuals, and the rate of interest on securities held by commercial banks might average lower than the general
average runs.
Mr. B E L L . They probably do, because of the desire of the banks to
keep their portfolios in short-term securities.
Mr. SMITH. In a work by Prof. Harold G. Moulton, associate professor of political economy at the University of Chicago, at the time
he published this work, the work being entitled "The Financial Organization of Society," Professor Moulton, who is now, I understand,
with the Brookings Institution, in his discussion of the Federal Reserve
banks system, among other tilings, said this:
Is the Federal Reserve Board under the domination of the Treasury Department? The association of the Federal Reserve Board with the Treasury Department has given rise to some criticism. It is asserted that Treasury fiscal requirements have dominated the policy of the Federal Reserve Board at times when
AMEND THE FEDERAL HE SERVE ACT 36
banking requirements were paramount and did not run parallel with Treasury requirements. Concretely, it is urged that the desire of the Treasury Department
to make a record in floating huge Liberty Loans at very low rates of interests was
responsible for the policy inaugurated by the Federal Reserve Board during the
war and maintained until after the Victory Loan was completed, of keeping discount rates at a very low level and hence stimulating speculation and inflation of
the currency.
I might state that this book was published in 1921.
Miss SUMNER. Does he ever speak of the Treasury as being under
the domination of the Federal Reserve Board?
Mr. SMITH. I have not read that in the book. Professor Moulton
goes on to say:
It has accordingly been vigorously urged that the Federal Reserve Board be cut
loose from the Treasury Department in order that it may exercise its great responsibilities unhampered by the views of the Treasury or by considerations of political
expediency for the party in power. It is unnecessary to enter upon a discussion
of the merits of the contention that the Federal Reserve policy of maintaining low
discount rates was opposed to public interests; it is enough to point out the
possibility of making the Federal Reserve Board subservient to the Treasury.
Now, is not the Treasury following precisely the same policy that
it followed in the World War period of virtually arbitrarily fixing low
interest rates and depositing bonds in commercial banks? These
bonds are not sold, but merely deposited in the banks. At the end
of the war, the banks held about $5,000,000,000 of direct Government
obligations, and by 1932 that had dropped to about $3,000,000,000.
Now these direct Government obligations will amount to about
$14,000,000,000 in commercial banks, representing nearly 26 percent
of the total deposit in the banks. What I want to know is whether
the Treasury is not following precisely the same course that it followed
in 1916, 1917, and 1918, during the other war period?
Mr. B E L L . I do not know what the relationship was between the
Treasury and the Federal Reserve Board in 1917, 1918, and 1919. I
happened to be in the Army at that time, and I am not familiar with
what went on, but I would question that the Treasury was engaged in
keeping rates down, or that it exercised any control over the Federal
Reserve Board sufficient to affect the rates of financing. Since that
time Congress has taken the Board physically out of the Treasury,
and has taken the Secretary off the Board. We have nothing to do
with their policies. There is close cooperation between the Board
and the Treasury in all of our financing operations. You say they
had this control in 1920 and 1921, but they apparently did not do the
job, because we paid 4% percent on the Victory Loan, and as high
as 5 and 6 percent on the 3- to 5-year notes. That was when the
Secretary was on the Federal Reserve Board. Now we have no part
in it, and are selling bonds at 2% percent or less. However, there is
close cooperation between the Board and the Treasury. Necessarily
there must be, because we are the biggest factor in the money market.
We are not doing anything in the Treasury to push down rates, but
we are paying what the market demands. The excess reserves, which,
of course, are available for investment, are responsible for low interest
rates.
Mr. SMITH. Y O U are not contending that you are selling direct
obligations or bonds to commercial banks, or that they are actually
sold?
Mr. B E L L . They are sold to the baiiks as well as to individuals and
others. They buy them with individual depositors' money. The
AMEND T H E FEDERAL HE SERVE ACT
37
money is turned over as bank deposits, and the banks buy the
securities.
Mr. S M I T H . Those direct obligations are not sold in the sense that
they are paid out of the savings of the people, but they are merely
deposited in the banks, and the Government checks against the
deposits.
Mr. B E L L . Y O U are saying in effect that the purchases by the banks
of Government securities will expand bank deposits. That is true.
That is what I explained awhile ago as one of the reasons why we are
having this defense savings bond program, to avoid expanding bank
deposits as much as possible.
Mr. S M I T H . I congratulate you on your attempt in that direction,
and I hope you will succeed, because I think that one of the blackest
marks on the history of the Federal Government was in the method
of financing the other war. I am entirely in accord with your policy
of selling bonds and having them paid for from the actual savings of
the people. There is no question but that is the proper way to
finance these securities. Now, since these bonds are not actually
paid for from the savings of the people, how do you explain or why do
you maintain that you do not fix interest rates? You set the interest
rates on these obligations. I am talking about the direct obligations.
You set those interest rates, do you not?
Mr. B E L L . The Secretary fixes the rate of interest on public debt
securities, but he fixes it In relation to the market conditions. He
would not fix a 2-percent rate on a Government security that would
be yielding in the market 2% percent. He has got to go to the market
for the interest rates, ^which are established by the market demand.
Then we issue securities that will sell under those conditions in the
market.
Mr. S M I T H . But there is no market or privato capital for investments, and, therefore, your market is a Government market.
Mr. B E L L . We do not create that. There is a market at the present
time for other securities, and in the past there has been such a market.
There is no difference from an inflationary angle in a bank buying a
Government security, and making a loan to you. There is no difference. There may be a difference in who spends the money. In one
case it is the Government, and in the other case it is an individual.
Mr. S M I T H . In connection with the statement of Miss Sumner, let
me reinforce that. I say that the Government does force these banks
to acquire these bonds. In fact, I have been told by pretty high
authority, even in the Federal Reserve System, that that is the case,
and to me a personal analysis shows it cannot be otherwise.
Mr. B E L L . Well, I do not know how I can deny it any more emphatically than I have, but I want to say to you that anybody who
tells you that, you just tell them to come down to the Treasury and
tell it to us, because I would like to see them once and hear about it.
Miss S U M N E R . H O W much connection does the Secretary of the
Treasury have with the Comptroller?
Mr. B E L L . He is under the jurisdiction of the Secretary of the
Treasury, just like any other bureau of the Treasury, and I have
talked to him on a number of occasions about this charge and he tells
me he has asked a good many of his bank examiners, and there is
nothing to it. And if any bank examiner said any such thing as
that, he is just talking out of place. He would not dare to do a
thing of that kind.
AMEND THE
FEDERAL HE SERVE ACT 38
Miss S U M N E R . H O would not be subject to criticism by the Comptroller?
Mr. B E L L . He certainly would; if he made any such statement as
that, he would be subject to very severe criticism.
Miss S U M N E R . Well, I can assure you I have talked to many banks,
and I know that is a fact, that the bank examiners do encourage them
to buy Government bonds and indicate what amount. They go over
the list of securities with them and say, "Now, you ought to have
more Government bonds." And you know when a bank examiner
talks to you and you are a director and sitting in the directors' room,
you are going to listen to what he says, because you do not want any
trouble with him. And all he has to do is just to say "You ought
to have some more Government bonds; you ought to have so many,"
and it is very persuasive.
Mr. R O L P H . What could he do if the banker said he did not want
to buy them?
Miss S U M N E R . I know I would not, on my side of the table, say
"Now, you can just go ahead and do what you please; go ahead and
do anything and see what I care." The bankers are very cautious
people; they do not do that. They do not want any trouble at all
with the Comptroller, and there are too many things that the examiner
can do, don't you know. The Comptroller can even tell you to raise
the wages in your establishment.
Mr. R O L P H . But you do not have to do it.
Miss S U M N E R . Y O U won't have to do it, but he has a right to say
"Write this note off," and you have to write it off. You want to keep
on, don't you? And I do not mind telling you that I am trembling
in my boots now, for even telling you what I am telling you here
about this thing.
Mr. R O L P H . An individual examiner might make suggestions, Mr.
Bell might make suggestions, but I do not see where the bank has to
follow it.
Miss S U M N E R . I will just show you how disagreeable a bank examiner can be. Last week an examiner in my district came in and
had not finished counting the currency when the bank closed because
it was time for his dinner, 6 o'clock, and he did not stay there. Now
he said, "You won't open in the morning until I complete counting
the currency." The cashier was not there at the moment, and the
boys in the bank said " M y goodness, if we do not open, we will have
a panic in this town." He said, "You just put a sign on the door
saying the bank won't open until we get through counting the cash."
Well, if you know anything about little towns, you know what would
happen in a situation like that. There is no telling what it would mean.
That is the sort of thing that an examiner might do, and they
make themselves so disagreeable if you say anything, that they clap
their fingers over their mouths, and it is terrible.
Mr. B E L L . I cannot help but believe they misinterpreted what this
bank examiner said to them. I do not think any bank examiner
would say "Don't open the bank tomorrow." They are chosen very
carefully and are told to be tactful, but, as a matter of safety, they
have to pass on everything in the bank; that is what they are there
for. And it is up to you people to take it up with the Comptroller
in Washington if anything of that kind happens.
Miss S U M N E R . I do not believe the people in the Government
Department in Washington appreciate—in fact, I am convinced of it,
AMEND THE FEDERAL HE SERVE ACT
39
that tliey do not appreciate how mild some of our country rural
people are. We arc a very law-abiding type, and they arc afraid of
these people; they are honestly afraid. I would be afraid, myself.
The CHAIRMAN. Miss Sumner, do you have personal knowledge
of this?
Miss SUMNER. Yes; I have.
The CHAIRMAN. Where the examiner said "Do not open the next
morning"?
Miss SUMNER. Yes, sir; and, finally, when the cashier came in
later he said "We cannot clo that," and he finally talked him out of it.
But, while the boys were there, they were not going to open the bank
until the fellow counted the cash and, when one of them started to
make complaint, here is what they said: "Now, don't do that; don't
do that." They are a little afraid.
Mr. B E L L . IS that a national bank?
Miss SUMNER. Yes.
Mr. B E L L . I would be delighted to look into it any time, and no
one there will be criticized.
Miss SUMNER. And if I am criticized afterwards for having mentioned it, I hope I can rely on you to protect me; because, while I do
not know what happens to a lot of banks, I have no doubt that
happens. And those are just little inconveniences to our people, who
are very sensitive.
Mr. B E L L . I can see where a bank examiner would criticize the
portfolio of the bank. If they have a note in there that is 5 years
overdue and no interest is being paid on it, naturally that is subject
to criticism and the bank should take steps to correct it and to write
it off, or put up a reserve against it. That is good, sound banking;
that is what the bank examiners are supposed to be there for. But in
your portfolio, they are not supposed to say "You have not enough
Government securities." They might criticize the type of investments you are making and say that "The type you are making is
unsafe from a banking standpoint." That is their business.
Miss SUMNER. I know that everybody in my family will just jump
overboard if they know I have talked about this thing, because we
get along very well and the bank examiner says we have one of the
best banks in the country. But, at the same time, I know these little
things happen in our bank and undoubtedly tliey happen to others, and
I know the gossip; from other banks, but I would not dare mention
somebody else's situation for fear somebody would see I mentioned
it here; but I thought it would not do any harm, in a general way,
without causing any trouble, or causing anybody to lose their job, if
I did speak about the way they use their influence, or the way they
handle the bank, and have you look into it.
Mr. B E L L . We will be glad to do it, and have done it a number of
times. We have told them that they are working for the United
States Government and they have to be careful in what they say and
to use tact.
Miss SUMNER. You can see in a small town what that bank not
opening in the morning, in order that that examiner could count the
money, would have done in that little town?
Mr. B E L L . Quite naturally.
Miss SUMNER. There might not be anything have happened in that
little town, but their competitors afterward would have been taking
advantage of it.
AMEND THE FEDERAL HE SERVE ACT 40
The C H A I R M A N . Well, the bank is insured, if it is a national bank.
Miss SUMNER. Oh, yes.
The C H A I R M A N . If they did not have their deposits insured and did
not open their doors, you probbaly would have a rush, but not otherwise.
Mr. SMITH. Mr. Chairman, there has been a great deal of criticism
against bankers making too much money on these Government securities which they hold. I tried yesterday to get from the Federal
Reserve Board, just as I asked you a minute ago, Mr. Bell, a statement showing the average interest rate earned by banks on direct
Government obligations, and I am wondering if I might have you
prepare a statement showing what that is, as well, also, as the average
annual interest rates on other Government securities, so-called guaranteed obligations, held by the commercial banks only. I think it
would be interesting, because the Federal Reserve Board informs me,
Mr. Chairman, that the average rate of interest earned by commercial
banks on all its securities at the present time is only 2.1 percent
annually.
The C H A I R M A N . Are you speaking of Government securities?
Mr. SMITH. N O ; of all of their securities.
The C H A I R M A N . On their securities of all types?
Mr. SMITH. On their securities of all types. And, therefore, I suspect the average interest rate earned on Government securities must
be lower, and possibly considerably lower.
Mr. B E L L . It is impossible, Mr. Smith, for us to figure that out.
We do not know what they earn. Suppose a bank buys a 3-percent
obligation due in 10 years, and they paid 107 or 108 for it—and they
all pay different prices for them; they did not get it on the original
subscription, but they bought on the market at different prices, and
the price they bought at controls their rate of return. We have no
way of telling that. We can tell what the banks hold and the probable
range for 5 years, and the average rate of 5-year maturities; but we
cannot tell you what the bank earns. That does not indicate that the
bank earns anything at all; because, out of that earning, they have to
pay the premium they paid on the securities.
Mr. SMITH. The reason I would like to have that in the record is to
relieve what I believe to be an unjust criticism.
The C H A I R M A N . A S far as the figures can be gotten, suppose you
put some information in the record.
Mr. B E L L . We will try and give what we can. And, Mr. Chairman,
your committee has asked for a number of statements, which it is
going to take some time to compile.
The C H A I R M A N . Just do the best you can.
Mr. B E L L . If you want this testimony back before reporting the
bill, I am afraid it is going to hold you up.
The C H A I R M A N . There is not going to be any urgent necessity for
publishing these hearings before this bill is reported. I do not want
to hold it up any longer than the day we report the bill for the publication of the hearings and, as a matter of fact, this bill is not going to
be passed the coming week, and there is a good lot of data asked for
in here that we can get and accumulate it.
(The committee thereupon adjourned until Monday, June 23, 1941,
at 10:30 a. m.)
@FedFRASER