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H. R. 7158

JUNE 17, 19, 1942

Printed for the use of the Committee on Banking and Currency


HENRY B. STEAGALL, Alabama, Chairman
CHARLES L. GIFFORD, Massachusetts
THOMAS F. FORD, California
ROBERT W. KEAN, New Jersey
LEON SACKS, Pennsylvania
ALBERT GORE, Tennessee
JOHN C. KUNKEL, Pennsylvania
THOMAS ROLPH, California
HALE BOGGS, Louisiana
MERLIN HULL, Wisconsin







The committee met, at 10:50 a m., pursuant to notice, for consideration of H. R. 7158, Hon. Henry B. Steagall, chairman, presiding.
(H. R. 7158 is as follows:)
[H. R. 7158, 77th Cong., 2d sess.]
A BILL To amend the Federal Reserve Act

Be it enacted by the Senate and House of Representatives of the United States
of America in Congress assembled, That subsection (a) of section 12A of the
Federal Reserve Act, as amended (U. S. C., title 12, sec. 263), is amended by
striking out the second and third sentences thereof and substituting the following: "Such representatives shall be presidents or first vice presidents of Federal
Reserve banks and, beginning with the election for the term commencing
March 1,1943, shall be elected annually as follows: One by the board of directors
of the Federal Reserve Bank of New York; one by the boards of directors of
the Federal Reserve Banks of Boston, Philadelphia, and Richmond; one by the
boards of directors of the Federal Reserve Banks of Cleveland and Chicago;
one by the boards of directors of the Federal Reserve Banks of Atlanta, Dallas,,
and Saint Louis; and one by the boards of directors of' the Federal Reserve
Banks of Minneapolis, Kansas City, and San Francisco. In such elections each
board of directors shall have one vote; and the details of such elections may
be governed by regulations prescribed by the committee, which may be amended
from time to time. An alternate to serve in the absence of each such representative shall likewise be a president or first vice president of a Federal Reserve
bank and shall be elected annually in the same manner."
SEC. 2. The sixth paragraph of section 19 of the Federal Reserve Act, as
amended (U. S. C., title 12, sec. 4G2b), is amended to read as follows:
"Notwithstanding the other provisions of this section, the Board of Governors
of the Federal Reserve System, upon the affirmative vote of not less than four
of its members, in order to prevent injurious credit expansion or contractionr
may by regulation change their requirements as to reserves to be maintained
against demand or time deposits or both (1) by member banks in central reserve
cities or (2) by member banks in reserve cities or (3) by member banks not
in reserve or central reserve cities or (4) by all member banks; but the amount
of the reserves required to be maintained by any such member bank as a result
of any such change shall not be less than the amount of the reserves required
by law to be maintained by such bank on the date of enactment of the Banking
Act of 1935 nor more than twice such amount."
SEO. 3. The ninth paragraph of section 19 of the Federal Reserve Act, as
amended (U. S. C., title 12, sec. 464), is amended by striking out the proviso*
thereof, so that the paragraph will read as follows:
"The required balance carried by a member bank with a Federal Reserve bank
may, under the regulations and subject to such penalties as may be prescribed by
the Board of Governors of the Federal Reserve System, be checked against
and withdrawn by such member bank for the purpose of meeting existing



The CHAIRMAN. The committee will come to order. We have called
the meeting this morning to consider H. R. 7158, and we have invited
Governor Eccles, to come down and meet with us and discuss this
bill, and I am going to ask him to proceed now, and the committee
members may interrogate him later. You may present any statement you have and the committee will reserve their questions until
you have completed it, Governor.
Mr. ECCLES. I have a brief statement, Mr. Chairman, of explanation of the proposed amendments, and I believe it desirable to have
that statement put in the record.
The CHAIBMAN. That will be done.
Mr. ECCLES. And I think, possibly, the shortest way to explain
these three amendments would be ta read that statement.
The CHAIRMAN. We will be glad to have you do so, Governor.
Mr. ECCLES. Section 1. Federal Open Market Committee: The
Federal Open Market Committee consists of seven members of the
Board of Governors of the Federal Reserve System and five representatives of the 12 Federal Reserve banks, and the proposed amendment would regroup the Federal Reserve banks for the purpose of
electing their five representatives on the Committee. The principal
change which would be effected by the proposed regrouping is to
provide that a representative of the Federal Reserve Bank of New
York be a member of the committee at all times. The regrouping
would also provide for one representative to be selected by the Boston,
Philadelphia, and Richmond Reserve banks; one by the Cleveland
and Chicago Reserve banks; one by the Atlanta, Dallas, and St.
Louis Reserve banks; and one by the Minneapolis, Kansas City, and
San Francisco Reserve banks.
Under the present statute a representative is elected by the Boston
and New York Reserve banks. As this has worked out in practice,
the Federal Reserve Bank of Boston has not had its president or
other representative serve as a member of the committee but only
as an alternate to the president of the New York bank, who has
served continuously. This situation has been unsatisfactory, and the
directors of the Boston and New York Reserve banks have agreed
that remedial legislation is necessary. As indicated below, it is desirable in the public interest that a representative of the Federal
Reserve Bank of New York be on the committee at all times. At
the same time, the Federal Reserve Bank of Boston should have the
opportunity for its president to serve from time to time as a member
of the committee, as do the presidents of the other Reserve banks.
The Federal Reserve Bank of New York occupies a unique position with respect to the Federal Reserve System, the Treasury, and
the banking system of the country. Its resources total approximately
40 percent of the aggregate of the 12 Federal Reserve banks. It is
located at the money market and at the principal market f or Government securities; its operations as fiscal agent of the United States
and its transactions with foreign governments, foreign central banks
and bankers, as well as its operations in foreign exchange, are in far
greater volume than those of any other Federal Reserve bank. It is
clearly in the public interest that the Federal Open Market Committee be given at all times the benefit of counsel of the Reserve bank
possessed of this sort of experience and in current touch with such



It may be suggested that the advice of the Federal Reserve Bank
of New York would be available even if it were not represented on
the Federal Open Market Committee. Admittedly, regardless of
the composition of the committee, the Treasury in discharging its
responsibility respecting the Goverment securities market would still
wish to confer with the Federal Reserve Bank of New Tork. Thus
as a practical matter the New York bank would be inevitably drawn
into discussions regarding Government financing as well as openmarket operations. But advice obtained unofficially is a different
matter from full-fledged participation in the committee's work.
Sound policy dictates that participation by the New York banks be
through its representative on the Federal Open Market Committee
rather than on a voluntary or unofficial basis.
Although it is clear from the hearings and debates that Congress
intended the Reserve banks to be represented on the Federal Open
Market Committee by their presidents, this was not specified in the
act, and efforts have been made to elect officers of commercial banks.
Hence it is proposed to specify in the law that the Reserve banks
must be represented by their presidents orfirstvice presidents and that
the details of their election may be governed by regulations prescribed by the committee.
Section 2. Reserve requirements: Section 2 of the bill would amend
section 19 of the Federal Reserve Act so as to authorize the Board
of Governors of the Federal Reserve System to change the reserve
requirements of member banks in central Reserve cities, within the
limitations of the present law, without necessarily making a change in
the Reserve requirements of member banks in Reserve cities.
Under the present law the Board of Governors of the Federal Reserve System, upon the affirmative vote of not less than four of its
members, in order to prevent injurious credit expansion or contraction, may change the requirements as to the maintenance of reserves
against deposits by member banks in Reserve and central Reserve
cities or by member banks located elsewhere. It does not have authority to change the Reserve requirements of member banks in central
Reserve cities without at the same time changing those of member
banks in Reserve cities. No change in Reserve requirements may
be made if the result is to decrease the requirements of a member
bank below the amount specified in the statute or to increase them
to more than twice that amount. At present Reserve requirements
of all member banks are at the maximum to which they can be raised
under the law.
Because of the recent increases in the amounts of Federal taxes, it is
probable that there will be a heavy withdrawal of deposits from banks
throughout the country in order to meet tax liabilities at or around
the quarterly dates on which Federal tax payments are due. In
order to meet these withdrawals many banks will find it necessary
to draw upon their balances with their correspondent banks, and
these in turn upon their balances with banks in central Reserve cities,
particularly New York. The excess reserves of member banks located in New York City have been ranging from $630,000,000 to
$1 >212,000,000 since January 1} 1942, and this amount may not be
sufficient to meet the withdrawal of deposits from these banks which
may be expected at tax payment periods. If this situation should
arise, the banks in New York City may find it necessary to sell United



States obligations in considerable amounts. Such action might have
a depressing effect upon the Government security market at a time
when this would be contrary to the public interest.
In order to avoid such a contingency it may be desirable to reduce
Reserve requirements of member banks in central Keserve cities. It
may not be advisable at the same time, however, to reduce the requirements of member banks in Eeserve cities and, accordingly, in order
to provide the necessary flexibility to meet the situation, it is felt
that the Board of Governors should be empowered to change the
Reserve requirements of member banks in central Eeserve cities
without at the same time changing the reserve requirements of other
member banks.
Section 3. Making loans and paying dividends while reserves are
deficient: Section 3 of the bill would amend section 19 of the Federal
Reserve Act by repealing the provision which prohibits member banks
of the Federal Reserve System from making new loans or paying dividends while their reserves are deficient, retaining in the law, however, the power of the Board of Governors of the Federal Reserve
System to prescribe penalties for deficiencies in reserves.
One of the difficulties leading to the enactment of the Federal
Reserve Act was the fact that bank reserves were unavailable in
times of stress and one of the reforms incorporated in the Federal
Reserve Act was a provision permitting reserves to be checked
against and withdrawn for the purpose of meeting existing liabilities, subject to regulations and penalties to be prescribed by the
Reserve Board.
The addition of a proviso prohibiting the making of new loans
and the payment of dividends while reserves are deficient is not
consistent with the purpose of this provision. On the basis of this
proviso, a recent decision of the United States District Court for
the Southern District of New York held a bank director personally
liable for losses sustained on loans made by the bank while its
reserves were deficient. Although this is in conflict with an earlier
decision of a circuit court of appeals in another circuit, it creates
a fear of personal liability which may prevent banks from availing
themselves of the privilege of utilizing their reserves in times of
If the proviso were repealed, the Reserve Board would still retain
the power to prescribe penalties for deficiencies in reserves and this
would be a sufficient deterrent for willful neglect of reserve requirements. The Board's present regulations prescribe a penalty in the
form of an interest charge amounting to 2 percent more, than the
Federal Reserve bank discount rate, so that it is cheaper for a member bank to borrow from the Reserve bank in order to maintain its
reserves than it is to become deficient in its reserves and pay the
Owing to the fact that large tax collections and the flotation of
large amounts of Government securities during the present emergency may cause wide fluctuations in available reserves, especially
in the money centers, it is particularly important during the emergency period to avoid any stringency in the money market resulting
from the rigid and unnecessary prohibition upon making loans while
reserves are deficient.



I might supplement that statement by saying in connection with
section 2 referring to reserve requirements, the Banking Act of 1935,
as passed by the House, and as reported out of this committee provided for the changing of reserve requirements, as requested in this
amendment. The Senate changed or refused to accept that proposal.
I think the banks, particularly the banking group of New York, were
opposed to giving the Board power to increase or decrease the reserve
requirements of the central Reserve banks, which are only those
banks in New York and Chicago. They were concerned more at the
time about increasing the reserve, requirements, and they did not
want the Board to have the power to increase their reserve requirements without having to increase the reserve requirements of the banks
of all of the other Reserve cities. The provision asked for then was
right, and it should have been passed. It is, however, much more
necessary today than it was at that particular time. Forty to fifty
percent of the excess reserves of the banking system were in New York
during the period while excess reserves were increasing so rapidly,
due largely to gold imports, and to a somewhat lesser extent due to
silver purchases. Those excess reserves were reflected more in New
York than in any other part of the country. It would have been
desirable at that time to have been able to increase the reserve requirements in New York where the excess reserves were in such abundance. Today the opposite is true. With the gold imports practically stopped, and the Government through the defense
war-program borrowing so heavily from the financial centers, and
disbursing the funds throughout the country, the effect has been to
pull down the excess reserves in New York much more rapidly than
those in the rest of the country. So that the, excess reserves in New
York are running around 20 percent of the excess reserves of the
country, instead of from 40 to 50 percent, and it seemed to us
very desirable that the Board have the power to reduce the requirements, and likewise to increase them at some later date when it may
be necessary in the central Reserve cities separate from having to
take action on the Reserve banks in the rest of the country. It is
a particularly necessary power at this time in connection with these
huge financial transactions that take place over tax periods and likewise that is taking place each month now in increasing amounts due
to the necessity for the Treasury to raise very large amounts of
This is one desirable improvement we feel that can be made at
this time. I want to call your attention to the fact that this was
provided for in the Banking Act of 1935 by this committee, so that
if you pass it now you would merely be passing wThat you have passed
The CHAIRMAN. And we wanted it at that time for a purpose
directly opposite to that which is desired now ?
Mr. ECCLES. That is it exactly, the excess was piling up through
not going into the rest of the country.
Mr. FORD. What you are seeking to accomplish is a more flexible
system which will be applicable to those centers where excess reserves
are most likely to increase in critical periods ?
Mr. ECCLES. We feel that inasmuch as the statute provides three
different percentages of Reserve requirements for the country banks,



for the Reserve city banks and the central Reserve city banks, recognizing the three classes and the three different Reserve requirements,
that so long as that provision is in the statute that the Board should
have the power to change the Reserve requirements either upward
or downward for the three different classes of banks. Of course,
there is a limitation to that, as you know. That provision is that
you can only double the statutory Reserve requirements. We cannot
reduce the Reserve requirements below the statutory provision, nor
could we increase them more than double the statutory provision, but
within that limitation we should be able, it seems to me, to increase
or decrease the Reserve requirements by classes of banks, that is, by
those three classes of banks.
The CHAIRMAN. YOU mean you should have the power to increase
or decrease it in order to meet the necessities of the situation in
relation to each class of banks?
Mr. ECCLES. That is right.
Mr. FORD, Your Federal Reserve System is a good deal like an
irrigation system, is it not? For instance, here is a series of reservoirs. If there were 10 reservoirs to supply water to a great area,
you would want to let the water out of one reservoir into another to
let it flow to the point where it was needed at any time it was
necessary, would you not ?
Mr. 'ECCLES. That is right. Of course, even this is a rather rough
general approach to the problem, but it is a necessary supplement
to that of open-market operation. I feel as to the decreased reserve
requirements,Nwe will say, for the country as a whole, when the situation at the present time is largely a money center deficiency, that the
deficiency is more likely to develop there than it is in the country
as a whole.
Now, there is another matter, I would like to say something in
connection with section 3, making loans and paying dividends while
reserves are deficient. The Board regulation provides that the banks
in what we call the country banks, those in the country classification,
can average their reserves over a 2-week period. In other words,,
they may be deficient for 3 or 4 or 5 days, or in excess for the rest
of the period, but so long as the average reserve over a 2-week period
meets the Reserve requirement there is no penalty, there is no deficiency. We likewise provide that the banks in the central Reserve
cities and the Reserve cities can average their reserves on a weekly
basis. That is desirable particularly when there are such large
financial transactions as there are taking place today.
For instance, I was told by one New York banker that their reserves will fluctuate more than $50,000,000 a day. That is the sum
that they have got to carry in order not to be deficient on any one
day. They have got to carry more excess reserves than they would
desire to carry. They would be perfectly willing to use their reserves
and invest them in Government bills or our securities, but they do
not want to take the chance of being deficient on any one day. That
is because of this decision that I referred to, a decision recently by
the United States district court holding the director of a bank liable
for loans that were made upon a day when the reserve of the bank
was deficient. I know that is true of all of the New York banks,
that they will not permit their reserves to run too close, because they



do not want to be deficient on any one day. It is inconsistent to
give the Board the power to regulate, to issue regulations as the
statute does. The Board regulations permit them to figure their
reserves on a weekly basis, and only if they are deficient on a weekly
basis are they penalized by a charge. It is expensive for them to
run deficient. So, the^ would not run deficient on a weekly basis,
but they pay no attention to that regulation. They are looking at
this court decision which says that you cannot be deficient on any one
day without the directors being liable for any losses sustained or any
loans made on that day, and the directors are likewise liable for any
dividend having been paid on that day.
Now, a large bank doing business cannot, stop on particular days
and say we cannot make a loan today, we cannot do business today, in
effect, because our reserves may be deficient, or are deficient today.
This makes no difference when the excess reserves were very large,
when the financial transactions were much smaller than they are
at the present time. As long as a bank had very large excess reserve
they were not concerned whether they averaged them by the day
or the week, because they had excess reserves all the time. Today
when their reserves begin to run closer, and their volume of transactions, largely through Government operations, fluctuate as greatly
as they do, they are hesitating to use their reserves, and we feel
that this provision of the statute which appears to be in conflict with
the other provision giving the Board power to regulate should be
repealed. Although this decision which has been rendered by the
court has not been taken up by the circuit court or the Supreme
Court, and it may be some years before you do get a final decision,
in the interim we think this situation which now exists should be
The CHAIRMAN. I should like to ask one question right there, Governor. I am not familiar with the decision to which you referred,
and I do not know anything about it, but I imagine that the decision,
if I understand you, would have been made irrespective of any regulation imposed by the Board as to the averaging of excess reserves?
It was made without regard to that regulation of the Board?
Mr. ECCLES. That is right.
The CHAIRMAN. That order of the Board obtains now and permits
them to average on a weekly basis?
Mr. ECCLES. That is right.
The CHAIRMAN. In that connection this question occurs to me,
Governor: Will what you are attempting to do by this bill change
that law? In other wTords the court holds now that the action of
an officer in making a loan when the reserves are depleted or below
the requirements, creates a personal liability against the officer,
would not the courts hold the same way after we have changed the
law as provided in this bill, leaving the matter entirely to regulation
by the Board, that is, provided the action was contrary to the requirements specified in the regulations of the Board?
Mr. ECCLES. Well, if Congress would repeal this proviso which prohibit the making of new loans and the payment of dividends while
reserves are deficient, then that would not be inconsistent.
The CHAIRMAN. What I am wondering is whether the court would
undertake to attach personal liability against an officer who made a




loan contrary to a rule or regulation of the Board, the same as it
would under the law.
Mr. ECCLES. I suppose it would not. But the Board has issued a
regulation that the country banks can figure their reserves on a 2-week
basis because they are removed from the Reserve banks, and from
the branch banks, and they have much more of a float, and they'have to
get their currency in and ship it out, and it is not as convenient for
them. Therefore, we have permitted the country banks as a practical
matter to average their reserves on a 2-week period. Now, with
respect to the central Reserve cities and the Reserve cities, they are
permitted to average their reserves on a weekly basis. I do not believe
that a court could hold a director liable if this provision was taken out
of the staute which provides that the payment of dividends and the
making of loans are prohibited. In other words, you have a specific
provision in the statute on that.
The CHAIRMAN. YOU think that the ruling of the court rests upon
a provision carried in existing law which would be removed by the
enactment of the present bill?
Mr. ECCLES. The Reserve bank counsel and our counsel have so
advised us about it.
Mr. SACKS. That does not say based upon that, in view of the action
of Congress that we speak now for^ all future action. They would
have to take the law and interpret it in accordance with the intent
of Congress.
Mr. ECCLES. Yes, I think so. I think there would be no question
about it. As it is now there is a conflict, that is the decision of the court
referred to, the decision of the United States District Court for the
Southern District of New York.
The CHAIRMAN. What is the style of that case?
Mr. ECCLES. I cannot cite it, I can give you the information later.
This is in conflict with an earlier decision of a circuit court of appeals
of another circuit. So, you see even the courts have not agreed on
it but it is a thing that at the moment we feel should be clarified,
and it is necessary to have a clarifying amendment because of the
reserve situation in the money market.
Mr. LYNCH. But if you repeal that paragraph that you refer to,
then you have nothing at all whereby you hold the directors liable if
they violate the 2-week provision that you suggest.
Mr. ECCLES. That is right.
Mr. LYNCH. Then they are absolutely free to violate the regulations without any penalty being imposed on them by the court.
Mr. ECCLES. NO ; because the Board regulations provide a penalty
in the form of interest charges. So, it becomes much cheaper to
borrow from the Federal Reserve than it is to pay the penalty.
Mr. LYNCH. At the same time, it relieves the directors of personal
liability for their wrongful act.
Mr. ECCLES. NO; there is nothing wrongful about it. The whole
purpose of a reserve is not to have a bank close and have 20 percent
or 30 percent of the money tied up and not used. The purpose of the
reserve is to use it in times of necessity, and it is perfectly inconsistent
to penalize a director for using the reserve at the time the reserve is


necessary. What purpose is there of having a reserve here if in a
difficult situation over a period you cannot use the reserve ?
Mr. SACKS. Would he not still be liable if he violated your 2-week
regulation or week regulation ?
Mr. ECCLES. No; I do not think they would be liable at all, because
the only provision which says they are liable we propose to repeal.
Mr. LYNCH. My point is this, the court held that if the directors
made a loan on any particular day when their reserves were not in
accordance with the regulations then they would be held personally
responsible, is that correct?
Mr. ECCLES. Yes, sir; that is right.
Mr. LYNCH. NOW, you propose to repeal that section of the law,
and at the same time you propose that instead of having a regulation
governing the reserves for any one day that they average it over
2 weeks or 1 week,
M r . ECCLES. Y e s .

Mr. LYNCH. Assuming that during that one week they do not keep
up their reserves in accordance with the regulations, or assume that
for several weeks they do not keep up their reserves, but during that
time, in spite of the fact that they are paying a penalty of interest
to you, there is no sanction placed on the directors for their acts.
Mr. ECCLES. There is no prohibition against it, you take the prohibition out. There is no provision at all that says they can or
cannot. If it was a case of dereliction of duties, or something that
was a willful act, I suppose if a bank finally closed, and it was
found that the directors were parties to deception or fraud or mismanagement, which is not involved in this at all, then that certainly would not exempt, them, but if the bank was operated in
good faith, and operated in the interest of its depositors during
this period when it was deficient I certainly would not feel that
merely because it was deficient in reserves and paid a penalty because of that that the directors would be liable if you took this
provision out.
Mr. LYNCH. If the bank continues, although it violates the regulations
Mr. ECCLES. It does not violate them.
Mr. LYNCH. Well, assume it does continue, assume the bank violates the regulations and still continues in business, you do not think
that any punishment should be meted out to the directors for their
violation, but if the bank fails, then they should be punished?
Mr. ECCLES. NO, I did not say that at all.
Mr. LYNCH. That is what I deduced from your original statement.
Mr. ECCLES. That is not what I said at all. All I am trying to
point out here is that if you take this out of the statute it relieves
the directors, and properly so, of the liability in case loans are
made on any day when the reserve is deficient. Otherwise, if you
do not do that, then the bank should provide not only the reserves
called for by the statute and by the Board's regulations, but to
be sure that they won't be deficient on any one day, they would
carry reserves substantially in excess of the statutory requirement,
but as a practical matter it does not make sense. It interferes
with their flexible, practical operation. I am not a lawyer. The
staff of our counsel have gone into it, and they have checked it



with the counsel of the Reserve bank and the counsel of private
banks, and everyone feels that this amendment should eliminate
any liability that would otherwise be incurred by the directors in
connection with the reserve deficiency.
Mr. LYNCH. Yes; I agree that it eliminates any liability on their
Mr. FORD. Let me ask you just a simple question, Governor. Would,
for instance, the purchase of Government bonds on a day when the
banks' reserves were deficient incur a penalty? That is a loan, is it
not ?
Mr. ECCLES. I would not think you would be concerned about the
purchase of Government bonds on any day, because the Government
is not likely to default.
Mr. FORD. Yes; you can go back and get the money all right, but,
nevertheless, they are making a loan to the United States Government on a given day when their reserves are deficient. Why would
not that apply ?
Mr. ECCLES. The only danger to a director is in case of a loss on a
loan made on that day. He is personally liable for the loss incurred.
Mr. FORD. Was there a loss incurred in this particular instance of
which you speak?
Mr. ECCLES. Oh, yes! the loans were made when this bank was
deficient in its reserves, losses were incurred, the bank went broke,
and the directors were held liable.
Mr. FORD. It is all involved in the safety of the loan ?
Mr. ECCLES. That is right, but the effect it has on any board of
directors of a bank is that they give instructions to the management
of the bank to make no loans on any day when the reserves are deficient.
The CHAIRMAN. That decision would mean that the officers who
made that loan would be underwriting it.
Mr. ECCLES. Because of that the directors of the bank give instructions to the management to not let the reserves become deficient,
sell your governments or keep these excess reserves there, keep your
money there so that you do not go deficient. So, that is what they do.
Mr. LYNCH. Is not that what they are supposed to do ?
Mr. ECCLES. NO, that is not what they are supposed to do. If it is,
why did the Congress give the Board the right to make regulations
about these reserves? For years and years until this decision came
out they have averaged their reserves. The country banks have
always averaged their reserves over a 2-week period.
Mr. LYNCH. The repeal of this paragraph would mean this, that the
responsibility is transferred, or possibly the penalty is transferred
from the directors who might be personally liable to the banks which
would have to pay an interest penalty, is not that it, for a violation
of the regulation ?
Mr. ECCLES. That is right. They pay the penalty, and as a practical
matter the banks never run a deficiency, or very seldom, on a weekly
basis. You would find on a weekly basis that there would not be any
penalty. The country banks do not run a deficiency and pay a penalty. They stay within the regulation, and they average it now on a
weekly basis, but you either ought to repeal the provision giving the


Board the power to regulate it, and let the statute stand, making it
perfectly clear that no bank should let its reserve be deficient on any
single day, either do that and repeal any power of the Board to regulate, or you should repeal the provision that we ask to be repealed
and let the regulations stand, and they would be effective.
Mr. SPENCE. D O you think you have the power now to average
reserve requirements over a period?
M r . ECCLES. Y e s .

Mr. SPENCE. YOU think that the law gives you that power now, do
you not?
Mr. ECCLES. Well, the law does two things. The law says you can
regulate, and we have regulated for a good many years. The country
banks have figured their reserves on a 2-week basis, and if we try to
put it on a daity basis they would raise the dickens about it.
Mr. SPENCE. Did the court in its decision pass upon your authority
to regulate the reserve requirements?

Mr. SPENCE. They did not pass on your authority to regulate at all ?
M r . ECCLES. NO, s i r .

not know whether you have that power or
not, do you?
Mr. ECCLES. We think that there is no question about it. We think
the Congress has given us that power, and we think we have got the
power, but the power is not effective in the face of another provision
of the statute which says that the directors are personally liable for
any loans made when the reserves are deficient.
Mr. SPENCE.- Was your authority ever plead in that case that you
had the power in those cases to average it over a period, and, therefore, that they had not violated the law because of that?
Mr. ECCLES. I have not read the decision.
Mr. SPENCE. SO, you do not know whether they passed on your
authority or not.
Mr. WILLIAMS. Where is your authority set forth in the law,
Governor ?
Mr. ECCLES. It is in section 19, the sixth paragraph.
Mr. WILLIAMS. I refer to the power which this Board has to place
a penalty upon them for a deficiency of reserves.
M r . ECCLES. Y e s .

Mr. WILLIAMS. Where is that?
Mr. ECCLES. It is in section 19, paragraph 6 of the Federal Reserve
Mr. SPENCE. That is the law as it now stands with the exception of
the proviso.
Mr/WILLIAMS. DO you have the law in front of you, Governor?
M r . ECCLES. Y e s .
Mr. WILLIAMS. I would like to have it read into the record.
Mr. ECCLES. I can read the proviso.
Mr. WILLIAMS. I am talking about your authority to place a penalty

on a deficiency of reserves.
The CHAIRMAN. The power of the Federal Reserve Board to regulate reserves and provide penalties for deficiencies.
Mr. WILLIAMS. Yes, to provide penalties in case there is a deficiency in reserves.



Mr. ECCLES. Section





Notwithstanding the other provisions of this section, the Board of Governors
of the Federal Reserve System, upon the affirmative vote of not less than four
of its members, in order to prevent injurious credit expansion or contraction,
may by regulation change the requirements as to reserves to be maintained
against demand or time deposits or both by member banks in Reserve and
central Reserve cities or by member banks not in Reserve or central Reserve
cities or by all member banks; but the amount of the reserves required to be
maintained by any such member bank as a result of any such change shall not
be less than the amount of the reserve required by law to be maintained by
such bank on the date of enactment of the Banking Act of 1935 nor more than
twice such amount.

Mr. WILLIAMS. NO ; that is not what I am talking about. Now, that
is all right so far. Now, suppose they do violate that, you say you
have the power to penalize them ?
Mr. ECCLES. I think our power to penalize them is only the power
to charge a penalty rate against the deficiency. I do not understand
that we have any power to do other than to say for the amount that
you are deficient during this period you shall pay a penalty rate, a
rate that is higher than the rate at which you could borrow from
the Federal Reserve bank.
Mr. WILLIAMS. But that is, in my judgment, a very doubtful implied power from what you read there.
Mr. ECCLES. Here it is in section 9 [reads] :
The required balance carried by a member bank with a Federal Reserve bank
may, under the regulations and subject to such penalties as may be prescribed
by the Board of Governors of the Federal Reserve System, be checked against
and withdrawn by such member bank for the purpose of meeting existing liabilities: Provided, hoicever, That no bank shall at any time make new loans
or shall pay any dividends unless and until the total balance required by the
law is fully restored.

Mr. WILLIAMS. That is
M r . CLAYTON. Y e s , sir.




19 ?

Mr. WILLIAMS; YOU think that is your authority?
Mr. ECCLES. There has never been, as far as I know, any question
raised as to the authority.
Mr. WILLIAMS. I was just trying to locate where it was, and to
get it in the record.
The CHAIRMAN. There has never been any question about the effectiveness of these orders until this new suggestion came in by way
of a court decision that creates confusion and doubt in the minds
of the banks ?
Mr. ECCLES. That is right.
The CHAIRMAN. And all 'you want to do under this bill is to continue what has been done heretofore and what has been accepted by
everybody except for this one decision that rules otherwise ?
Mr. ECCLES. If it had not been for this recent court decision we
would not have thought anything about making this amendment,
but this court decision now has stopped every New York bank. They
will not do any business on the weekly provision; they run on a
daily basis, and they won't go deficient on any day because of this
court decision.
Mr. MONRONEY. But were not these directors personally liable if
their average deposits for the week were below the average required,
personally liable for the loan made at that time?



Mr. ECCLES. I do not think at that time our regulations let them
figure on an average basis of a week. I,think the court has construed this provision of the law which says that you shall not be
deficient in reserve requirements, and the court has felt that this
provision of the statute that is passed by Congress apparently supersedes the power of the Board to regulate ana, therefore, they have
paid no attention to the regulations. So, you have a conflict here,
and as I have stated, you either ought to make it perfectly clear that
they have got to figure the reserves every day and the Board has no
power to regulate, or you ought to make it perfectly clear that the
regulations of the Board would stand.
Mr. MONRONEY. But in actual practice this prohibition against
making loans or declaring dividends when the reserves are deficient
certainly means something in the law. Was it construed that the
directors ever had personal liability under this ?
Mr. ECCLES. I do not quite get your question.
Mr. MONRONEY. I am referring to this prohibition against making
loans or declaring dividends when the reserves were deficient,
whether on a weekly basis or a two-weekly basis average, or whether
on the daily basis, was that ever construed to mean individual liability of the bank directors?
Mr. ECCLES. I could not say. I think this is the only case that
has arisen, and what I know of this case is that a director was sued,
and the case went to the court, and this director was held personally
liable in the amount of the loss of some loans that were made while
the reserves of the bank were deficient. I do not know whether the
reserves were deficient one day or more than one day, but the decision was based upon the loss made on loans while the reserve
was deficient, irrespective of whether it was a day or a week.. It was
a question of the loans made during the period when the reserves
were deficient, and losses were incurred on those loans.
Mr. SPENCE. Were your orders with reference to average reserve
requirements over a period in effect at the time these loans were
Mr. ECCLES. I do not think they were.
Mr. CLAYTON. NO, sir; I do not think so. It was a recent decision.
Mr. ECCLES. I would have to check as to the date when our regulations went into effect and also as to the date of the decision. I
won't be sure. I would not be sure as to what regulations we had
in effect at the time of this deficiency. All I know about it is that
our lawyers who are thoroughly familiar with the case and the
lawyers in the New York bank said this matter has been taken up
with the New York banking people, and with our lawyers by most
of the New York banks. All of the New York banks have asked
in the light of this decision that* this be repealed; ^ Otherwise our
regulation which now permits them to average their reserves on a
weekly basis will be ineffective. They said they will pay no attention at all to our regulations. Their lawyers have advised them
not to do so, and unless this is repealed they will not let their
reserves become deficient. They will sell government bonds, or
do whatever is necessary to keep their reserves up every day. In
order to keep them up of sufficient amount one banker told me last
week he would have to maintain $100,000,000 more than was actually



required in order to be perfectly sure that he would not be deficient
on any day.
Mr. GAMBLE. Might it not hurt the standing of the bank, Governor, if it had to admit it could not make a loan if it was deficient
in its reserve?
Mr. ECCLES. The point is a bank would not be deficient. It would
run with enough excess reserve so that it would not permit itself to
become deficient on any day.
Miss SUMNER. He means that it might cause a run on the bank.
Mr. ECCLES. Nobody would know that it was deficient on any one
Mr. GAMBLE. I know, but they would have to give a good reason
for turning the loan down.
Mr. ECCLES. They would turn the loan down, or possibly they
would defer it. They would defer it until they could sell securities.
Of course, if they are deficient they will sell their governments.
That is easy, and they sell them right now. They would either do
that or come into the Federal Reserve and possibly borrow, but it is
" 11 "ora bank to figure reserves on such a small
Miss SUMNER. I want to know if you are thinking of raising the
excess reserve requirements for the small banks in rural communities?
Mr. ECCLES. We have no power to do so.
Miss SUMNER. That is, if this bill is passed.
Mr. ECCLES. This bill has nothing to do with that. This* bill gives
us no power to do that.
Mr. PATMAN. Referring to the Federal Open Market Committee,
the present committee is composed of 12 members, 7 from the Board
and 5 from the Federal Reserve banks ?
Mr. ECCLES. That is right.
Mr. PATMAN. The Board, however, is lacking one of being the
whole 7?
Mr. ECCLES. That is right.
Mr. PATMAN. With this change in the present Board you will still
have 12?
Mr. ECCLES. We would have 11 if we have any vacancy.
Mr. PATMAN. You would still authorize 12?
M r . ECCLES. Y e s .

would the five be changed? Will this change
the bank members?
Mr. ECCLES. NO ; it will still leave five bank members.
Mr. PATMAN. It would still leave five bank members, but there
is a different way of selection.
Mr. ECCLES. That is right. It is a different grouping. You see,
the present grouping provides for New York, Cleveland, Philadelphia, Chicago, and St* Louis. There are six of the banks, and they
elect three of the five members on the committee, and then of the
western banks, San Francisco, Kansas City, and Minneapolis, one;
and Richmond and Atlanta, one. Now we are proposing a regrouping.
Mr. PATMAN. And the regrouping is outlined in the bill itself?
Mr. ECCLES. Yes; that is right.



Mr. PATMAN. What are the powers of the Federal Open Market
Committee, Governor Eccles?
Mr. ECCLES. Would you like to have the statute read on it?
Mr. PATMAN. I know the statute is rather specific, but in practice
how often do you meet?
Mr. ECCLES. I think we are required to meet not less than four
times a year.
Mr. PATMAN. Do you meet more frequently than that, usually?
Mr. ECCLES. Yes; I think we have during the last year or two.
What we have had to do, in order to facilitate the operation of it
is, we have had an executive committee composed of three of the members of the Board and two of the banks, and we meet much more often,
in fact, in our operations.
Mr. PATMAN. To carry out the administration of the whole group?
Mr. ECCLES. That is right, of the whole group, and they delegate
certain authority to the executive committee with limitations. They
always give you authority up to a certain limit to buy or sell securities,
and that authority has to be renewed or extended from time to time
to meet the situation. Now, we have had several emergency meetings
of the Federal Open Market Committee. We had such a meeting in
1939 just before the European war started, and we had one right
after Pearl Harbor. There have been several instances where we
have had to get them in quickly. Now, however, the executive committee is sitting almost in constant session, almost a week at a time.
Mr. PATMAN. What is your policy with reference to the price for
Government bonds? Suppose there should be a tendency for Government bonds to go below par, do you have any definite policy not
to let them go below par?.
Mr. ECCLES. NO, sir; we do not feel that there is anything necessairily sacred in par, because when you talk about par you have got
some bonds selling as high as 110 or 112, and you have other Government bonds selling practically at par. In other words, at different times, bonds have been issued with different maturities and different interest rates, and there are certain bonds now outstanding that
are partially tax exempt, bonds that were issued prior to the bill
prohibiting issuing them.
Mr. PATMAN. Is it not a fact that you did send out letters to the
banks which made the statement that the Federal Open Market Committee was ready to buy all bonds at par?
Mr. EOCLES. NO, sir; not buy, we adopted a policy, did,
that would loan par on them.
Mr. PATMAN. That would loan par on Government securities?
M r . ECCLES. Y e s , s i r .
Mr. PATMAN. DO you

charge the interest rate that is effective in
that particular Federal Reserve district?
Mr. ECCLES. One percent.
Mr. PATMAN. One percent.
M r . ECCLES. Y e s .
Mr. PATMAN. Have

you ever told all the banks that you stand
ready to make loans at par at a 1-percent-interest rate?
Mr. ECCLES. Each Federal Reserve bank has done that.
Mr. PATMAN. Each Federal Reserve bank has done that?




Mr. ECCLES. Yes; we did: Just recently the Federal Open Market
Committee instructed each Federal Reserve bank, as its agent, to
offer to purchase Treasury bills at the rate of three-eights, and those
bills are now being pretty widely distributed and sold throughout the
country. The Treasury is offering each week $800,000,000 of bills.
Mr. PATMAN. At what rate?
Mr. ECCLES. It is a bid price, but the very fact that we offer to take
them at three-eights puts a ceiling on the rate.
Mr. PATMAN. That puts aflooron it, does it not?
Mr. ECCLES. NO ; it puts a ceiling on the rate. It does not put a
floor on it. Competition for buying those bills has kept your ceiling
below three-eighths.
Mr. PATMAN. If they can buy them for one-eighth, they can turn
them right in for three-eighths and make a profit of two-eighths?
Mr. ECCLES. They buy them on the basis of three-eighths yield. If
they buy them on the basis of one-eighth, the yield on them is twoeighths.
Mr. PATMAN. Regarding the excess reserves, you will not have any
more power if this law is changed like you propose than you would
have under the existing law, except you can break them up into
groups ?
Mr. ECCLES. Into three instead of two.
Mr. PATMAN. Into three groups instead of two groups ?
M r . ECCLES. Y e s , s i r .
Mr. PATMAN. And that

is in order to take care of the situation
which you explained a moment ago?
Mr. ECCLES. That is right.
Mr. PATMAN. What are the excess reserves on the money market
at the present time?
Mr. ECCLES. They are running around two billion five hundred
Mr. PATMAN. HOW much could they buy in Government bonds if
they were to use the excess reserve to the limit ?
Mr. ECCLES. About $12,000,000,000.
Mr. PATMAN. $12,000,000,000?
Mr. ECCLES. Yes, sir; that is, assuming that the deposit structure
and the present structure does not change.
Mr. PATMAN. It would be about $12,000,000,000?
Mr. ECCLES. Yes; you see, the Federal Reserve requirement is about
20 percent.
M r . PATMAN. Y e s , s i r .
Mr. ECCLES. For the country

it is 14, and for the central Reserve
cities it is 20, and for the Reserve cities it is 26, so that -wefigureon
about a 20-percent Reserve requirement, so that on the basis of $2,500,000,000, if that were all fully utilized on the factional Reserve basis,
I would estimate that they could buy about $12,000,000,000 worth of
governments, that is, if it were utilized fully and completely through
the entire Reserve, all the banks.
Mr. PATMAN. Suppose today they bought those $12,000,000,000 of
bonds, what would they have back of those bonds to support them in
addition to what they have now? In other words, what increased
assets would the bank have except Government bonds?



Mr. ECCLES. They would have the Government bonds themselves,
which would be an asset, and they would have a liability, however, in
the form of a deposit.
Mr. PATMAN. That is right.
Mr. ECCLES. SO that they would be in pretty tough shape if they
had that deposit liability without the assets.
Mr. PATMAN. Governor, in regard to the excess reserves, it is not
contemplated that you expect to change these reserves so that the
larger banks can buy more Government bonds? You do not have that
in mind now ?
Mr. ECCLES. Well, it is not done, I would say, for that purpose, primarily or specifically. If we wanted to enable the banks to buy a lot
of bonds we could.
Mr. PATMAN. By lowering the reserve requirements?
Mr. ECCLES. By lowering the reserve requirements, yes; or we could
step up and buy a lot of bonds directly by Fed itself, and put more
reserves in by open-market purchases. What we would lite to see
done is more of the Government bonds placed outside of the banks,
and we would like to see an expansion of the bank-deposits structure
go up as slowly as possible. We feel that there is an element of danger
in a too-rapid growth or in too large an expansion of deposit currency*
Mr. PATMAN. I agree with you that the bonds should be sold outside of the banks, and I think we should encourage selling the bonds
outside of the banks.
Mr. ECCLES. But the poiiit is if you have too much reserves in the
banks it has two effects. The pressure of excess reserves continues to
force your rates down and in the process of forcing them down the
banks will go out and bid up and buy bonds on the open market in
order to keep up their necessary income. They have a minimum
income requirement, and in an effort to try to keep that up they try
to increase the volume of their holdings to offset the drop in the rate.
If their excess reserves were kept at a high level it would put them
underpressure to keep those reserves invested and you would find that
more and more of the financing would go to the banks and less to
the public, because the lower the rate, the less likely the public are
going to be interested in buying. We find we have an example in this
bill rate. When the bill rate was nothing, and it was, for a time, a
very small fraction of 1 percent, there was no purchase of bills outside
of the money market, outside of-New York, and practically all of the
bills, were purchased in New York.
Corporations with surplus funds, individuals, foreign governments
and municipalities bought no bills. Today with the rate just up to
three-eighths, there are tens of millions of these bills being bought by
corporations, country banks, and banks throughout the country are
buying them, and that would not be true, and it was not true when that
rate was below one-fourth.
Mr. PATMAN. I want to get that later on, but I want to ask you this
now in order to get the information I desire: Let us suppose that the
banks are called upon to buy $12,000,000,000 of Government bonds
today. That consumes all of their excess reserves. If you wanted to
increase their excess reserves in order to buy another $12,000,000,000
of Government bonds, how would you do that, through the Federal
Open Market Committee?



Mr. ECCLES. We might decrease the reserve requirements.
Mr. PATMAN. HOW would you decrease them?
Mr. ECCLES. I think it runs between $5,000,000,000 and $6,000,000,000.
Mr. PATMAN. Between' $5,000,000,00(X and $6,000,000,000?
Mr. ECCLES. Yes; somewhere between five billion and six billion.
Mr. PATMAN. If it were decreased as you suggest, that would enable
you to buy how many bonds?
Mr. ECCLES. If we decreased it to the full amount, then the reserve*
requirements are 10 percent instead of 20 percent, and you can buy
about 10 to 1.
Mr KEAN. What does change it from 5 to 1 or 10 to 1 ? Would you
explain that again?
Mr. ECCLES. .AS it is the requirements of the Federal Reserve Bank
System of the country as a whole are about 20 percent. • If we changed
the reserve requirements to the full amount we could then say the
reserve requirements are only 10 percent instead of 20 percent, and
you can get about. 10 to 1, and that would be about $50,000,000,000.
Mr. PATMAN. After you have already reduced the reserve requirements of the banks and have bought these $50,000,000,000 in bonds, if
you need to buy still more, how would you handle the others ? Suppose
you wanted to call upon them to buy $25,000,000,000 more in bonds ?
Mr. ECCLES,. We could carry it on then, if it were necessary* by an
open-market operation.
Mr.. PATMAN. In other words, you buy a billion dollars' worth of
bonds, what would be the effect of that billion dollars on the banks?
Mr. ECCLES. If they could get a billion dollars they could buy up
about $10,000,000,000 in bonds.
Mr. PATMAN. Then if you need to sell another $10,000,000,000
worth of bonds, you could get another billion dollars from the bank?
Mr. ECCLES. Yes; but if you did that you would have inflation on
your hands, if you got any higher.
Mr. DEWEY. We have been talking about the liability of directors
in making loans, and I think that any bank directors that carried out
a proceeding in buying bonds to that extent would not require any
regulations they ought to be put in jail anyway.
Mr. PATMAN. I did not get that.
Mr. DEWEY. Any bank directors participating in buying Government bonds or other securities in any such quantities as you are mentioning thereby cutting down the reserves of the bank. I think that
the liability is very clear and they should be punished for such acts.
The CHAIRMAN. They would be within the law.
Mr. PATMAN. We have tofinancethe war in some way.
Mr. DEWEY. I know; but the banks of the United States are not
supposed tofinancethe war entirely.
Mr. PATMAN. Certainly they are. They are public institutions,
and they have been given wonderful assistance by the Government,
and they ought to render some public service; and if they cannot render it during the war, when should they render it ?
Mr. DEWEY. D O not ruin thefinancesof the country by operations
siich as you have been mentioning. The Treasury Department and
the Federal Reserve Board, working together, are finding other
means of financing it rather than ruining all the banks by forcing
them to purchase Government securities.



Mr. ECCLES. Of course, the banks have never been forced to. They
buy Government securities ;>f their own accord.
Mr. PATMAN. Why should they be?
Mr. ECCLES. There is not any question but what a very, very imgortant part of the banks' income hjas been from the interest from
rovernment securities, and the Federal Reserve System has been in
a position to either create a climate favorable for credit expansion
or to create one less favorable. Now in a depression period we felt,
and I think everybody did, that a condition that was favorable to
credit expansion was desirable. That was not going to create inflation ; we recognized that, or at least, we tried to create a condition in
the banking system that was favorable for the banks to expand credit.
We reversed the action from 1932,1933,1934, 1935, and 1936. It was
a condition favorable to expansion of credit. The banks were encouraged to loan, and the Government helped them to find outlets for
some of their funds by having them take Government bonds, and
the banks were so anxious to get Government bonds; and they bought
them so freely, and the excess reserves were such m the banks that
they gradually forced the rate of interest down on Government bonds
from where they were to where they are now.
So it was the banks bidding for Government bonds because of the
demand on the part of banks, because they were the principal underwriters of them, and the demand for Government bonds on the part
of the banks was in excess of the supply to such an extent that you
have the present interest rate.
Now, we feel that it is desirable to stabilize the interest-rate structure for thefinancingof the war period, so that the investors and the
banks will know pretty largely upon what to defend. I do not feel
that the war should befinancedon increasingly higher interest rates,
and I feel that the purchaser of a 2^-percent bond today should not
find in a year from now that if he had waited he could have gotten
2% percent or 3 percent, and the bond which he bought today is selling
at a discount.
I feel very strongly that the financing should be done on the basis
of a stabilized rate structure
Mr. PATMAN. Mr. Chairman, I have a very important engagement
at 12:30. Of course, I anticipated we would get through before that
time, and I need something like 30 or 40 minutes more, and I wonder
if it would be all right to ask Governor Eccles to come back at another
time for further questioning, because I know there are other members
who would like to ask him some questions this morning.
The CHAIRMAN. I am sure he would be glad to come back. Let me
ask the Governor when it would suit him to come back again.
Mr. PATMAN. We have that oil hearing tomorrow, Mr. Chairman.
The CHAIRMAN. I have not set that for tomorrow, because I anticipated that we might notfinishwith this this morning.
Mr. ECCLES. I had another conference committee meeting set for
11 o'clock, when we meet informally to discuss capital issues, and that
has been. set in the main by the Secretary of the Treasury. If I could
come up Friday, if it would be just as convenient for the committee,
I woul d appreciate it.
The CHAIRMAN. We will let you come back Friday if it suits you



Mr. ECCLES. If tomorrow suits the committee better I will just have
to pass up that conference tomorrow, but I wTould like to attend that
conference if Friday suits the committee just as well.
The CHAIRMAN. YOU may suit yourself and, if Friday suits you
better, we will hear you Friday.
Mr. KUNKEL. Governor Eccles, you referred to this court case, and
I wonder if you could secure and place the opinion in the record, and
also any comments that the attorneys care to make on it, and I should
also like to ask the chairman and the members of the committee if
that could go in at the start where you make reference to it in connection with this bill ?
The CHAIRMAN. Yes, We will meet tomorrow morning on the other
bill at 10:30, and will expect you to continue Friday at 10:30.
Mr. DEWEY. I cannot be here Friday, Mr. Chairman. I would like
to ask if the Governor will bear with me for a while, as I would like
to ask him a few questions now regarding reserves.
The CHAIRMAN. We would be glad to have you do so, Mr. Dewey.
Mr. DEWEY. I want to talk a little bit regarding discounting 16-day
loans and reserve requirements. If a bank had a large amount of
Government securities on hand and desired to increase its reserve it
could make a 16-day loan; could it not?
Mr. ECCLES. It depends on what it is borrowing on. There are
various types of loans.
Mr. DEWEY. Can you give us the types of loans?
Mr. ECCLES. I could not do that offhand. There has been practically no borrowing from the Federal Reserve System since I have
been connected with it.
Mr. DEWEY. If we are going into any such purchase of securities
by the banks as that mentioned by Mr. Patman there will be plenty
of borrowing from the Federal Reserve banks by banks to take
care of their requirements to avoid the sale of Government securities.
Mr. ECCLES. Mr. Patman was talking about the Reserve system
providing banks with sufficient reserves so that the barks could do
that without borrowing from the Reserve System, without selling
existing securities, so that it would not be a case of boi rowing from
the banks at all.
Mr. DEWEY. Mr. Patman's idea was for the system to buy directly
from the Treasury?
Mr. ECCLES. Mr. Patman's idea was to reduce the reserve requirements and the statutory requirement which would enable them with
the present excess reserves, if the Federal Reserve should reduce
the reserve requirements of all member banks by the amount that
they have already authority to reduce them, that would give the
banks more than $5,000,000,000 additional excess reserves, and if
every bank used all the excess reserves that it had, that it then could
buy approximately $50,000,000,000 worth of Governments.
Mr. DEWEY. Who, the banks?
Mr. ECCLES. Yes, the banks.
Mr. DEWEY. That is what I am talking about.
Mr. ECCLES. But they would not have to borrow any money from
the Federal Reserve to do that.
Mr. DEWEY. N O W , then, coming to the point where they have no
excess reserves, or their deposit liability is increased in one way or



the other, and that is the point I am coming to, and Mr. Patman
came to it. He wanted them to buy more bonds, and I think he said
this war would cost $200,000,000,000 or $800,000,000,000, and the
banks would have to, according to him, purchase them which would
create additional deposits in the banks and require additional reserves. In connection with that there is a point where they would
have to start either rediscounting with the Federal Reserve System,
or making loans from the Federal Reserve secured by these bonds ?
Mr. ECCLES. NO ; the Federal Reserve would buy in the open market. If the Federal Reserve then bought a billion dollars of securities in the open market that would be. new Treasury issues. The
banks would still hold them, and the Federal Reserve would put into
the banks another billion of excess reserves. If they used that billion they could buy five billion more of Governments, and you could
keep the price up. For every billion of the Federal Reserve banks
put in the open market operations, the private banks could buy
five billion.
Mr. DEWEY. That comes pretty close to some other ideas I have
Mr. ECCLES. I mean they could buy ten billion. I mean the
Federal Reserve when it carries out an open market operation, that
is, if it purchases Government securities in the open market it puts
new money into the banks which creates idle deposits.
Mr. DEWEY. There are no excess, reserves to use for this purpose.
Mr. ECCLES. Whenever the Federal Reserve System buys Government securities in the open market or buys them direct from the
.Treasury, either one, that is what it does
Mr. DEWEY. What are you going to use to buy them with?
Mr. ECCLES, What is who going to use?
Mr. DEWEY. The Federal Reserve bank to make these purchases.
Mr. ECCLES. What do they always use?
Mr. DEWEY. . You are going to create credit?
Mr. ECCLES. That is all we have ever done. That is the way the
Federal Reserve System operates. The Federal Reserve System
creates money. It is a bank of issue.
Mr. DEWEY. That would tend to run into wide open inflation, currency expansion. It is currency inflation running hand in hand with
credit inflation, is not that right? That sort of procedure would be
diametrically opposed to everything we have been trying to do with
price control.
Mr. ECCLES. We all recognize, Mr. Dewey, that it is desirable to
finance the war, so far as it is possible to do so by taxes, that is most
desirable, and, secondly, by the sale of Government securities to other
than banks, primarily to the people who would otherwise spend their
money on consumers' goods, and that the creation of new money or
the creation of additional money by the sale of Government securities
to the banks is inflationary in one sense, that is, it is inflationary in
the sense that it creates an increased amount of the means of payment without increasing the supply of goods available for purchase,
and up to a point certainly everything should be done to avoid
the expansion of bank credit. We have already got now over
$50,000,000,000 of demand deposits and currency, and Tfeel that that
amount of deposits and currency could support a substantial amount



of Governmentfinancingwithout increasing the total amount of bank
deposits. You can only accomplish that by getting the owners of
those funds to invest them. The banks do not loan those funds.
The people and the corporations that own that money are the only
ones that can invest that money, and if they would invest that, if they
would buy Government bonds, and the Government then spends that
money, it goes right back again and the recipients of the money then
spend it again, thereby increasing the velocity and the turn-over.
I would like to see the velocity of existing deposits increased in both
velocity and use, and at the same time to avoid as much as possible
the expansion of the volume.
I am not saying that we can avoid some expansion of the volume
of deposits. I am not saying that some expansion of the volume of
deposits possibly would be bad as long as the national income is
growing. You naturally get a larger volume of deposits concurrent
with a national income of $120,000,000,000—you get more than you
did when the national income was $60,000,000,000 or $70,000,000,000,
so that as far as the growth of deposits is concerned, certainly within
the last year or two, I doubt if it has been any more rapid than the
growth in the national income.
Now, we have reached the point in the growth of the national income,
or we are getting there where further growth of the national income
is not going to bring about further development in production, because
you cannot increase the supply of goods much beyond what you are
doing now, but up to this time the growth in national income has been
a growth in total production. From now on the growth in national
income as expressed in dollars would be brought about through a
price increase and that, of course, would be undesirable.
Mr. DEWEY. Again, in line with this policy of selling the bonds to
the public, you naturally are dealing very closely with the Treasury
for such distribution. Are there any plans being set up other than
the sale of these Victory—I forget what you call them?
Mr. ECCLES. YOU mean the E . F. G.'s?
Mr. DEWEY. Yes; the E. F. G.'s. Is there any effort to sell longer
term securities to the public ?
Mr. ECCLES. Those are pretty long term, the E . F. G.'s They are
12-year securities subject to an interest penalty if converted earlier.
They bear 2% percent if carried to maturity, but if cashed prior to
maturity the return that the holder gets is in relationship to the
period in which he held the securities.
Mr. DEWEY. YOU have some theory on some so-called tap issues of
some securities.
Mr. ECCLES. Do you mean the nonnegotiable tap issues?
Mr. DEWEY. Would you say a "vVord on that, please ?
Mr. ECCLES. I would prefer not to discuss that, because it does not
seem to me it is pertinent to this legislation. It seems to me it is
somewhat aside from this legislation, but it is related to discussions
had between the Eeserve people and the Treasury, and I feel that
unless a complete, general, broad, carefully prepared statement covering this whole question of finance is going to be given out publicly
that for me to get into somewhat of a discussion of the thing may
well be misunderstood. It is a matter that a great deal of thought,
a great deal of time, and a great deal of consideration has been



iven to by the Open Market Committee and by the Board, by the
reasury people and the Reserve people have agreed on definite ideas
on which we are all in full and complete agreement as to a complete
program on this.
Mr. DEWEY. Would you go as far as saying, or I think you have
stated, that you believe that this war can be fought on a 2^-percent
Mr. ECCLES. I have felt that the long market could be stabilized to
2y2 percent. I have said that quite a number of times, commencing
back as long as over a year ago. One of the reasons was that the
Treasury had a lot of securities out that were bearing 2% percent.
Those 2V2-percent securities were selling at more than par before the
war started, and even before there was any large amount of funds
being spent for defense purposes. It meant to talk about a different
rate than 2y2 percent, it meant that the securities that were then
out would all decline, and it meant that the holders of those securities
would have some losses, may well have some losses, and it meant that
there would be uncertainty as to how high the rate was going, if 2y2
percent was not the ceiling, then what would be, and nothing could
be more upsetting to the stability of a Government market than to
be financing at increasing rates, meaning that every time securities
were purchased you could be sure that at a later date you could purchase them on a more favorable basis, and then on those that you
had already purchased you would have a loss on them. That is not
the way to finance a war. We would have been better off—I think
it would have been possibly easier—to finance the war, and I do
not mean by that that it is difficult now, but if the rates had been higher
and the securities lower so that as the financing went on the rates
would gradually decline, and the securities would advance, that would
be a most favorable inducement to the investor, feeling that what he
was getting was a little better, and that the rate might be getting a
little less. Of course, the rate is so low now on government securities
that it would desirable to expect public corporations and those outside
of the banks to invest funds in government securities at declining rates,
so that we have felt, and it is has been pretty generally accepted by
the financial community that the market for securities, which means
the interest-rate structure, should be stabilized within pretty narrow
limits, that we should maintain a pattern from the shortest rate to
the longest rate, and not have that sort of gyration where you have
got to raise billions of dollars every month. One thing more you
must have is stability in the government-security market, and one
of the proposals of this bill is to enable the Federal Reserve Board,
that is, the Open Market Committee of the Board, to help to maintain stability in the security market.
Mr. WILLIAMS. I would like to ask you one question, Governor,
about section 2 of the bill which amends the existing law. Under the
present law if you wanted to change the rates or the reserve requirements on deposits in any one of the three classes of banks would you
have to change it as to all of them in the same issue ?
Mr. ECCLES. We would in two classes of them, but not in all three.
Mr. WILLIAMS. What two classes go together?
Mr. ECCLES. The central reserve cities, that is, New York and
Chicago, and the reserve cities, in that we cannot change the central
reserve cities without changing the reserve cities in exactly the same




ratio. If we increase the reserve requirements in one we have to increase them in the other, or if we decrease the reserve requirements
in one we have to decrease them in the other, but we could change
the reserve requirements in those two classes of cities without changing
the country bank classification.
Mr. WILLIAMS. But "they would have to be changed in the same
ratio ?
Mr. ECCLES. Exactly.
Mr. WILLIAMS. This amendment is designed to permit a change
in any of the three in the proportion you want to change them?
Mr. ECCLES. That is right, within the limitations of the statute.
Mr. WILLIAMS. Yes; that is right.
The CHAIRMAN. Thank you, Governor Eccles. The committee will
meet tomorrow morning at 10:30.
(Thereupon, at 12:40 p. m., the committee adjourned until tomorrow, Thursday, June 18,1942, at 10 a. m.)







The committee met at 10:30 a. m., Hon. Henry B. Steagall (chairman) presiding.
The CHAIRMAN. Governor Eccles, we will be glad to have you resume your testimony on the bill, and Mr. Patman would like to
interrogate you further at this time.








Mr. PATMAN. Mr. Eccles, the day before yesterday I had gotten
down to the point where, if we needed more money, one way to give
the banks extra reserves to purchase Government bonds would be
for the Open Market Committee to buy Government bonds in the
open market, and I suggested if you bought for the Federal Reserve
Bank one billion dollars' worth of bonds, that would automatically
create a billion dollars of reserves in the banks and, after the reserves
had been reduced 50 percent, the maximum, that would enable the
banks to purchase $50,000,000,000 worth of bonds. Now, let us assume
that has happened
Mr. ECCLES. Ten million dollars' worth, by the purchase of a billion dollars' worth of bonds in the market.
Mr. PATMAN. I got the two mixed up. The purchase of a billion
dollars' worth of bonds in the market, after the excess reserves had
been reduced, will enable the banks to buy 10 billion ?
Mr. ECCLES. That is right.
Mr. PATMAN. Where the 5 0 billion came in was if you would automatically reduce the reserves now, which you have a right to do,
that would give them $5,000,000,000 of excess reserves which they
could use to purchase $50,000,000,000 worth of bonds.
Mr. ECCLES. That is right.
Mr. PATMAN. NOW let us assume that we not increase the reserves,
in the banks, and you go in the open market and buy a billion dollars'
worth of bonds: you buy them with Federal Reserve money, do you
Mr. ECCLES. Well, we buy them with Federal Reserve credit.
Mr. PATMAN. I know; but suppose the banks call for the money,
you issue Federal Reserve notes, do you not?
Mr. ECCLES. What we do, if we purchase Government securities
in the market, is we credit the account of the bank that turns them
in. They usually come through the banks.
Mr. PATMAN. That is right.




Mr. ECCLES. Even though they may be individuals who are selling
the securities; and we debit the bond purchase account, showing that
the Federal Reserve has a liability to the banks to the extent of $1,000,000,000, which represents their reserves on the one hand, and that
they own $1,000,000,000 of bonds in what we call the portfolio, on
the other hand.
Mr. PATMAN. I know in practice that is exactly the way it is done,
Mr. Eccles; but suppose the banks want the billion dollars in currency,
you would pay it in the Federal Reserve notes, would you not?
Mr. ECCLES. That is right.
Mr. PATMAN. Those Federal Reserve notes, as we have often discussed, are obligations of the United States Government?
Mr. ECCLES. That is right.
Mr. PATMAN. Then you use those Government obligations to buy
interest-bearing Government obligations and you place them with the
Federal Reserve banks, 12 of them?
Mr. ECCLES. That is right.
Mr. PATMAN. And they would continue to receive interest on those
Government obligations as long as they were outstanding?
Mr. ECCLES. That is right.
Mr. PATMAN. SO the result is the Government's credit has been
used and the Government has gotten nothing for the use of that
credit; the Federal Reserve banks are using it free, are they not?
Mr. ECCLES. Well, the Government in effect, for all practical purposes, owns the Federal Reserve banks.
Mr. PATMAN. For all practical purposes!
Mr. ECCLES. Yes; because the Federal Reserve banks are not operating for profit. The Government can take from the Federal Reserve
banks, at any time they choose to do so—and they have done it in
the past—any earnings that the Federal Reserve may make. They
took $140,000,000 from the Federal Reserve banks and used it to set
up the capital for the Federal Deposit Insurance Corporation. If
at any time the Federal Reserve's income, as a result of its purchase
of Government securities, should enable it to accumulate large surpluses that the Congress ielt it wanted to use, they could appropriate
those surpluses for whatever purpose they wanted to.
Mr. PATMAN. I understand that, Mr. Eccles, and that it has been
done in the past. The law used to provide that that surplus would
overflow into the Treasury. Of course, that has been changed. But
the point I am endeavoring to reach is this: To what point are you
willing for the banks to go in buying Government bonds? All of
the banks now have a total capitalization of about three and onehalf billion of capital stock and three and one-half billion of surplus,
and one billion of undivided profits. That is about $8,000,000,000
of capital structure. How far are you willing for these banks to go
in buying Government securities? Are you willing for them to buy
$100,000,000,000 worth, or $150,000,000,000 worth?
Mr. ECCLES. YOU are speaking of private banks?
Mr. PATMAN. Yes; I am speaking of private banks.
Mr. ECCLES. I would like to see the Government's deficit financed
to the greatest possible extent out of the sale of its securities to the
public outside of the banks.
Mr. PATMAN. I agree with you on that.



Mr. ECCLES. I would not feel that it would he necessary to sell to
the banks anything like $100,000,000,000 of. securities. I would feel,
if anything like that amount of securities was sold to the banks, that
we would have failed to distribute the securities to the public as they
could and should be distributed, and we would have created an inflationary condition in the banking system.
Mr. PATMAN. That is not an answer, Mr. Eccles, to my question. T
asked you the question how far you would be willing for the banks to
go. I agree with you that we should sell bonds to the public, to those
who have existing accounts and have transferable accounts, rather than
the creation of new deposits. I thoroughly agree with you on that.
But suppose we are unable to sell a sufficient amount of bonds—and
we are selling only about a billion dollars' worth a month and spending two billion—and suppose we have to keep on selling securities to
the banks, how far are you willing for them to go with their present
capital structure?
Mr. ECCLES. I would not want to fix some specific amount, some
ratio, at all. I recognize'to the extent that the Congress is unwilling
to levy an adequate tax system and to the extent that the Government
does not devise securities that the public is willing to buy, then the
difference jnust be made up through the selling of securities to the
banking system, or through pursuing the course which you have suggested, which is equivalent to the issuance of currency.
Mr. PATMAN. Well, is not the selling of bonds to a bank, that creates
a deposit by a bookkeeping transaction, equivalent to the issuance
of currency?
Mr. ECCLES. NO ; there is a very great difference.
Mr. PATMAN. The credit in the bank has the equivalent of currency,
has it not?
Mr. ECCLES. There is a very substantial difference. When you issue
currency, when you create excess reserves, you drive down the rates.
As you drive down the rates, you reduce the interest of the public
in the purchase of the securities, and you increase the pressure for
the banks to purchase and, of course, decrease the pressure for the
public to purchase.
Mr. PATMAN. There is no pressure on the banks to purchase now,
is there ?
Mr. ECCLES. There would be pressure on them as the rates went
down, because there would naturally be an effort to increase the volume—in other words, to offset the reduction in rates.
Mr. PATMAN. In other words, if instead of buying $1,000,000,000
worth of bonds from private banks, the Federal Eeserve banks would
create that credit themselves on the books, you say that would be more
M r . ECCLES. Y e s .
Mr. PATMAN. More inflationary?
M r . ECCLES. Y e s .
Mr. PATMAN. Let us suppose you

need $1,000,000,000 this morning,
the Treasury does, and the Treasury gets that on a certificate of indebtedness from the Federal Eeserve banks, without interest, and in that
way creates $1,000,000,000.
Mr. ECCLES. That is right.
Mr. PATMAN. What is the difference in the actual creation of money
or increasing the deposits in the amount needed, and in selling $1,000,



000,000 worth of bonds to private banks and increasing their deposits
by exactly $1,000,000,000 ? .
Mr. ECCLES. There would be a very substantial difference.
Mr. PATMAN. What is the difference?
Mr. ECCLES. I will explain it to you.
Pursuing your suggested method of giving to the Federal Reserve
banks a certificate for $1,000,000,000 and the Federal Reserve banks
giving the Treasury credit for $1,000,000,000, that would be the
equivalent to the Treasury issuing currency in the first instance.
There would be no difference whatever in putting non-interest-bearlng certificates into banks as you suggest, and merely printing a
billion dollars of currency and depositing the currency with the
Reserve banks to be disbursed by the Reserve banks as the currency
needs of the public require the use of currency. That would be
exactly the same, because when that credit of the Treasury in the
Reserve banks of $1,000,000,000 is spent, that billion dollars goes out
into circulation as the Treasury spends it and becomes a deposit in
the banking system somewhere on the one side, and becomes an excess
reserve on the other side. So that the banks are then in a position,
with that billion dollars of reserves that has been put with them, to
expand a multiple amount of credit and that billion dollars puts
them immediately under pressure to loan money, or to buy securities.
It creates a condition or climate that is favorable for the easiest kind
of credit expansion.
The supply of an excess of reserve funds in the hands of the
banking system would tend to drive down bill rates and other rates
to the vanishing point and, as the rates drop, the banks attempt to
offset their loss of income, in. order to keep going, by buying a
greater volume. That, of course, would tend to divert the securities
into the banks and away from the public—the very thing we do not
want to do. When the banks buy Government securities directly,
they have, in lieu of the excess reserves, an asset in the form of Government securities and it actually diminishes the excess reserves
of the banking system, because, as the banks buy Government securities, they increase the total deposits by that amount; and as the
deposits increase, the reserve requirements increase. In other words,
if the banks buy one billion of Government bonds, they create a
billion of deposits and the reserve requirements go up 200 million.
So that you actually reduce any excess reserves by the purchase
by the.banks of Government bonds; whereas, with your proposal,
vou increase the excess reserves. That is a fundamental difference.
Mr. PATMAN. But, Mr. Eccles, suppose you had the power to control the excess reserves—and you have the right to increase them;
you could make it 25 percent, 50 percent, or 100 percent—then that
would be a complete answer to what you said, would it not?
Mr. ECCLES. N O ; it does not answer it at all, for this reason
Mr. PATMAN. You could wipe out the excess reserves you did not
Mr. ECCLES. That is right; but you would have to pay the banks
for the service they rendered fully as much as the interest they get
on Government bonds.
Mr. PATMAN. The banks are getting paid now; the people are
paying now for the carrying of their accounts, and why should the
neoDle and the Government both pay?



Mr. ECCLES. Look at the earnings of the banks! Bank stocks are
selling for 50 percent of their liquidating value today. Look at the
whole banking picture: Can you say that the banks are excessive
earners? Is there any line of business that is rendering a more useful service than the banking system, and getting less return?
Mr. PATMAN. I do not know about the returns
Mr. ECCLES. I wrote you a letter here in March on this very subject
that covered this whole field, and it seems to me this is more or less
going around that same circle.
Mr. PATMAN. One thing is obvious, that the bank stockholders all
have in all invested $8,000,000,000; that they have been permitted to
put three times that much in Government securities on which they
receive interest now. I do not object to that; I want to give the
banks a fair return. I think the banks are a very necessary and
highly desirable institution, and are rendering a wonderful service,
but as long as the Government subsidizes the banks like it does—
and three times the capital structure should be enough—I think if the
Government can finance the war debt by not being compelled to pay
interest on the remainder; it would be perfectly fair to the taxpayers
that it be done.
Mr. ECCLES. Let me/answer that by asking a question: Why is
the interest a burden on the taxpayers, when the taxpayers get the
Mr. PATMAN. What do you mean by "the taxpayers get the interest?" Do you mean to say that the liolders of Government bonds
are the principal taxpayers?
Mr, ECCLES. Pretty largely.
Mr. PATMAN. Of course, if they were all the same, your suggestion
would be correct, but I do not tlnnk they are all the same.
Mr. ECCLES. Yes;

have some very burdensome excise taxes.
but looking at the economy as a whole, they are
the same. You might be interested to know that the insurance companies own a very large amount of Government bonds and of course,
as I am sure you must know, the policyholders in the insurance
companies number more than 60 million.
Mr. PATMAN. I am not objecting to the insurance companies buying Government bonds. They are exchanging deposits; they are
not creating the money to buy them, But I have often heard you
say that the banks create money and I notice in all of this advertising in the bond-sales campaign and the talks and speeches encouraging people to buy bonds and stamps, they make this statement,
that "if the people do not buy bonds and stamps it will cause inflation, because the commercial banks will be required to buy these
bonds and, if the commercial banks buy the bonds, they create the
money, which automatically increases the demand deposits and causes
inflation." Now, is that a correct statement, or not?
Mr. ECCLES. Well, commercial banks as a whole create money; but
the individual bank in purchasing Government bonds or making
the loan has the reserves with which to do it; because, when they set
up the credit for. a loan or for the Government bond which they
purchase, they of course do not know how soon that credit may be
drawn out; therefore, to them, they are investing funds that they
have on hand.



Mr. PATMAN. But they remain in the banking system as a whole ?
Mr. ECCLES. They remain in the banking system as a whole, as an
increase in deposits.
Now I want to get back to this question of the insurance companies and others purchasing Government securities, that is, others
outside of the banks.
Mr. PATMAN. There is no difference between us on that.
Mr. ECCLES. A S I understand it, your proposal is that all institutions and individuals, with the exception of commercial banks, be
permitted to purchase interest-bearing Government notes; that your
proposal is merely to finance that portion of the Government's requirements through the Federal Reserve System, without interest,
that it is impossible to finance by the sale of interest-bearing
Mr. PATMAN. TO the holders of existing accounts.
M r . ECCLES. Y e s .

Mr. PATMAN. That is right.
Mr. ECCLES. And you want to make up merely the differential.
Mr. PATMAN. That is right.
Mr. ECCLES. HOW do you prevent then the banks from going in the
market and bidding for open-market securities—securities that are
in the market?
Mr. PATMAN. Well, of course, I would hold them down to the
amount of bonds that they had as of a certain definite period and
let them exchange all they wanted to. They are getting about 400
or 500 million a year now in interest on bonds which they hold, which
is enough to pay their employes expenses.
Mr. ECCLES. What you would do is to freeze the commercial banks—
Mr. PATMAN. Put a ceiling on the amount.
Mr. ECCLES. YOU would freeze the commercial banks' holdings of
commercial securities and would not permit them to purchase any
more Government securities.
Mr. PATMAN. In excess of a certain amount.
M r . ECCLES. Y e s .

Mr. PATMAN. They could sell and buy, but they could not go beyond
that ceiling.
Mr. ECCLES. Of course your proposal is somewhat of a modification
of a former proposal that was designed, as I recall, to finance the
entire Government deficit through the issuance of non-interest-bearing certificates through the Federal Reserve System.
Mr. PATMAN. YOU are referring to bill H . R . 6391, 1 think, and it
says specifically in there, Mr. Eccles, that they shall be allowed to
hold that amount of bonds that they held at the end of 1941, December 31. I think you will find that specific provision in there.
Mr. ECCLES. The fundamental objection to your proposal, first, is
the inflationary effect through the increase of the excess reserves
on the part of the banking system. If that was met by increasing the
reserve requirements by the amount of the excess reserves that were
created in the banking system through purchase by the Federal Reserve
banks of certificates, theq, of course, the inflationary objection would
be partly overcome; it would not be as inflationary. You get, then, to
the pomt of what is the banking system worth to the community;
should it be required to render an increasing amount of service without
an increasing return?



As the Government increases its expenditures of funds, through the
method you have indicated, you would greatly increase the deposits
of the banking structure. That in itself, of course, would be inflationary, because there would be an increasing amount of deposits
created as you propose. You would create deposits in exactly the
same amount, but in a different maimer, and you would get the
inflationary effect through a great increase in the deposits—not
through the banks loaning the money, but through the Federal Eeserve
actually creating the money instead of the individual banks creating
the money. You would create the money, of course, in exactly the
same amount that we, of course, increase the deposits of the banks,
and increase the work of the banks in handling the increased volume
of deposits.
The banks are up against this situation today: their costs of operation, labor costs, particularly, are increasing. The volume of their
work is greatly increasing because of the volume of business activity
in general and the volume of check transactions and particularly
the work they are doing for the Government in connection with War
Savings bonds and other Government securities, upon which they get
no return. And along with that, through the curtailment of installment credit, they are rapidly losing the most remunerative loans.
Priorities has curtailed the construction of houses and, therefore,
the mortgage loaning business of the F. H. A. which proved to be
a very desirable type of business for the banks—they were by far
the largest holders of F. H. A. mortgages—those loans will be on
the dedine and, as a matter of fact, loans in the aggregate are
now on the decline and I look to see, over the next year or so, the
volume of bank loans and investments, outside of Governments,
diminishing. And unless the holdings of Governments increase to
some extent, I do not know what thq banks are going to do from
an earning standpoint, unless they should put much heavier service
charges on the public. The rank and file of the public who use
the convenience and the services of the banks for keeping their
books—because that is about the only books that the average person
has—would be charged and would have to be charged more if the
bank was unable to increase its loans and investments, its source
of revenue, to offset the increased expense due to the increased
volume of activity.
So that you get down to the perfectly practical problem here of
having to pay in one way or another for the service which the
banks render, and they certainly are not overpaid.
Mr. PATMAN. And you think it is easier to pay through interest on
Government bonds ?
Mr. ECCLES. I think that the whole principle of paying interest
on debt is fundamental in the democratic capitalistic system.
Mr. PATMAN. Have you ever given consideration to saving the
interest on the Government war debt?
Mr. ECCLES. To saving interest?
Mr. PATMAN. T O not paying interest on the Government war
debt? Have you ever tried to arrive at some plan that would be
safe and logical to save interest on the war debt?
Mr. ECCLES. It does not save any, because the public gets the
interest on the war debt.
Mr. PATMAN. But they are not the same people.




Mr. ECCLES. I started to point out to you how nearly the same
they were. We seem to think that people are all debtors on the one
side, and all creditors 011 the other. A great many people, in fact
possibly the bulk of the people, are both debtors and creditors.
Mr. PATMAN. Well, we would not have any money unless we >vere
in debt, would we?
Mr. ECCLES. That is correct. But the savings of the public in the
mutual, savings banks, the savings of the public in the savings deposits of the commercial banks, and those savings in those two types
of institutions, which will run between 20 and 25 billion dollars, are
invested, a very substantial part, in Government bonds and they
represent the savings of tens of millions of our people. I think the
holdings of Government securities by the insurance companies, as I
recall, are around 8 billion or more and they represent something over 60 million policyholders. Government trust funds from
its retirement systems of various kinds, Social Security trust funds—
which, after all, belong to all the people—are invested in Government securities and there is over $8,000,000,000 of Government securities held there.
I do not recall what the commercial banks own; something like 20
billion of Government securities.
Mr. PATMAN. It is 24 billion, I think, now.
Mr. ECCLES. But their securities are the ones with the lower interest rate, because they own the shorter securities, the notes and the
bills, which of course are low-interest-bearing securities.
Then there are the war savings bonds and stamps which now run
five, six, or seven billion dollars in that field. And we all know that
they are generally owned by the public.
So that when we think of interest on Government debt going to
a comparatively few rich people, it seems to me we fool ourselves,
because the interest on the Government debt
Mr. PATMAN. But you are getting away from what I am talking
about, Mr. Eccles. You see, I am in accord with you on the selling
of bonds and stamps to people who have existing accounts, including
individuals, corporations, life insurance companies, or any institution
that has an existing account, because that is necessary to keep down
inflation. But when this war is over, you know that these people
who now hold bonds and stamps are going to be anxious to buy
automobiles, refrigerators, and something they need in the form
of essential civilian products and, in doing that, they are going to
want their monev.
Mr. ECCLES. Well, some of them will; some will want some of it.
We hope they do.
Mr. PATMAN. Suppose we have $ 1 0 , 0 0 0 , 0 0 0 , 0 0 0 worth of holdings
of these bonds wanting their money after the war is over, will you
have the banks just to create that money like you are talking about
and thp Government pay interest on it, or will you finance it in some
wav w^hereby we save that interest rate ?
Mr. ECCLES. YOU, of course, are assuming that everybody wants to
convert into cash.
Mr. PATMAN. NO; you are absolutely mistaken. I do not say that;
I say a lot of people will, and I say assume, for the purpose of discussion, that $10,000,000,000 worth of them want their money, where



are 3 0 1 going to get that money—have the banks create it and have
the people forever pay interest on it?
Mr. ECCLES. NO. AS long as we maintain the national income at
a high level and maintain full employment, there will be a terrific
lot of savings, and people who want to sell their securities, or to
convert them, will likely find a market for them in people who are
still saving and who want to buy them. The insurance companies
Avill still have a very large income currently to invest; the mutual
savings will likely have a large income currently to invest.
So that I am not at all sure when the war is over, and I hope not,
that the Government will have to be issuing a lot of further securities
expanding the debt as they are at the present time; that the problem
of employment would be met by the backlog of purchasing power
that will be created in the field of housing and consumers' durable
goods, and that the corporations and many individuals and institutions will still have funds to invest and likely will be able to provide
a market for those who want to sell.
Mr. PATMAN. What do you expect the interest rate to be after
the war?
Mr. ECCLES. I think the interest rate is largely a controlled factor;
that is, the interest rate is pretty largely what the Federal Reserve
and the Government make it.
Mr. PATMAN. Well, under existing policies supported by law, the
Federal Reserve Board can really fix the interest rate, can it not?
Mr. ECCLES. NO ; we cannot fix it
Mr. PATMAN. What I mean is you can control it.
Mr. ECCLES. The Federal Reserve can influence it within rather
reasonable limits.
Miss SUMNER. Governor Eccles, I hope you include in your remarks
relative to the need on the part of some citizens for Government bonds
the fact that there are State laws which make it necessary and mandatory for trust estates and estates held by administrators and executors to invest in Government bonds and, in many cases, Government bonds are the only legal investment for those funds.
Mr. KUNKEL. I want to ask Mr. Eccles if he will insert the letter
he wrote you (Mr. Patman) in the testimony.
Mr. PATMAN. Let him put it in at the end of his testimony.
M r . KUNKEL. Y e s .

Mr. PATMAN. Also the letter I wrote him and his reply to it.
(The letters requested are as follows:)
[Statement for the press for release in morning newspapers of Tuesday, March 25. 1041]

Washington, March 21, 1941.




House of Representatives,
Wash ington, D. C.
DEAR Mr. PATMAN: From time to time my attention has been called to vour
frequent public utterances on the floor of the House and over the radio,
culminating in your recent radio address as printed in the Congressional
Record of March 17, 1941. You have long charged that the Federal Reserve
Sys;em is under the domination of the private bankers of the country and more
recently you have proposed that the Government finance its entire expenditures
through the issue of new money and without the payment of interest. Since
these questions are of increasing importance in these limes, I feel that your
statements should not remain unanswered lest the public be misled into supposing that the issue by the Government of interest-bearing bonds is unneces-



sary, extravagant, and wasteful, as you contend. Your propositions concern
matters in which I have an especial interest and for the purposes of the
record I am making this personal reply. While I have no reason to believe
that the Board would differ with the substance of this letter, it has not been
submitted to the other members and therefore does not necessarily represent
their views.
Your plan as described in the Congressional Record is for the Government to
finance its expenditures by issuing new money and avoiding the payment of
interest. In this fashion you would have the Government meet not only its
normal expenditures in excess of receipts but also the enormous defense
expenditure now under way and in contemplation and ultimately the entire
outstanding Federal debt.
The sovereign power of the Congress to authorize such a program is beyond
question. What has to be determined, however, is whether it would be for the
good of the country to embark on such a course. To my mind it would be
disastrous. Plausible as your proposals may be made to appear, there is no
escape from the truth that someone must pay for everything. If the Government could save the billion or more a year without causing any cor responding
or greater losses to the country, no one could reasonably be opposed to your
proposal. I am convinced, however, that the creation of the huge amount of
new money contemplated by your plan could only lead to incalculable losses
for the country as a whole.
At the outset I think it necessary to dispose of some of your misconceptions
on the subject of the banking system. First of all, the interest received by the
commercial banks of the country on their Government bond holdings is not an
unconscionable tribute, as one might imply from your discussion. The banking
system of the country is an indispensable part of our capitalistic economy. Practically all the people make use of some banking service, either directly or indirectly.
How would these people be affected by your proposal? If the revenue from
Government bond holdings should be taken from the banks, they would seek some
other source of revenue to replace it or reduce their disbursements. Obviously
they could not raise their lending rates, since the huge amount of new money
involved in your plan would drive interest rates even below their present low
levels. The banks would be obliged to reduce still further the rate of interest
paid on their savings accounts although the savers of the country are now
receiving an excessively low rate of return. Beyond that, the banks would have to
increase materially their service charges of various kinds, principally for checking
accounts. These efforts to replace the revenue now derived from interest on
Government securities would impose a new burden upon the people of the country
substantially in the same amount as the interest now received by the banks on
their Government bond holdings. There is this important difference, however,
that the new burden upon savers and other individuals using banking services
would fall most heavily upon the more numerous owners of small accounts
whereas the burden of taxes collected by the Federal Government to pay interest
on its bonds falls for the most part upon those with ability to pay.
Nor can it be truthfully said that banks make inordinate profits, and that they
could operate on a sound basis with less income. During the ID-year period 193039 the average rate of net earnings on invested capital by member banks was
2 percent, which is less than a reasonable rate of return. It should be noted that
these earnings relate only to banks which survived the great depression. A
complete picture would show that during the period 1929-33 inclusive, 9,755
banks failed and their stockholders in nearly every instance lost their entire
investment and in many cases paid assesments up to the par value of their
stock. During the 5-year period 1935-39 the average rate of return was 6.1
percent, but this better showing was due in la,rge part to the fact that during
this period banks were realizing recoveries on losses charged off during the
depression and profits on the sale of securities in a steadily rising bond market
Obviously, these are nonrecurring items, without which the earnings for this
recent 5-year period would have been substantially lower.
That the banking business is not considered lucrative by the investing public
is attested by the fact that during 1940 the average price of common stocks of
19 New York banks was about 55 percent of the corresponding prices in 1926,
whereas public utilities stock prices averaged around 80 percent and industrials
around 100 percent of the corresponding prices in 1926.
The effect of your proposals upon mutual savings banks, life-insurance companies, educational endowments and other ihstitutional investors who hold Government bonds would be even worse because these institutions would have great

difficulty in making up the loss of revenue. They would be compelled to reduce
drastically their disbursements. Savings banks would have to reduce still further the rate of interest paid on their accounts, life-insurance companies would
have to curtail dividends on outstanding policies and charge higher premiums
for future policies, and educational endowments would be forced to decrease their
support of schools and colleges.
One of your favorite complaints is that the Federal Reserve banks are owned
by private bankers and that the Board of Governors in Washington as well as
the Federal Reserve banks are operated in the interest of private bankers.
These charges will not stand up under examination. The Board of Governors,
the members of which are appointed by the President and confirmed by the
Senate, is a public body. As to the Federal Reserve banks, you rest your case
upon the slender point that the stock of the Federal Reserve banks is owned by
the member banks. Congress specifically provided for this, as well as for the
rate of dividend and Congress can change the nature of the stock and the rate
of return at will. This so-called stock ownership, however, is more in the nature
of an enforced subscription to the capital of the Federal Reserve banks than
an ownership in the usual sense. The stock cannot be sold, transferred or
hypothecated, nor can it be voted in accordance with the par value of the shares
held. Thus the smallest member bank has an equal vote with the largest.
Member banks have no right to participate in earnings above the statutory dividend, and upon liquidation any funds remaining after retirement of the stock
revert to the Government. You greatly exaggerate the significance of! this socalled stock ownership. At the current dividend rate of 6 percent, it involves
the payment annually of approximately $8,000,000 to more than 6,000 member
banks, and could be done away with altogether without important effects except
to put an end to an illusion created by you and| others in the minds of some
people. At the same time, it is my view that the Federal Reserve System should
be unequivocally a public instrumentality but the ownership of the stock of the
Federal Reserve banks is not the determining factor.
Coming to the principal issues involved in your proposal to issue a constant
stream of new money to finance the Government, th3 reasons why this would be
contrary to the public interest may be summarized as follows: (1) Borrowing
by the Government at interest, particularly the borrowing of money actually
saved by consumers, rather than issuance of currency, is a necessary safeguard
against inflation, particularly at this time, and (2) borrowing by the Government
at interest is an essential part of the capitalist economy in which we live.
There are times when the money supply should be increased and times when
it should not be. It is one of the tasks of the Federal Reserve System to see that
the money supply is adjusted to current requirements of the economic situation.
The System has powers to supply almost unlimited increases, but its powers to
prevent harmful increases or to bring about needed decreases are now wholly
The prevailing situation, which is likely to continue during the new few years,
does not call for increases in the available supply of money. The amount of adjusted demand deposits and currency, which together constitute the supply of
money owned'by the public, already exceeds $42,000,000,000 or more than double
the amount that existed in 1933 and some $15,000,000,000 more than was on hand
at the peak of the boom period of the twenties. A large part of these deposits represents idle funds being held on demand for future investment. In addition,
commercial banks of the country have over $6,000,000,000 of reserve funds in
excess of their requirements and available as a basis for a multiple expansion
of loans and investments and therefore of deposits. In fact, existing deposits,
if utilized at the rate of turn-over that prevailed in the twenties, could support
a tremendous boom without creation of an additional dollar of new money.
With prospects for improved business under the stimulus of the defense program, it is probable that individuals and institutional investors will find greater
demands for their now idle lendable funds, and that these funds will be put to
more active use. In the first place, idle funds will be lent to the Government
for its defense expenditures, and this will unavoidably put them into active circulation. Then, as business improves, idle funds will be put to use by large and
small business units raising new capital. Even beyond this, as prosperity grows,
individuals themselves will put into circulation part of their accumulated cash
savings by buying goods and services as one kind and another, the purchase of
which they postponed in the past when they accumulated those cash savings.
It is possible that this expansion of the use of existing funds may go so far that,
added on to the present rate of turn-over of 'money and goods and services, it may



exceed the productive capacity of our economic system. Such a condition is
one of monetary inflation, characterized by attempts to buy things that cannot
be bought, that is, by the bidding up of prices of goods, of equities, and of other
property—in other words by the usual phenomena of general inflation.
One way of helping to avoid this development is for the Government to
finance its expenditures by taxation and by borrowing existing funds. It is
better that borrowing be done from the current savings of the public and from
past savings now held as deposits of individuals, business corporations, insurance companies, and other fiduciary institutions, rather than from the idle
reserve funds of the banking system. Borrowing from the latter results in a
further increase in the supply of bank deposits. It amounts to financing with
new money which would be dangerous if the supply of deposits were already
actively in use and with production already nearing capacity levels. Yet your
proposal would court this danger by bringing about an even greater increase
in bank deposits. In order to carry out the growing. defense program it may
at some stage become desirable that borrowing be entirely from current savings—
which will, however, need to be larger than now—so that for every dollar the
Government spends the consuming public will have spent a dollar less. It may
also be necessary to absorb a part of the banks* additional lending power by
increasing their reserve requirements, as was indicated by the special report
which the Federal Reserve System submitted to Congress on December 31, 1940.
Your proposal, on the contrary, would increase manyfold the excess reserves of
member banks, through the issuance of new money by the Federal Reserve banks
for Government expenditures, and would add enormously to the banks' lending
Your plan is inconsistent with the nature of our capitalistic democracy. As
our economic system works, a large part of the public saves a part of its income
which is invested in homes or in plant, equipment, and the like, which supply
current goods and services to others. Or they lend to the Government to meet
its expenses in excess of tax receipts. Interest is the most common form' of
compensation that these individuals obtain for the use of their money. These
savings are often not invested directly but are entrusted to insurance companies,
banks, and other institutions, which do the lending. These institutions receive
interest and in turn either pay interest or provide services to savers, as well as
meet their operating costs.
Interest on debt—a large part of which is public debt—constitutes income
of private individuals, of educational and charitable trusts, of insurance companies, and of banks. A certain part of it pays for the costs of the process of
investment. Discontinuance of interest on the public debt, therefore, must be
thought of not merely as so much saved the Government or the taxpayer, but
also as so much income cut off from savers, trusts, institutions, and individuals
that require the safest type of investment.
If there were some virtue in your ideas for Government financing, other countries might be expected to follow them! But the fact is that not even the dictator
nations and none of the other powers have abandoned the payment of interest on
Government issues. For all of the boasted efficacy of German financial management, the Nazi government has adhered to strict orthodoxy in paying interest
rates, considerably higher than those prevailing in the United States, on its obligations and has sought with much success so far to avoid creating new money.
Instead, by heavy and widely distributed taxation, the Nazi government has sought
to finance its vast expenditures so far as possible out of existing funds and to
avoid monetary inflation, possibly because the memory of the demoralization of
the mark after the first World War is still so fresh in German memory.
Financing Government by issuing currency would have a double-barreled effect
upon the interest income of the public. It would reduce the amount of interest
received by savers, and it would increase the amount of money available for investment. As use for these funds was sought, interest rates on all types of debt
would decline, until the bare costs of investment could not be met. In such circumstances, funds intended for investment would either remain uninvested or
would, out of necessity, be used for the speculative purchase of existing consumption goods, physical property or equities of various kinds. This would intensify
the inflation already generated by capacity production for the defense program if
financed by new money. Such conditions would completely demoralize our economic system as now constituted. It* would mean the end of capitalism and
require the substitution of some other system in its place.
Very truly yours,

M. S. ECCLES, Chairman.


Washington, D. CMarch


24, 1941.

Chairman, Board of Governors, Federal Reserve System,
Washington, X). C.
DEAR MR. ECCLES : I have received your letter of March 21, 1941, and I expect
to reply to it as soon as I have the time to do so. It is my belief that your views
should be given to the public, and when I reply to your letter, I expect to insert
it in the Congressional Record, along with my reply.
Before replying to it, and in order to get our definitions straight, I would like
for you to answer the following questions:
1. Has the Federal Reserve Banking System refused to comply with certain
laws which affect governmental institutions, including civil service, because the
Board took the position that it is not a governmental institution?
2. Is it not a fact that the Open Market Committee has the greatest power
and influence that can be exercised by any group in connection with the Federal
Reserve Banking System? (If you disagree about this, please outline the tremendous powers that can be exercised by this committee and state wherein these
powers are not as great as the powers possessed by any other committee or group
in the System.)
3. Please give the names and addresses of the Open Market Committee and
the institutions in which the members of this committee, who are not on the
Board of Governors, are connected.
4. Please give the names and addresses of the advisory committee and the
names of the companies and institutions the members of this committee are
connected with.
o. I have asserted that the Federal Government can issue either interestbearing bonds or money, or both bonds and money. Is this a correct statement
or not?
6. I have also asserted that a Federal Reserve bank obtains money from the
Federal Reserve agent for the cost of printing, which is approximately 30 cents
per $1,000. If this statement is not true, please indicate wherein it is untrue.
7. I have also asserted that Federal Reserve notes that are paid into circulation by a Federal Reserve bank are not obligations of the Federal Reserve bank,
but these notes state on their face: "United States Government promises to pay
upon demand
dollars." Am I correct in the statement that the money issued
by the Federal Reserve banks are obligations of the Federal Government and
not the Federal Reserve banks and is the same as a Government non-interestbearing obligation?
8. I have stated that under our present system the Treasury can sell a
thousand-dollar bond providing for an annual interest payment to a Texarkana,
Tex., bank and that the Dallas Federal Reserve Bank could take the one thousand dollars' worth of Federal Reserve notes and buy these bonds from the
Texarkana bank. That the Federal Reserve bank at Dallas could continue to
hold the Government bonds until due and collect interest each year when payable from the Government; that this was, in effect, permitting a privately
owned institution—the Dallas Federal Reserve Bank—to use the Government's
credit free of charge to buy an interest-bearing obligation, which the Government must continue to pay interest on. Do you agree that this illustration is
possible under our present system? If not, why not?
9. Do you agree with my statement that the private commercial banks have
created by bookkeeping transactions almost $20,000,000,000 for the past few
years for the purpose of acquiring United States Government interest-bearing
If you agree that the banks create this money, do you also agree that the
Government could create it directly without having any morte money in circulation than if the banks created it?
10. Do you also agree that the Federal Reserve Banking System creates money
on the Government's credit without paying the Government anything therefor?
11. Do you agree further that the same security that is behind a United States
Government bond is behind a Federal Reserve note, which is a Government noninterest-bearing obligation?
12. Do you believe that the Federal Reserve Banking System should be wholly
owned and controlled by the United States Government through its duly appointed representatives?



13. Is it a fact that if a Board in charge of the Federal Reserve System is
given the powers, which were recently requested in a special report, that dangerous inflation can be prevented, even though the Government uses its own credit
by paying money into circulation instead of using the present system?
14. If in answer to the preceding interrogatory, you state that the powers would
be insufficient under the circumstances, what additional powers could be granted
by Congress that would absolutely control and prevent dangerous inflation?
15. I have often asserted that by the time the Federal Government pays a
long-term bond, it will pay as much in interest as on the principal. Do you
agree that this statement is correct? If not, give me your opinion.
16. Do you consider the title to the gold in the United States Government or in
the Federal Reserve banks?
17. How much money could be created by the Federal Reserve Banking System
under existing laws and regulations if used to the limit upon the gold certificates
claimed by the Federal Reserve banks and United States Government bonds
held by both the Federal Reserve banks and the member banks?
18. Is it true that the Board of Governors have agreed upon a policy to pursue
that will cause an increase in interest rates generally?
19. Is it true or not true that you personally believe interest rates should be
much higher?
20. Is it true or not true that you favor the Federal Government taxing the
income of State and municipal securities for the purpose of causing an increase
in interest rates generally?
21. Please state your answer to the following:
(а) All of the stock of the 12 Federal Reserve banks is owned by private
commercial banks and not one penny of it is owned by the Government or the
(б) The Federal Reserve banks pay no taxes whatsoever to the Federal Government and only pay taxes on real estate to the States and political subdivisions
in which they are located.
(c) Salaries are paid to individuals connected with the Federal Reserve Banking System up to $50,000 a year.
(d) Practically all of the income of the Federal Reserve banks is from Government bonds, which were purchased through the free use of the Government's
(e) Although the original law required excess profits of the Federal Reserve
banks to go into the Federal Treasury, at this time under existing law, the
Federal Reserve banks do not pay anything into the Federal Treasury.
22. I would like to precede this question with an explanation. My proposal
is for the Government to pay the private commercial banks the $138,000,000 that
they have invested in stock in the Federal Reserve Banking System and for the
Government to take over the System and operate it in the public interest. If
Congress should enact such a law, do you agree that the Federal, Reserve banks
could accept from the Treasury non-interest-bearing obligations and give the
Government credit upon the books of the Federal Reserve banks therefor, permit
checks to be drawn upon the account by the Treasury and no more credit or
money would be placed in circulation than if Government interest-bearing bonds
had been issued and sold to the commercial banks?
23. Do you agree that if the Federal Reserve Banking System is owned by the
Government, and expenditures arefinancedas proposed by me that there will be no
more actual money printed than is printed under the present system?
24. Although the members of the Board of Governors are appointed by the
President, is it a fact that their salaries are paid by the privately owned banks?
For your information, I am not advocating the issu&nce of any kind of new
money and am not advocating abolishing the charging of private interest, except
on United States Government obligations. Further, I am not proposing for the
Government to issue money or credit with no expectation of it being paid. I
agree that someone must pay for everything, and if the Government issues noninterest-bearing bonds under my proposal, they could be paid back 4 percent a
year and the debt entirely liquidated in 25 years, whereas under your system, if
4-percent interest is paid each year for 25 years, the Government will still owe
the principal of the debt.
When you have replied to these questions, and I hope you will see your way
clear to do so at an early date, I shall be very glad to answer every question
raised in your letter of March 21,1941.
Yours sincerely,


APRIL 18, 1941.

House of Representatives,
Washington, D. C.
DEAB ME. PATMAN; Upon my return to Washington a short time ago I found
yours of March 24 in which you acknowledged my letter of March 21 and advised
that you expect to reply to it as soon as you have the time to do so. Meanwhile,
in your letter of March 24 you ask me to furnish answers to a series of 24 questions which you propound.
From a perusal of your questions it is evident that they are not directed to the
fundamental issue which I discussed in my letter of March 21; namely, the
fallacy of your proposal to have the Government finance its expenditures without paying interest. This issue I considered of sufficient importance to justify
my answering your proposa] publicly. On the other hand, it would serve no useful
purpose to embark upon a correspondence which subjects me to a catechism
covering a variety of matters which run the whole gamut of the problems of
money, banking, and public finance, but are scarecely relevant to the real issue.
Again, many of your questions have the appearance of calling for factual answers,
but such answers would not convey the correct meaning. For instance, your
question 21 (a) asserts that all of the stock of the Federal Reserve banks is
owned by private commercial banks and not 1 penny of it is owned by the Government or the people. While this is technically true, a mere statement of it is
misleading, since this ownership is not of the character implied by the ordinary
meaning of the term, particularly with reference to the matter of control. • But,
us I pointed out in my letter of March 21, "This so-called stock ownership, however, is more in the nature of an enforced subscription to the capital of the
Federal Reserve banks than an ownership in the usual sense. The stock cannot
be sold, transferred, or hypothecated, nor can it be voted in accordance with the
par value of the shares held. Thus, the smallest member bank has an equal vote
with the largest. Member banks have no right to participate in earnings above
the statutory dividend, and upon liquidation any funds remaining after retirement of the stock revert to the Government. You greatly exaggerate the significance of this so-called stock ownership."
Again, many of your questions involve matters which are within the purview
of the Wagner questionnaire and which cannot be adequately dealt with except
in full and open discussion such as will presumably be had before the Senate
Banking and Currency Committee. However, should this or any other committee
of Congress wish me to discuss a series of questions as far reaching as those
contained in your letter I should be glad to respond, as I have frequently done
in the past. Such matters do not lend themselves to satisfactory discussion by
- In your questions 3 and 4 you ask for the names of the members of the Federal
Open Market Committee and the Federal Advisory Council. The composition
of these two boards is printed monthly in the Federal Reserve Bulletin, and in
the April 1941 issue will be found on page 378. For your convenience a copy of
this Bulletin is enclosed herewith.
Yours sincerely,


Now, Mr. Eccles, in raising money to pay the debt, you know we
have to have burdensome taxes. Are you in favor of a sales tax?
Mr. ECCLES. I very strongly opposed a sales tax at this stage as
being a regressive tax, bearing no relationship whatever to the ability of the taxpayers to pay.
I would favor a sales tax in preference to no tax, however.
I feel that taxes are very essential to reduce purchasing power,
but the sales tax is the wrong way to get at it at this time, I believe.
I believe in first things first and I don't think that a sales tax
should be enacted until other taxes are enacted.
I would not want to say that a sales tax may not be necessary. I
think that if the war goes on long enough and we continue to spend
the amounts that are contemplated, we possibly will need on top



of all the other taxes we are able to get, some form of—I would like to
put it this way—we may need some form of sales tax.
Of course you have now very substantial taxes that are called
ex&se taxes and I favor the excise tax if applied in a nonregressive
manner rather than a general sales tax.
Mr. PATMAN. Mr. Eccles, in obtaining this money from existing
sources of supply, one of the ways is the way suggested by the gentlewoman from Illinois, Miss Sumner, but there are a lot of dormant
accounts in this country. It has been estimated there are $100,000,000
in dormant accounts in banks and in even the banks that are members
of the Federal Reserve System.
Don't you think that money should be used to buy Government
bonds—I mean accounts that have been neglected for 10, 20, or 30
years ?
Mr. ECCLES. I would think that those funds in the banks are being
used. I mean the banks don't just earmark their dormant accounts
and then set aside that money in the vaults—set aside in its vaults
so much currency to meet the account. The funds are intermingled
with all other funds and those funds are invested the same as any
other funds.
Mr. PATMAN. For instance, there are a great many dormant trusts.
There is one in Massachusetts for the relief of superannuated wool
carders. The fact is there have been no wool carders in the last
150 years but the money is still accumulating in the banks.
Mr. ECCLES. Well, aren't those funds invested ?
Mr. PATMAN. Yes; I presume they are. By the banks?
M r . ECCLES. Y e s .

shouldn't there be some way—why shouldn't
the banking system suggest some way of handling these funds and
segregating them and investing them in Government securities directly. There is an endowment providing for the ransom of American seamen held by barbary pirates on the North Coast of Africa.
There was another one established for the sufferers of an incurable
fever caused by coal gas. There is another trust dated 1683 providing for the relief of seven aged Protestants in the County oi Cork,
Ireland. For the last 50 or 60 years the trustees have been unable
to find seven Protestants of any kind in all the County of Cork.
There is a fund which has been established in St. Louis since 1851
for the assistance of aged and worthy distressed travelers passing
through St. Louis to take up new land in the West.
According to the last report the fund had more than $1,000,000
surplus and there are no takers.
It just occurred to me those funds could certainly be utilized in
the purchase of bonds and stamps; but as you suggest they are in
banks and undoubtedly are being used now through the banking system
as a whole.
Mr. ECCLES., Yes. I don't think they are in the form of what we
call hoarded currency.
Mr. PATMAN. I read the report of the Federal Reserve Board
and the report of the Comptroller of the Currency and I gained the
impression that the number of banks is on the decline and the number
of branch banks are on the increase. Is that the tendency or not?
Mr. ECCLES. I think there is very little increase in the number



of branch banks. I don't recall the figures, but from 1933, I mean
after the bank holiday, up to the present time, I would doubt if in
the agregate there are any more banking offices now than there were
at that time. But the increase, I am sure, is not an important factor,
and it may be that there are actually less offices than there were at that
Mr. PATMAN. In the bill we passed here a few days ago, creating
the Smaller War Plants Corporation, there was an amendmentoffered by the gentlewoman from Illinois, which was adopted and it
is now a part of the law, providing that there should be no limitation
on the amount of a loan to any person or corporation by any bank,
providing, of course, that the loan is guaranteed by the Government
or some agency of the Government.
Have you given consideration to that amendment, Mr. Eccles?
Mr. ECCLES. Are you referring to the technical aspects of it?
Mr. PATMAN. NO ; I am talking about—suppose a bank had a capital
stock of $250,000, could they, under this amendment, negotiate a loan
for say $5,000,000 if it is guaranteed by the Government or some agency
of the Government ?
Mr. ECCLES. It would take the limit off. There is no limit to the
amount of Government bonds, for instance, that a bank can buy.
Its only limit is its supply of funds.
Mr. PATMAN. You mean there is no limit now ?
Mr. ECOLES. That is right:
Mr. PATMAN. This amendment did not cause that—it was already
that way ?
Mr. ECCLES. NO; the difference is—there has -been no question
about direct obligations of governments. This was simply a case
of recognizing the loans which were guaranteed as having the same
status as a direct Government obligation.
For instance, what is spoken of as loans made by banks under the
Regulation V, which regulation was written by the Federal Reserve
Board in carrying out the provisions of an Executive order which
provides that the Army, the Navy, and the Maritime Commission can
guarantee loans made by banks for war-production purposes, the
Reserve bank acting as the agents for the Army, Navy, and Maritime Commission.
A question was raised as to whether or not the bank could loan
more than what is spoken of as its "legal limit" on a guaranty
of that sort, and as I understand it this amendment was passed
for the purpose of permitting banks to take off the restrictions that
were imposed on banks as to ordinary loans.
Mr. PATMAN. There are two other points I want to cover and I
will be through. One is on the reserve requirements last November
being raised. Why did you raise the reserve requirements last year?
Mr. ECCLES. The excess at that time was around $ 7 , 0 0 0 , 0 0 0 , 0 0 0 — —
Mr. PATMAN. Was the objective to stiffen or increase interest rates?
Mr. ECCLES. The objective was to increase the short-term rates in
part, and to stabilize rates and to try and induce more loans to be
made outside of the banks. As long as the banks had the large
excess reserves and the interest rates were falling
Mr. PATMAN. Because there was too much competition with one



Mr. ECCLES. NO, no, it wasn't that at all. As long as the banks
were under pressure to be buying Government securities and large
excess reserves put them under pressure to buy, there was a tendency
to drive the rates down and the lower the rates would go the less,
likelihood there was of inducing the public to purchase Government
The trend was in the direction of the banks buying and not the
public and we were anxious to divert more of the purchasing to the
public and have less in the banks, and it was felt that such a large excess
reserve created an unstable money market situation.
Mr. PATMAN. Another point, Mr. Eccles, is that there are 197,000
taxing units in the Federal Government, and State governments,
48 State governments, 3,070 counties, and different school districts
and road districts and levy districts and all kinds of political subdivision districts. Now, a number of these districts, and especially
school districts, are dependent upon sources of revenue that are
going to be greatly decreased because of eliminating the making and
the sale of automobiles and restricting so greatly the use of gasoline,
upon which there is a heavy tax and which is one of the principal
sources of revenue for many of the school districts and school systems
throughout the country.
Have you or your group given any consideration to the Government assuming any part of these obligations under the unusual circumstances caused by the war, in the national interest in helping
out those school districts, for instance ?
Mr. ECCLES. NO, no, the Federal Eeserve Board has not and I
don't know of any other agency of government that has.
Mr. PATMAN. It has not?
Mr. EOCLES. Not that I know of.
Mr. PATMAN. In connection with the receipt and expenditures
of the Federal Government, I believe that we will appropriate this
year, by the time this Congress is over, about $150,000,000,000; will
it not, Mr. Eccles? It has already gone over 100 billion.
Mr. ECCLES. I haven't kept track of the appropriations from day
to day and that is what one would have to do to keep up with it.
Mr. PATMAN. I mean authorizations.
M r . ECCLES. Y e s .

Mr. PATMAN. Like the other day we appropriated 8y2 billion dollars.
Mr. ECCLES. That is authorizations you are referring to?
Mr. PATMAN. Yes. Anyway they exceed $150,000,000,000?
M r . ECCLES. Y e s .
Mr. PATMAN. I had

the amount of receipts added up of our Government from the time it was first organized in 1789 to the present time,
and the total receipts to date are only 143-odd billion dollars, so that
will be greatly in excess of what the Government has heretofore collected in all the 153 years of its existence. And, regarding the interest
rates on Government bonds, the interest collected for the first 120
years of our country's existence, the average amount of interest paid
was $20,000,000 a year.
From 1893 to 1917, it only averaged $33,000,000, but since 1917, the
interest each year has been $801,000,000.
I bring this up for the purpose of showing that the interest paid
on Government obligations had never been a problem up until after



the first World War, and it never did become such a great burden
until now when it looks like we are facing a $300,000,000,000 debt, and
if we pay as much as 2% percent interest there will be an interest
burden of 7y2 billion dollars, and if we have to pay that much and if
people like yourself insist that we must do it, and you say we must
pay interest, why, I don't see how we will ever pay this debt of 7%
bil)lion in interest and then the running expenses of the Government.
It looks to me like it will be just almost unbearable.
Mr. ECCLES. Of course, I don't agree with you that the interest is
the problem indicate, neither do I agree that there is any necessity
for, any such size of debt. If we ever permit the debt to go to
$300,000,000^000, it will be because the Congress has been unwilling
to levy the kind of taxes that a war economy calls for.
It seems to me that we confuse ourselves a good deal with reference
to what we call the "burden" of debt.
You have made some comparisons with former periods in our history. It seems to me that the economy today has greater wealthproducing power, than, of course, it has ever had before. The thing
that is of importance is: what has the economy left over after paying
the interest? Does the payment of interest to the Government in any
way detract from our ability to produce and distribute wealth, or
to produce and distribute goods ?
It actually doesn't in any way interfere with the ability of our
economy to produce and distribute goods and after all that is the
wealth of the country.
Mr. PATMAN. But it will make a big difference to the taxpayers.
Suppose you create $1,000,000,000 through the Federal Reserve and
pay 2y2 percent on that debt for the next 40 years, the debt will be
paid, but if you create the money through a commercial bank and
pay 2y2 percent interest for 40 years, you still owe the debt at the end
of those 40 years, so there is a big difference to the taxpayer.
Mr. ECCLES. If all debts were paid, you would have no money.
Mr. PATMAN. That is very true.
Mr. ECCLES. And it is impossible for an economy to save and invest
without debt. That is the very basis of your capitalistic system and
even in the communistic countries, Russia, for instance, they have
recognized the need of debt and savings.
Mr. PATMAN. Not necessarily interest-bearing debt.
Mr. ECCLES. They have interest-bearing debts, however.
Mr. PATMAN. I say not necessarily interest-bearing debt. You can
create money without interest-bearing debt.
Mr. ECCLES. The Russian Government sells an interest-bearing
bond to its people and they likewise have an insurance system or
mutual insurance systems of insurance, Government-owned, of course,
that enable people to save through buying this insurance, as people
in this country save to buy insurance, and unless you devise some
system for completely eliminating savings, it seems to me that you
cannot eliminate a system of debt, and as long as you have debt there
must be interest on that debt.
Mr. PATMAN. Not necessarily to create money, Mr. Eccles, you
don't say that, do you?
Mr. ECCLES. NO, no; you can print money. I mean there is no
problem at all about the United States Government being able to
issue greenbacks to whatever extent it desires.



Mr. PATMAN. Well, the Federal Reserve Bank issues greenbacks
every day, doesn't it?
Mr. ECCLES. No, no; the Federal Reserve Bank does not issue
greenbacks to pay for the Government deficits at all.
Mr. PATMAN. Let us see if they do. Suppose you buy $1,000,000,000 worth of Government bonds, where do you get the money?
Mr. ECCLES. But it is the purpose for which you issued it.
Mr. PATMAN. I know. I am asking you where you get that one
billion dollars? Where did you get it? You create it, don't you?
Mr. ECCLES. We are a bank of issue. That is a central bank. All
central banks do that. The central banks of Russia and Germany
do that.
Mr. PATMAN. And if that isn't printing press money, I would like
to know what it is.
Mr. ECCLES. There has been no scheme devised for creating money
in any other way.
Mr. PATMAN. Thank you very kindly, Mr. Eccles.
Mr. FORD. Mr. Eccles, I would like to ask you a question, if you
don't mind. When a man goes to work for the Government, the
Government pays him a salary, doesn't it, for his services; some
plants produce some goods and they sell those goods to the Government, and the Government pays for it, don't they? When people
loan money to the Government in lieu of their personal services, they
are paid an interest rate for the use of that money, aren't they?
What is the difference between that and paying a salary to the man
that works for the Government?
Mr. PATMAN. I am going to object to that. I think it is right for
the people to pay interest for money, but I object to letting the banks
create the money out of nothing and then our people and Government
pay interest on that.
Mr. FORD. No matter how much the bank creates there must be
assets in the bank to cover that.
Mr. PATMAN. N O ; they haven't anything to cover it. They will
have a capital of $8,000,000 and
Mr. FORD. All right; that money is redeemable, but they have to
have a structure behind it to get the money.
Could you buy $1,000,000,000 worth of bonds, could a bank buy
$1,000,000 worth of bonds from the Government on a capitalization
of say, one million or two million?
Mr. ECCLES. Well, a private bank certainly wouldn't buy $1,000,000,000 worth of bonds if it didn't have the one billion dollars worth
of credit either in the Federal Reserve, correspondent banks, or in
currency, or all three. It would have to have the funds with which
to pay for those bonds when it bought those bonds.
Mr. FORD. NOW, it is true that you buy $1,000,000 worth of Government bonds—when you do that you are simply crediting the
United States Government on your books with a deposit of
Mr. ECCLES. That is correct.
Mr. FORD. But you may have to pay that out tomorrow?
Mr. ECCLES. That is right. And, therefore, when that deposit is
paid out you have got to have the funds with which to pay it or you
would have to sell the bonds the minute the deposit was transferred



in order to get the money to take care of the transfer, so that the
individual bank, although it appears to create the money by putting
on the asset side the bonds that it purchases and on the liability
side, credit to the Government the. amount of those bonds, yet the
Government withdraws those deposits and that bank never knows
whether an amount equal to those deposits is going to come back to
it through Government expenditures.
Mr. FORD. What would happen, Mr. Eccles, if the $3,000,000,000
that the President is authorized to issue any time he pleases, what
would happen if that were issued ?
Mr. ECCLES. Which $3,000,000,000 do you refer to?
Mr. FORD. The one put on the agricultural bill some years ago.
Mr. ECCLES. Oh, that is known as the Thomas amendment.
M r . FORD. Y e s .
Mr. ECCLES. Well,

as those funds were spent it would increase the
deposits in the banks by three billion—increase the bank's total reserves by $3,000,000,000 and the Government interest-bearing debt
would not increase at all.
Mr. FORD. Then you would probably be called upon to raise the
reserve requirements in order to take care of that pressure, wouldn't
Mr. ECCLES. That is right, and the banks would have three billion
more of deposits to look after and handle, but wouldn't have $3,000,000,000 worth of income-bearing loans or securities to pay them for
the handling of the $3,000,000,000 deposits which were created.
Mr. FORD. If there was no interest on Government bonds, the only
way banks could possibly handle them would be by making a charge
for that service, isn't that right?
Mr. ECCLES. It would have to get something.
Mr. FORD. A direct charge?
Mr. ECCLES. That is right. The banks would have to get an income from some source to offset the increased work and service
involved in handling the business, and the return on Government's
is certainly not—doesn't pay any one excessively.
I was interested when John Maynard Keynes, the chief adviser, I
suppose he is, to the British Treasury, and director of the Bank of
England, was here recently—not recently, but when he was over
here last fall, I think it was. I discussed with him the means that
the British Government was using in their war financing and where
the banks came into the picture.
He pointed out to me the type of financing that Britian was doing
in order to sell as many of their securities as possible to the public
and then whatever the deficit was or the difference they borrowed
from the banks. They happen to have only four or five banks there
with a great many branches and they would informally allocate the
amount to be taken by each bank. They would say that they need
so much money and those banks would just take what was required
to meet the difference between the expenditure and what they were
able to raise in taxes and in selling the bonds outside, and they wero
given a rate which was, as Keynes says, "a living rate."
They were given 1% percent for a 90-day or 6-month bill, I am not
sure which, but at least they were given V/g percent, which was a



rate that they had agreed upon with the banks as being a living
rate for short-term paper.
Now, that is about three times as much as we pay for a similar
maturitv in this country. I just thought you might be interested in
Mr. FORD. We pay about three-eighth percent, don't we?
Mr. ECCLES. Three-eighths for 90-day paper., At the present rate
the British pay 1%. Now, I am not certain whether that was for 90day or 6-month paper.
"Well," I said to him, "Can't you get a less rate than that?"
"Well," he said, "of course we can, I suppose control or fix any
rate that you want to by putting enough reserves into this picture
so as to reduce the rate but," he says, "the banking system is performing
a very necessary and useful service and we have determined that that
is the minimum living rate for them," and he said, "that has just
been arbitrarily agreed to as a living rate."
And, they decided that that was the best way to help pay the banks
for their services.
Mr. FORD. What does their long-time paper bring?
Mr. ECCLES. Why, I wouldn't be sure. They don't have any. They
are not putting out any paper for nearly as long a time as we are.
As r recall it theirs is somewhere around two and three quarters for
10-vear paper. I would not be certain of that, however. The rates
in Britain are running at least a half of one percent more than the
rates here.
Mr. FORD. I saw a statement in an article that I read that they
were two or three points above the old consul rate.
Mr. ECCLES. Well, the rates average, I would say, on British paper,,
at least a half of 1 percent more than is being paid here.
The rates the Government is are the lowest rates that
have ever been paid; and mind you, that is in spite of the fact that
they are not issuing any tax-exempt or partial tax-exempt securities; that the present fully taxable securities yield a lower current
rate than their partially tax-exempt securities when they were originally sold.
Mr. FORD. Well, Mr. Eccles, I have been looking into this. Supposing we paid up our bonded indebtedness right now. That would
relieve the Treasury of several billion dollars in interest, but in what
position would the Government be when it became necessary to secure
an income ? What would happen ? They would have to go out to find
private investments to take up that, wouldn't they?
Mr. ECCLES. It is practically impossible today for the income of
various forms of institutions, education and philanthropic; religious, as well as the various forms of trust funds to find an outlet
for their income for those funds except in governments, and that is
likewise true of insurance companies, mutual savings banks, and other
institutions—all savers. The allocations and priorities have practically stopped private building of any kind except for war purposes
and therefore most of that form of development or expansion is being
financed by the Government, so that the Government is borrowing the
money with which tofinancethat industrial construction and so about
the only avenue or outlet for savings for capital accumulations of all
kinds is through the purchase of governments.



Mr. FORD. A S a matter of fact, however, we could finance the war
with non-interest-bearing securities, but I am wondering what would
happen when peace came. Has anybody figured that out?
Mr. PATMAN. It would be a lot easier than have the seven and a half
billion-dollar annual interest burden.
Mr. FORD. I don't know whether it would or not. I am wondering.
I am trying to figure it out. I am not criticizing your stand or anybody else's. I am simply asking for information.
Mr. ECCLES. Well, I think the difficulty of controlling inflation is
sufficiently great without increasing that difficulty bv financing the
war through an expansion of currency such as has been suggested.
That would only increase, to my way of thinking, greatly increase
the problem of inflationary control.
Mr. PATMAN. There are ways of offsetting that, though, aren't
there, Mr. Eccles?
Mr. ECCLES. Not to the extent that the funds are once created.
You can offset the excess reserve effect of the multiple expansion by
increasing reserve requirements by a sufficient amount to offset the'
increase in deposits so that you wouldn?t get the multiple expansion
that you otherwise would get, but you would get a huge expansion
of deposits and you wouldn't save anything. .You would have to
pay the banks just as much in some other way. You would save
nothing and you would be undertaking a completely new and untried
procedure. It wouldn't save the economy as a whole a thing.
Mr. MONRONEY. Isn't the fundamental principle that $1,000,000,000
worth of Government bonds are worth $1,000,000,000 is because they
have a productive working capacity, a capacity to produce interest
on that $1,000,000,000? If they were dropped into the currency
system without interest, they would become deadwood and merely
represent a medium of exchange, but with interest-bearing power,
they have a productive capacity which makes them worth the par.
value for which they are issued.
Mr. ECCLES. Well, of course, when they are issued for war purposes that is not true, because $1,000,000,000 of public debt when the
proceeds are spent for bombers or tanks and ships that are sunk or
shot down, they don't have any value. Their value disappears. As
a matter of fact, there is no productive value even if they survive.
Mr. MONRONEY. What I mean is the bonds themselves have a productive value because of the fact that they work and make interest
for the security holders.
Mr. ECCLES. Well, of course, the interest that is paid on the governments must be collected from the people, from the taxpayers as
a whole, just as the interest when it is paid goes to the taxpayers
as a whole. A sort of a bookkeeping entry is really what it amounts
to. As long as the debt is financed internally, if we think of ourselves as one great family, and we are all paying the taxes to pay
the interest and we are largely all receiving the interest when it
is paid—maybe not directly but indirectly through our insurance,
through our savings banks, through our educational institutions,
through our hospitals, through innumerable ways, we are getting
the interest that is paid.



Mr. MONRONEY. In answer to one of Mr. Patman's questions, you
observed in the absence of an effective tax bill to finance the war, and
also in the failure of the Government to make bonds attractive
enough to draw private money, that the only other alternative was
to put these bonds in the banks. From that would you preclude any
consideration of any compulsory savings plan ?
Mr. ECCLES. The Treasury has adopted a program of voluntary
sayings that the President in his seven-point program indicated was
going to be tried out—the voluntary savings program. That pl*n
is under way and I would prefer not to discuss the pros and cons
of a voluntary savings plan and enforced savings plan when thb
voluntary savings plan has been decided upon at least for the present.
Mr. ROLPH. Mr. Eccles, what is the advantage of a bank being
represented on the Open Market Committee? For instance, I have
read of the situation in Boston. I notice that certain of the bank*
have two representatives. For instance, Cleveland and Chicago have
one representative while another has three. What is the advantage
of being on this open Market Committee ?
Mr. ECCLES. Advantage to whom?
Mr. ROLPH. To the Federal Reserve bank itself and the branch
flanks. For instance, why is Boston so anxious to have a representative?
Mr. ECCLES. Well, they have felt that as long as the statute provides that the Federal Reserve bank should have five representatives
on the Open Market Committee, and they were grouped with New
York, that is was somewhat of a reflection upon them if every other
bank took its turn in being represented except Boston.
Mr. ROLPH. IS that the way it works out?
Mr. ECCLES. Yes. They always rotate. For instance, in the west
there are three banks in the western group—San Francisco, Minneapolis, and Kansas City.
Mr. ROLPH. And they take turns, is that right?
Mr. ECCLES. Yes, they rotate each year. The statute provides that
there shall be an election once a year and the Open Market Committee
shall organize and elect a chairman and vice chairman and secretary
and so forth, Boston has been the only bank that has never been represented on the Committee and it has been felt that the importance of
New York was such that they should be on the Committee and Boston
has continued to waive what was, they felt, their proper rights.
Mr. ROLPH. Then there is really no particular advantage to the
bank of having a representative on the committee at any one time,
is there, outside of New York itself? For instance, what advantage
does Boston get by having an opportunity to get on the Committee?
Mr. ECCLES. No bank is supposed to get any advantage. The Open
Market Committee is not designed to give any member any advantage. The purpose of the Open Market Committee is to render a
public service in exercising its control over the money market in the
public interest entirely.
I am sure that Boston or no . other Federal Reserve bank wants or
expects representation on the Committee for any other purpose.
Mr. ROLPH. I was just curious to find out about that.
Mr. SMITH. Mr. Chairman, may I ask a few questions?



The CHAIRMAN. Mr. Smith.
Mr. SMITH. Mr. Eccles, you propose to lower the reserve requirements, as I understand, under this bill of the central reserve city
banks only, is that correct ?
Mr. ECCLES. This bill gives to the Federal Reserve Board the power
to change the reserve requirements.
Mr. SMITH. In those particular banks?
Mr. ECCLES. NO ; to change the reserve requirements of the central
reserve city banks without being required to change the reserve requirements of the reserve city banks, which is the present requirement of the
Mr. SMITH. NOW, what percent of the total deposits in the commercial banks would be involved in the operation of that particular
Mr. ECCLES. This does not affect in any way the commercial deposits
of these banks.
Mr. SMITH. Well, you alter the reserve requirements of the central
reserve city banks. I don't quite understand that would not involve
at all the deposits.
Mr. ECCLES. What you want to know is what are the total deposits
of the central reserve city banks ?
Mr. SMITH. That is right.
Mr. ECCLES. In relation to the total deposits of the Reserve System?
Mr. SMITH. That is right.
Mr. ECCLES. I couldn't tell you.
Mr. SMITH. IS it a substantial amount?
Mr. ECCLES. About 35 percent.
Mr. SMITH. Maybe I misunderstood you then the other day when
you spoke about the New York banks.
Mr. ECCLES. I said the resources, the assets of the New York Federal
Reserve Bank, represented about 40 percent.
Mr. SMITH. Federal Reserve ?
Mr. ECCLES. Of the resources of the Federal Reserve System.
Mr. SMITH. YOU state at the present time the average reserve requirement is about 20 percent, is that right?
Mr. ECCLES. That is right on demand deposits.
Mr. SMITH. .Have you any idea, what the average would be under
this bill ? You must have in mind some figure at which you expect
to fix reserve requirements, do you not?
Mr. ECCLES. If we reduced the reserve requirements in the central
reserve cities to the present reserve requirements of the reserve cities,
which this bill would permit us to do, it would increase the excess
reserve by about one billion and a quarter. The reserve requirements
of the central reserve cities are 6 percent on demand deposits, 6 percent
on time deposits.
The reserve requirements of the reserve cities are 20 percent and the
time deposit reserve requirement is the same for all banks, so that if
the reserve requirements of the central reserve cities was reduced to
the 20 percent, I mean a reduction of the reserve requirements from
26 percent to 20 percent, this would release about one billion and a
quarter of reserves from required reserves to excess reserves.
Does that answer your question?



Mr. SMITH. Yes; that answers it. -Now, the expansion of deposits—the possible expansion of deposit liabilities at the present
time is about five times the reserve, is that correct ?
Mr. ECCLES. That is right. That is the maximum possible expansion.
Mr. SMITH. And so the lowering of the reserve requirements in
the particular banks referred to would increase to a certain amount
the possible expansion?
Mr. ECCLES. That is right.
Mr. SMITH. The expansion possibilities of deposits?
Mr. ECCLES. That is right.
Mr. SMITH. YOU spoke, Mr. Eccles, about the Government devising
securities that are attractive to the public, or you made a statement
something to that effect. By that you mean issuing Government
securities at a higher interest rate, do you not?
Mr. ECCLES. NO, no. I would feel that to issue securities at a
higher interest rate would be a mistake. It would immediately
have the effect of outstanding securities dropping in price. It
would shake the confidence of the public in Government securities,
f t would cause the public to wonder how far Government securities
were going to drop and how high* a rate the Government might
I feel that the rate structure must be stabilized at around the
present levels—that the present pattern of rates must be maintained.
MJ\ SMITH. Just what did you mean then—I don't quite understand what you meant by that statement.
Mr. ECCLES. Well, for instance, your Defense Savings bonds are
aa attractive security. They have features that make them attractive. The yield on Defense Savings bonds, series E, have been designed to meet the requirements of the smaller investor, of the investor that has up to $3,750 a year to put into those securities. That
is just typical.
Now, I wouldn't want to get into a discussion of my views as to
other changes that might be made in other types of securities that
might be designed to attract other types and forms of funds, but
I can say that I did not have in mind the question of increasing
interest rates.
Mr. SMITH. Mr. Eccles, as to the question of issuing interest-bearing Government securities as is being done at the present time to
the banks, and on the other hand issuing non-interest-bearing securities directly to the Federal Eeserve banks: The question has been
raised here as to whether there is any difference between the two
ways of financing. Isn't it a fact that the private bankers themselves, throughout the country, the whole banking fraternity, individually and collectively, are urging as much as possible the sale or
disposition by the Government of its securities to private investors?
Mr. ECCLES. That is correct.
Mr. SMITH. NOW, suppose instead of the Treasury issuing its securities as it does at the present time, it would issue non-interestbearing obligations directly to the Federal Eeserve banks, is it not
a fact that we would be taking away one of the most powerful and


effective influences for privatefinancingthat there is in the country?
Mr. ECCLES. I think so.
Mr. SMITH. SO that there is A vast difference between the two
systems or methods, or whatever you may wish to call them, of
financing. You agree with that?
Mr. ECCLES. Yes, I agree.
Mr. SMITH. In other words, the psychology of financing these
securities through the private banks, as is being done at the present
time, tends toward sounder banking, sounder financing, and tends
especially toward private control and private investment, whereas
the financing as has been proposed, of Government interest-exempt
securities directly to the Federal Reserve Bank, leads in the direction of irregular and unsound financing and toward political control of financing, is that not correct ?
Mr. ECCLES. Well, I am not concerned about what A e call "political
control of financing," if you mean by that Government control,
because that is what we have and I believed we should have Government control of financing. I think the Constitution has recognized
that that is a power of the State and a power that the State should
exercise, so I believe in public control of finances, but I believe the
public control of finance should be exercised so as to preserve thedebtor-creditor system and to maintain as far as it can possibly be
done methods offinancialstability in the economy.
Mr. SMITH. Let me put it this way then, Mr. Eccles. We are
already near to fiat money, pure fiat money, and we would be nearer
to pure fiat money if we issued these obligations interest free directly
to the Federal Reserve banks than we are by financing under the
present method. It is but a small step from issuing these securities
to the Federal Reserve banks, interest free, to printing money
Mr. ECCLES. Well, there is no really fundamental difference at
Mr. SMITH. Yes; there is still a fundamental difference there.
Mr. ECCLEJS. What is it?
Mr. SMITH. Well, after all your bond is a tax warrant—Of course,
you may say the other is a tax warrant and if you do, why, to be sure,
there is no fundamental difference.
Mr. ECCLES. If the Federal Reserve banks are required to purchase
such non-interest-bearing certificates as the Treasury may require them
to purchase, if', as and when it has a deficit tofinance,then there is no
difference between that and the Treasury issuing directly its currency
and depositing the currency in the Federal Reserve bank to its
credit—not a particle of difference.
Now, true if the certificates they deposit with the Federal Reserve
bank had a definite maturity date and they must be paid at a certain
maturity date, whereas if the currency was put out and there was 110
retirement of it called for, there would be that difference.
Mr. SMITH. That is right. Now, Mr. Eccles, there is one more
fundamental consideration I believe we should recognize in connection with the kind of financing that the Government undertakes to
raise its funds to carry on the war.



We suppose that there is still in the banking fraternity, individually and collectively, a conscientiousness of reserves. That was
the fundamental principle which underlay the enactment of the
Federal Reserve System. Is that not true as a matter of fact?
Mr. ECCLES. That is right.
Mr. SMITH. All right, when we think of reserves we think of
gold, as the law provides that reserves shall consist of gold, or gold
certificates, though "lawful money" may also be used as reserves
against Federal Reserve deposits. Nevertheless we think, or hope,
the banking fraternity is still thinking in terms of gold reserves,
however enigmatic and illusory this thinking may be.
Now, I hope and I believe that private bankers throughout the
country when they consider the advisability of financing these bonds
by selling them directly to the public instead of putting them in the
banks, have in mind the fact that reserve requirements still exist;
and isn't it true that they feel the need of private financing because
of that—the danger in other words, of excessive inflationary deposits in the banking system which means ultimately a lack of true
gold reserves, isn't that true?
Mr. ECCLES. Well, it is difficult for me to say what the bankers
might think of the thing. I think that some of them don't think of
it at all and others may think of it as you indicate. I think, generally speaking, however, that the bankers are not concerned about
the banks being required to buy so many Government securities that
the gold reserve requirements will be jeopardized.
The gold reserve requirements are so small as compared with our
supply of gold that the amount of bonds that the private banks could
finance, thus increasing, of course, the amount of their required reserves with Federal Reserve, is so great that it is almost fantastic, so I
think that the banks are merely concerned about the rapid growth of
deposits as a result of their creating deposits through the purchase
of government securities.
I think that it is true of some of them. As I say, I think a great
many of them don't think very much about it, but I do think that
the more thoughtful banker is concerned about the inflationary effect
brought about through a rapid expansion of bank deposits through
the purchase of government securities by the banking system.
Mr. SMITH. But you would say, Mr: Eccles, that it is the responsibility of the Federal Reserve banks and especially the Federal Reserve Board, to give consideration, due consideration, to that particular question.
Mr. ECCLES. That is right. I think that the Federal Reserve, the
Open Market Committee, and the Board have some responsibility to
exercise and use their influence to whatever extent they can, to
avoid unnecessary inflationary development of the money system.
We do have the responsibility of seeing to it that the war is financed
and I think that the Government security market should be maintained upon a reasonably stable basis.
Along with that we have the duty, I think, to exercise our influence so far as possible, both in connection with our advice to the
Treasury as well as with reference to public statements that we may
make, that financing should be done so far as possible outside of the
banks and whatever we can do to bring that about by advice or action,
I think we ought to do.


Mr. SMITH. Well, the reason, Mr. Eccles, that I raised this question is because of deposit liability expansion possibilities. I have an
estimate here from figures received from the Federal Reserve Board
just yesterday, that present reserves would permit an expansion of
deposits of about $187,000,000,000 and that is aside from any expansion of deposits that might result from silver
Mr. ECCLES. YOU are basing that on the gold reserve ?
Mr. SMITH. Alone.
Mr. ECCLES. On the present gold reserve?
Mr. SMITH. That is right. Now, the point is, we are talking about
spending in this war an amount equal to the total value of our national wealth. I have heard figures up to $300,000,000,000. I don't
know what it is going to cost. But certainly when we get up into
figures that high or even 150 billion or 200 billion, the question of
gold reserve becomes an exceedingly important matter, does it not?
Mr. ECCLES. I don't think so.
Mr. SMITH. Well, doesn't this ultimately hinge on the Gold Reserve
Act of 1934, which specifically provides that all forms of currency
shall be maintained at a parity with gold?
Mr. ECCLES. Congress can change the act -as they did in 1934:—
the question of what the gold reserve is. That is an arbitrary matter
left up to Congress. I mean there is nothing sacred about the present
reserve requirements and statutory provisions. They have been
changed before and they can be changed again.
Mr. SMITH. Then you think we can change the amount of reserves
at will without affecting the value of securities?
Mr. ECCLES. Yes. I think the gold reserve has no relationship to
the value of the securities. We could have a very great inflation
and still maintain the present gold reserve and likewise have a very
great deflation. We'saw that when gold was selling at $20.67 an
ounce, that the gold would buy very much less in goods, for instance,
than in the bottom of the depression when gold was worth $35 an ounce,
when it would buy almost twice as much in goods. So here is a situation where the price of gold went up and the price of goods went down.
There was a feeling that by increasing the price of gold; you
recall, that the increase of the price of gold would be immediately
reflected in increasing the price of goods. Well, of course, that we
all know didn't work, so I say that the question of the gold reserve
doesn't have any relationship to it.
Mr. SMITH. Stability of value
Mr. SMITH. Of the currency?
Mr. SMITH. Either bank currency
Mr. ECCLES. I don't think so.

or circulating currency?

Mr. SINRTTH. Mr. Eccles, what then is the fundamental principle of
the Federal Reserve Banking Act?
Mr. ECCLES. Well, it isn't that.
Mr. SMITH. You would go on record—I don't believe you want
to do that, go on record as saying the amount of gold reserve has
no relation to the stability of the value of circulating currency or
bank currency
1 don't believe you want to do that.



Mr. ECCLES. That is right, yes, I do. I don't want to retract anything. I am perfectly willing to let that stand.
I have said that inflation is brought about by an increase in the
means of payment in excess of the supply of goods—an increase
in the means of payment in the hands of those that want to spend the
money in excess of the supply of goods, and that if Congress appropriates the money, the Federal Reserve can't be expected to refuse to supply or do what is necessary to supply the funds that the
Congress appropriates, and I am sure that the gold reserve would
not be permitted to be a deterrent any more than the Eeserve Act
was permitted to be a deterrent at the time the Glass-Steagall bill
wTas enacted in 1932 amending the Eeserve Act so that the Eeserve
System could meet a situation that had been brought about by the
loss of gold, the hoarding of gold and by the absence of commercial
As you recall the original Federal Eeserve Act provided a certain
percentage of deposits and currency must be secured with gold and
with eligible paper and when there wasn't the gold and the eligible
paper to meet the requirements, why, Congress immediately changed
the law so that the requirements could be met, and I say that the
Congress would do that again if the emergency called for it, and,
therefore, the gold reserve that you refer to isn't in itself the factor
that is going to make the currency of the country stable in its purchasing power or in its value.
Mr. SMITH. NOW, Mr. Eccles, I wish to be understood on one
point that you brought up that the banks must find some means of
financing the requirements of the Government. I agree with you in
that pompletely. The point I am trying to get at is that we should
devise—it is up to Congress to provide that means of financing
which involves the least amount of danger and which promises the
greatest amount of security to our people and to our Government.
We were discussing the two different ways of financing these
securities, and I agree with you and I think that the country in
general agrees, that these securities should be financed by selling
them directly to the public, exchanging them for actual savings,
money actually earned instead of depositing them in the banks.
Mr. ECCLES. That is right.
Mr. SMITH. And the point that I wish to bring up here is that
after all there is a relationship, of course, you deny it, between the
stability of value and the amount of gold reserves.
Mr. ECCLES. Stability of the value of. goods, you mean, and
Mr. SMITH. Value of currency, what you call—what is commonly
called purchasing power of currency, either in the form of bank
currency or in the form of circulating currency.
Mr. ECCLES. I do deny that the amount of the gold reserve, the
gold requirements have anything to do with the price level which
means it has nothing to do with the value of the currency.
Mr. SMITH. Aren't you in effect saying there is no relation whatever of the gold in this country to our currency?
Mr. ECCLES. That is right.
Mr. SMITH. There is no relation whatever?
Mr. ECCLES. That is right.


Mr. SMITH. YOU then take the attitude we are completely off the
gold standard?
Mr. ECCLES. Yes; completely.
Mr. SMITH. And that the clause in the Gold Reserve Act of 1934:
which, if the committee will indulge me for just a moment, I would like
to read because I would like to have it in the record.
I am trying to find the clause relating to the maintenance of the
value of all forms of currency to the value of gold and I just don't
happen! to see it at the present time, but I will ask, Mr. Chairman,
for permission to insert it in the record following this hearing.
The CHAIRMAN. That is all right, it is so ordered.
(The matter referred to by Mr. Smith is as follows:)
Section 6 of the Gold Reserve Act of 1934 reads in part as follows:
"Except to the extent permitted in regulations which may be issued hereunder by the Secretary of the Treasury with the approval of the President,
no currency of the United States shall he redeemed in gold: Provided, however.
That gold certificates owned by the Federal Reserve hanks shall be redeemed
at such times and in such amounts as, in the judgment of the Secretary of
the Treasury, are necessary to maintain the equal purchasing power of every
kind of currency of the United States."
In section 9 is to be observed another reference pertinent to the question
of the relation between gold and circulating currencies. The same reads in
part as follows:
"That the Secretary of the Treasury may sell the gold which is required to
be maintained as a reserve or as security for currency issued by the United
States, only to the extent necessary to maintain such currency at a parity with
the gold dollar."
Certainly the language in each one of these provisions should leave-no doubt
that the law intended that gold should control and regulate all prices, assuming,
of course, that gold certificates are representative of gold and nothing else.
It is true there is language in section 8 of the act here referred to which
throws some doubt upon this interpretation. This provision grants to the
Secretary of the Treasury, with the approval of the President, "authority to
purchase gold in any amounts, at home or abroad" and so forth, then is added
the following enigmatic language—
"* * * of law relating to the maintenance of parity, * * * to the contrary notwithstanding."
It would appear that this language coxild be so interpreted as to give the
Secretary of the Treasury full power to sever gold completely from all forms
of paper currency to suspend it completely as the standard unit of value and
measure of exchange values, leaving prices and exchange values to find their
levels to the arbitrary will of the supreme political authority.

Mr. SMITH. I am rather astonished at your statement here and I
am more or less impelled to press the point somewhat. It makes no
difference then, whether we have an ounce of gold as reserve or
whether we have 700,000,000 ounces?
Mr. ECCLES. It has made no difference to Russia for 20 years; it
lias made no difference to Germany for a long while. Most of the
countries of Europe have had to give up the idea of the gold reserve.
Their currencies have gone into managed currencies. The British
have made quite a number of changes with reference to their gold
reserve requirements as they lost gold and as the requirements of the
war financing increased they made changes to meet the situation.
I don't feel that our gold reserve, our gold stock has had any relation to the purchasing power of our currency.
Mr. SMITH. Did it operate that way in Germany and in Russia ?
Mr. ECCLES. I don't believe it had any relationship.
Mr. SMITH. Well, now let us look and see. In Russia at one time
the ruble was devalued 75 percent. Did that make a difference in the



purchasing power of the rubles remaining in circulation after the
devaluation ?
Mr. ECCLES. But you devalue a currency in relation to gold without necessarily affecting its purchasing power.
Mr. SMITH. YOU don't mean to say that did not affect the purchasing power of the ruble?
Mr. ECCLES. I don't know—I am not familiar with the history of
the Russian ruble. All I know is that the Russians have mined
gold as a commodity to sell to the democracies and get goods that
they wanted to get and that they haven't looked upon gold as a necessary item to support their currency.
Mr. SMITH. Mr. Eccles, what do you think they devalued the currency for except to effect
Mr. ECCLES. The devaluation of a currency merely means you can
increase the supply of your currency and you decrease its purchasing*
Mr. SMITH. That is the point.
Mr. ECCLES. But the gold doesn't have anything to do with that.
You take in this country, we have had a tremendous expansion of—
we possibly have two or three times the volume of bank deposits in
currency that we had in, we will take the time of the last war, and
yet our price structure today is not any where near as high as it was
at the time of the last war.
At the time of the bank holiday we had outstanding in currency
the greatest volume of currency we had ever had outstanding ana
the lowest, possibly one of the lowest prices that we had had for a
good long while.
Mr. SMITH. You mean just before the crash we had that amount
of deposits. Deposits afterward dropped considerably, didn't they?
Mr. ECCLES. Yes; because some of the banks weren't opened and the
deposits were frozen—they weren't made available after the bank
Mr. SMITH. That is all, Mr. Chairman.
Mr. FORD. I want to ask one more question.
The CHAIRMAN. Very well.
Mr. FORD. Mr. Eccles, do you think that if the savings bonds or
savings stamp bonds we have out now that run for 12 years at 2y2
percent, which we are selling at the rate of about $600,000,000 a months
or something like that, if there was a clause put in there saying that
the person who held, the bond for the full 12 years would get a bonus
of one-half or 1 percent, do you think that would stimulate the sale
of those bonds?
Mr. ECCLES. I did not quite understand your question.
Mr. FORD. If the present bonds had a. clause in them," bonds that
are selling at low prices—low-priced bonds—if there was a clause
in the bond providing that if they held the bond for the full 12
years they would be given a bonus of one-half of 1 percent, which
would mean they would get instead of 2y2 percent over the 12-year
period they would get a full 3-percent interest; don't you think that
would loosen up a lot of money?
Mr. ECCLES. I don't think so. I don't think that the question of
whether it is 2.92 or practically 3 percent, which they are getting now,
makes any particular difference. I don't think an extra half percent
would make any difference.


Mr. FORD. YOU don't think so?
Mr. ECCLES. No; I don't think so.
Mr. FORD. I was just wondering what your opinion is.
Mr. ECCLES. I don't think so. I think that 3 percent—a 3-percent
return, or practically 3 percent compounded as at the present time,
is a good return on capital.
Mr. FORD. I am thinking; of the G series, which is a straight 2%
percent for 12 years, would be made more attractive if the purchasers were given a one-half of 1 percent bonus for holding that
bond for the 12-year period.
Mr. ECCLES. Well, of course, the minute you do that you throw all
the rest of your financing out of line. There is no reason why you
should give series G 3 percent for 12 years and series F no increase.
There would be no point in increasing series G and not increasing
everything else proportionately.
Mr. FORD. I am thinking it might bring out a lot of money now
that we are not getting.
Mr. ECCLES. Well, I feel that we have to keep the pattern of rates
steady. The relationship has been established, and I don't believe
right in the face of a rapidly increasing public debt you can begin
to shift your pattern of rates that are established without greatly
upsetting your market situation.
Mr. FORD. I am glad to have your opinion on that.
Mr. ECCLES. With reference to a question by Dr. Smith, a question
that he asked me, maybe I should clear up this point, that theoretically
and not practically, theoretically, so long as the statute provides that
there shall be 40 percent of gold held in the Reserve systeln against
the deposit liabilities
Mr. SMITH. Thirty-five percent.
Mr. ECCLES. Thirty-five; and 4 0 percent held against the currency liability, there is, as I say, a theoretical limitation to the expansion of currency and bank deposits, but that expansion, it seems
to me, is within the scope of our present gold reserve. The expansion can be so great that the devaluation that there would be and
could be, a very great devaluation in the purchasing power of currency without any change whatever in the dollar value of gold. You
could expand your currency and bank deposits, I think, as you indicated, up to 180-some-odd billion dollars. Such an expansion, such
an amount could create a tremendous inflation and thus destroy the
stability of the purchasing power of money, and that was what I was
trying to make clear—that the gold itself for all practical purposes,
had little or no value in stabilizing the purchasing power of our
currency or our money; that if you got the kind of an inflation that
you could get by maintaining the present gold reserve requirements,
and that the situation was such that further expansion could not be
carried out, and that Congress felt that it was necessary to have a
further expansion, they would very readily change, no doubt, the gold
reserve requirement just as they met a situation in 1932 by the passage
of the Glass-Steagall Act to meet a situation that seemed to be called
for at that time.
Mr. SMITH. NOW, Mr. Eccles, I agree with you that the gold held
in this country is unrelated or only remotely related to prices because
it isn't circulating. It can't have the proper and normal relation
to prices unless and until it is actually circulating.



There is another question I would like to ask you. You mentioned
Russia and Germany as being instances where it has been shown
there is no relation between gold and prices, in which, of course, I
think you are wholly mistaken. But may I ask you this question:
Do you have any historical evidence since the use of paper money,
to show where any monetary authority believed there was no relation
between gold and paper money, and have you any historical evidence
where any legislative body in the world, up until let us say 1917 or
1918, went on that assumption in dealing with the question of gold
as money?
Mr. ECCLES. Plenty has been written on the subject. The libraries,
I am sure, are full of pamphlets and articles and books on every
side of the question.
I haven't had the time to read them. I think they are living in
the past and that we have got a new world that we tire living in
and we haven't any blueprints. I have been so devoted to the present problems that I haven't had a great deal of time to delve into
the history of it.
Mr. SMITH. Well, John Law had that idea and they had it during
the French Revolution and we had it in the colonies, but doesn't
history tell us those ideas were given up ?
Mr. ECCLES. Well, as I say, I am not a historical authority.
Mr. WILLIAMS. Mr. Eccles, would you mind me asking you a
question with reference to this bill?
Mr. ECCLES. It would be quite refreshing.
Mr. WILLIAMS. Well, I want to ask for my own benefit and for the
benefit of the record, what is meant by the expression "central Reserve cities"? What does that mean?
Mr. ECCLES. I couldn't say except the two cities, New York and
Chicago, are at the present time classed as central Reserve cities.
The CHAIRMAN. They are fixed that way in the statute, aren't they?
Mr. ECCLES. The Board has the power to change the classification of cities, in other words.
Mr. WILLIAMS. The central Reserve cities under the regulations and
rules of the Board are simply New York and Chicago.
Mr. ECCLES. That is right.
Mr. WILLIAMS. NOW, wThat are Reserve cities? Let me ask you
if that means simply the cities where the Reserve banks are located?

Mr. WILLIAMS. What does it mean?
Mr. ECCLES. There are a great many cities where the Reserve
banks are not located—I think there are about 108 cities.
We have discussed a good number of times the establishing of a
formula by which you could decide which cities should be put in a
Reserve classification and in what we term a "country banking"
classification, cities which are not in either a Reserve city where a
Reserve bank is located, or a branch of Reserve bank. I have felt
they should possibly be all classified as "country"—"country bank"
classification. However, the bankers in those cities have preferred
to remain in the classification of Reserve cities and we haven't gone
so far as to arbitrarily change the classifications.
There isn't any good reason why some of the cities which are called
Reserve cities should be Reserve cities and other cities just as large


and possibly even larger, should be in the class of country bank
Mr. WILLIAMS. Well, what is the fundamental principle by which
you determine a Reserve city ?
Mr. ECCLES. Why, I have felt there is only one Reserve city and
that is New York. That is the one central Reserve city, that is the
point at which the surplus funds ultimately flow unless they go into
the Reserve bank of the district.
A country bank will carry a balance in a Reserve city but the
Reserve city carries its balance in excess of what it may have in the
Reserve System in a central Reserve city, so that it may well be—let
me put it this way, that New York is the only central Reserve city
in fact. New York doesn't carry balances throughout the country.
The country carries balances in New York and that is the distinction
between a central Reserve city and a Reserve city. The Reserve cities
are not likely to carry Reserve balances in country banks. The country banks carry their excesses in the Reserve cities; the Reserve cities
in the central Reserve city.
Mr. WILLIAMS. Are all cities where-they have banks that carry
country balances considered Reserve cities ?

is what I am trying to get straightened out.
What is the dividing line between them ?
Mr. ECCLES. We have none. There is nothing in the statute and
there is no formula by which we can go. The banks that desired to
be Reserve cities and have pretty largely continued as Reserve cities,
are now as they were in the beginning.
We have discussed the advisability of reducing the Reserve cities
or restricting Reserve cities to those points where there are Reserve
banks or branches of Reserve banks.
Mr. WILLIAMS. But you have enlarged that field if you have over
100 of them now.
Mr. ECCLES. NO ; we have reduced the number. There are less Reserve cities that there was.
Mr. WILLIAMS. YOU have a great many more Reserve cities than
you have Reserve banks and branches?
Mr. ECCLES. Yes; that is right; but there has always been substantially more.
Mr. WILLIAMS. I was wondering if there wasn't some kind of a
principle by which you determined what a Reserve city was.
Mr. ECCLES. Governor McKee can probably answer that question
for you.
Mr. MCKEE. Prior to the formation of the Federal Reserve System there was a correspondent bank relationship between banks
through which banking functions were carried out. Without such
a relationship banks could not function.
The National Banking Act provided for the recognition of balances
of country banks carried in Reserve cities as part of their reserve
required under the law at that time, and that built up these various
points throughout the country in excess of where there are regional
banks and Federal Reserve branches at that time, but the character
of the business in those towns was in part bank deposits and they
were recognized as Reserve cities and have continued as such.



As Governor Eccles said the amount has been materially reduced
from back in those days and probably could be reviewed again, but
that is how that Reserve city got its origin in my opinion.
Now, I am going back to the day when I was in the banking business and prior to the Federal Reserve Act, and I do know that we in
Reserve cities got credit for carrying our balances as a national bank
in a central Reserve city, and a small country national bank got
credit for carrying their reserve with us.
Mr. SMITH. Mr. Chairman, Mr. Williams, I believe the point that
you raised can be cleared if you go a little bit further with the
National Bank Act in this little booklet put out by the Federal Reserve Board, which is called The History of Reserve Requirements
for Banks in the United States. In this book appears the statement:
The next important change in the National Bank Act came in the act of March
31, 1918, which gave the Comptroller of the Currency the authority to designate
additional redemption cities.
In this act for the first time the term "Reserve cities" was used to designate
cities where banks might hold part of the reserve of banks located elsewhere.
The act also introduced—

and this is the point, Mr. Williams—
the act also introduced the term "central Reserve city," which was applied to
New York City because it was permitted to hold part of the reserves of all banks,
including those located in Reserve cities.

There is your distinction, if that is still being carried out.
Mr. WILLIAMS. The picture in my own mind now is that there are
cities containing banks that are carrying reserves that are not considered Reserve cities, just as those that are in the Reserve city classification.
Mr. ECCLES. That is right. As Governor McKee has pointed out,
before the time of the Federal Reserve Act country banks or banks
in smaller cities carried their reserves with banks in the larger cities,
and as the statute recognized those balances carried with those Reserve
banks, that is balances, carried with banks in what was designated
as Reserve cities, were looked upon as legal reserve.
Now, , of course, there has been a great shifting since that time.
Some cities have become much more important and some less important.
The establishment of the Reserve banks and branches have likewise
lessened the importance of the correspondent bank relationship, and
we do not recognize a balance carried with any other bank as a part
of .their legal reserve for any bank that is a member of the Reserve
System. All national banks, of course, are members and, of course,
those State banks, which are members, the only reserves which are
recognized as a legal reserve, are the reserves that are carried with the
Federal Reserve bank.
Now, there are a great many of the smaller banks, as you know,
that are State nonmember banks and they still are permitted to carry
their balances with banks in Reserve cities and be counted as their
legal reserve requirements by their State laws, so there is a good deal
of resistance on the part of banks in Reserve cities to have their cities
classified as "country banks" because they have a certain amount of
correspondent bank business from the nonmember State banks and
they would likely lose that business if their classification was changed
to "country banks" from Reserve city banks.


That is why the number of Reserve cities has been held stationary.
It is due largely to the way it has grown up.
Mr. WILLIAMS. There is one other thing. The reserves are not as
high, either?
Mr. ECCLES. The reserve requirements?
Mr. WILLIAMS. I mean legal requirements.
Mr. ECCLES. That is more of a factor now than it would have been
for the past 6 or 7 years. During the past 6 or 7 years they all had
such large excess reserves that it wasn't much of a factor. As the
excess reserves begin to disappear that will be an inducement. However, a Reserve city should favor from that standpoint, being classified as a country bank city because its reserve requirements would be
reduced. That would be in its favor.
Mr. WILLIAMS. It doesn't seem to me there is very much scientific
basis for this reserve requirement when based upon whether or not a
particular bank is in a Reserve city. In other words, there may be a
bank classified as a "country bank" that may be much larger than
another bank in a larger city.
Mr. ECCLES. That is correct.
Mr. WILLIAMS. And still the reserve requirements would be much
Mr. ECCLES. That is correct, exactly. It is simply a question of
what has been. Of course, the question of reserve requirements gets
into the question of all banks of deposit being members. I mean we
can get into a very extended discussion of this; and I agree with you
that this whole question of reserve requirements is not very scientific
and if the subject were not so controversial I certainly would like to
see this whole subject of reserve requirements and bank membership
and quite a number of other things that don't make very much sense,
considered, but I don't believe now is the time to undertake any
fundamental overhauling of the banking picture which could be done,
I think, with value to the public.
The CHAIRMAN. It is my recollection that the law classified New
York and Chicago as central Reserve cities and also made a list of
Reserve cities.
I find in the Federal Reserve Act a provision that authorizes the
Federal Reserve Board to add to the number of cities classified as
Reserve and central cities, and there is a further provision which
brings national bank associations under the requirements set forth in
section 20 of the act. It is also provided that existing reserve and
central reserve cities may be reclassified or terminated—terminate
their designation as such.
It would seem that that law established central reserve and reserve
Mr. ECCLES. That is right.
The CHAIRMAN. And the Federal Reserve Act allows and empowers
the Board to classify or abolish them.
Mr. ECCLES. That is right. We recognize that we have that power,
but have exercised it very little.
The CHAIRMAN. Off the record.
(Discussion off the record.)



The CHAIRMAN. Of course, the committee appreciates your attendance and your able discussion of this bill, Governor Eccles, and
we wish to thank you.
Mr. ECCLES. At the hearing last Wednesday there were certain excerpts from the case of Michels&ri v. Penney, and other citations that
the chairman said he would accept for this record.
Mr. CHAIRMAN. That is true; and you may hand them to the
(The documents referred to are as follows:)


(D. C. S. D. N. X., O.'t. 6, 1941) 41 Fed. Supp. 603
NOTE.—The opinion in the above-entitled case is very long; contains a voluminous statement of facts regarding a number of claims involved in the case; and
discusses at some length the qualifications and responsibilities of directors of
national banks. The matter quoted below relates only to that part of the case
dealing with the liability of a director for losses upon loans made while reserves
are deficient.
The case is being appealed to the circuit court of appeals.

"Action by Hamilton Michel sen and others, individually 'and as assignees, and
constituting depositors of the City National Bank in Miami, Miami, Florida,
Depositors' Committee on behalf of themselves and all depositors of the City
National Bank in Miami, Miami, Florida, against James Penney, sometimes known
and referred to as J. C. Penney, and another to recover for losses allegedly sustained by reason of the named defendant's alleged negligence and failure to
perform his duty as a director of the bank. On exceptions to findings and conclusions of a Special Master.
"Exceptions sustained in part and overruled in part" (p. 606).







"On reconsideration of the whole case, X am satisfied that what I have already
said (on the subjects of 'casual relation* and 'statutory interpretation') makes
plain why, on the particular facts involved in Reserve Deficiency Losses Nos. 6
and 7 herein, I do not consider myself bound by Holman v. Cross„ 6 Cir., 1935,
75 F. 2d 909, or by Allen v. Luke, C. C. D. Mass. 1908, 163 F. 1018, to the extent
that they point to a contrary^ conclusion" (p. 615).







" C L A I M S NOS. G AND 7

(Losses upon loans made during reserve deficiency)
"Net loss claimed $28,545.65.
"Penalties, $5,178.21.
[15, 16] "As to this claim, my difference with the Master is that,, although
Penney is not shown to have known personally of the reserve deficiencies, he
should, upon the whole case, be held to be chargeable with such notice. Consequently, if by reason of this, liability rests upon him, it should be so declared.
So far as the bank suffered losses as a result of loans made during the periods
when there were deficiencies at the Federal Reserve Bank, I shall hold Penney
to responsibility. The express command of the statute is that during a time
of reserve deficiency—'* * * No bank shall at any time make new loans or
shall pay any dividends unless and until the total balance required by law is
fully restored.' 12 V. S. C. A. § 4G4.
"This provision of law should be construed to mean precisely what it says.
Its purpose is to require a bank that is deficient in reserves to restore the
same as quickly as possible. Restoration will be neither expeditious nor certain
if a bank be permitted to pay dividends and make interim loans. Furthermore,
if the statute can be violated with impunity, and without personal liability to
the directors who give assent thereto, enactment of the measure was an idle

gesture. Losses resulting from loans made during the time that thereswas a
deficiency in reserves are recoverable. A diligent director would have known
of the deficiency and acted accordingly.
"[17] The law does contemplate that a bank's reserve may fall below the
minimum that should at all times be on deposit. For such shortages as occur,
a regulation of the Federal Reserve System provides its own penalties, and
these in this case were paid. Penney should not be compelled to restore them.
They were a part of the operating cost of the bank, and, in the absence of more
proof than is here, as to which overdrafts were justifiable and which were not,
I shall hold for defendant" (p. 628).
In the case of Holman v. Cross (C. 0. A. 6th Circuit, 1935), 75 Fed. (2d)
900, the receiver of the First National Bank of Allegan, Michigan, brought
suit against the directors to recover losses on loans on the ground that they
were made in violation of various statutes, or negligently or improvidently.
Among other things he sought to recover the amount of losses sustained on
loans made while the reserves were deficient in violation of the proviso in
section 19 of the Federal Reserve Act that "no bank shall at any time make
new loans or shall pay any dividends unless and until the total balance required
by law is fully restored." In support of this contention he relied upon a provision of section 2 of the Federal Reserve Act to the effect that in cases of
noncompliance or violations of the provisions of the Federal Reserve Act
''every director who participated in or assented to the same shall be held liable
in his personal or individual capacity for all damages which said bank, its
shareholders, or any other person shall have sustained in conscqucnce of such
The court held that the losses on the loans made while the reserves were
deficient were not "in consequence of" the violation of the Reserve Act and
that therefore the directors were not personally liable. After discussing a
number of cases holding that, even in the absence of words of limitation, the
violation of a statutory duty may support liability only where the loss or injury
results approximately from such violations, the court said:
"Finally, in this connection it is clear that the mandate of the statute
here involved was intended not to protect member banks against loss, but to
protect the Federal Reserve System in maintaining an adequate compulsory
reserve to enable reserve banks to furnish an elastic currency and to afford
means for rediscounting commercial paper. The injury intended to be prevented by the law alleged to have been violated, is not the injury here complained of. It follows that the court did not err in sustaining the exceptions
of the defendant to the findings and conclusions of the master imposing upon
them an individual liability for losses which resulted from loans made while
the deposit with the Reserve Bank was impaired."
In the case of Allen v. Luke et al. (U. S. Circuit Court, District of Massachusetts, 1908), 163 Fed. 1018, the stockholders of a national bank brought
suit against the directors to recover the amount of unpaid loans made while
the bank's reserve was too low in violation of section 5191 of the Revised
Statutes. The court refused to hold the directors liable on this ground and
"The object of Rev. St. § 5191 is to insure the constant presence of a cash
reserve. If this were depleted below the statutory limit, the bank might suffer loss for want of cash on hand, and for such a loss, if one occurred, the
defendents might be liable, although the loans made while the reserve was
below the limit were paid at maturity. This provision of the statute was not
intended to protect the bank against bad loans, and a loss arising from their
nonpayment cannot fairly be said to be caused by the directors' violation of
law. Moreover, the bill here goes no to allege that the statutory reserve was
replenished after the bad loans were made, and before the bank went into
the receiver's hands. In this respect thr deirmrers are sustained.

"SEC. 5191. Every national banking association in either of the following
cities: Albany, Baltimore, Boston, Cincinnati, Chicago, Cleveland, Detroit, Louisville, Milwaukee, New Orleans, New York, Philadelphia, Pittsburgh, Saint Louis,
San Francisco, and Washington shall at all times have on hand, in lawful money
of the United States, an amount equal to at least twenty-five per centum of the
aggregate amount of its notes in circulation and its deposits; and every other
association shall at all times have on hand, in lawful money of the United States.



an amount equal to at least fifteen per centum of the aggregate amount of its
notes in circulation, and of its deposit. Whenever the lawful money of any
association in any of the cities named shall be below the amount of twenty-five
per centum of its circulation and deposits, and whenever the lawful money of
any other association shall be below fifteen per centum of its circulation and
deposits, such association shall not increase its liabilities by making any new
loans or discounts otherwise than by discounting or purchasing bills of exchange
payable at sight, nor make any dividend of it profits until the required proportion,. between the aggregate amount of its outstanding notes of circulation and
deposits and its lawful money of the United States, has been restored. And the
Comptroller of the Currency may notify any association, whose lawful-money
reserve shall be below the amount above required to be kept on hand, to make
good such reserve; and if such association shall fail for thirty days thereafter
so to make good its reserve of lawful money, the Comptroller may, with the concurrence of the Secretary of the Treasury, appoint a receiver to wind up the
business of the association, as provided in section fifty-two hundred and thirtyfour."

The CHAIRMAN. The committee will stand adjourned until next
(Whereupon, at 1:15 p. m. the committee adjourned until Tuesday,
June 23,1942.)