View original document

The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.







Critics of the proposed Banking Bill of 1935 have now had full
opportunity to present their views. It is my purpose today to discuss
briefly the objections that have been raised.
One cry raised against the bill is that it is based on a new, untried
and unsound theory. Let us inquire what that pernicious theory is.
It is, in a nutshell, that the authority and responsibility for regulation
of the money supply of the country should be entrusted to a public
body and exercised in the public interest. This is not a new theory.
In its essentials it is nearly as old as government itself. One of the
first powers conferred by the Constitutional Assembly upon the
Congress of the United States was the power to coin money and to
regulate the value thereof. This bill carries out the purposes of this
constitutional provision by recognizing the well-known and unques­
tionable, though not altogether unquestioned, fact that bank deposits
subject to check are money in the same sense as coin and currency.
Some of our critics have attempted to maintain that deposits are not
money. But this is quibbling over words. The spending of a dollar by
writing out a check has just as much effect on the demand for goods
and on prices as the spending of a dollar of currency. Regulation of
the volume of money, therefore, must include regulation of deposits
as well as of currency.
It is true that up to the war there was no provision for regulation
of the volume of deposit currency for the purpose of achieving given
objectives. We relied upon the workings of the automatic gold stand­
ard. At no time since the war, however, has the gold standard been
automatic. We did not dare to allow our system to expand to the
limits permitted by the enormous gold inflow after the war. Neither
can we tolerate the expansion made possible by our present huge
supplies of gold. I am, moreover, confident that we would never again
tolerate such a drastic deflation as resulted when foreign central
banks drew gold away from us in 1931. The automatic gold standard,
in other words, is gone, and I see no early prospect of its return. The
only alternative to violent upward and downward fluctuations in our
money supply, with its accompanying disastrous effect on business
activity, is an effort to create adequate machinery for regulating
changes in the volume of bank deposits. We are today confronted
with a condition, not a theory. However much in theory you may
prefer an automatic gold standard, what you have is a situation which
contains the basis of a more drastic inflation than we have ever



experienced in this country. If we are not to allow this to happen,
we must have the machinery for counteracting it and we must be
prepared to use this machinery.
Since we are committed to regulation, there are two questions
which we must ask ourselves and attempt to answer. The first is,
does the system as now constituted offer the best possibilities for the
successful formulation and prosecution of monetary policy? The
second is, where should the authority and responsibility for national
monetary policies be placed?
I wonder how many of you appreciate how unsatisfactory the set-up
of the Federal Reserve System is from an administrative point of
view. Do you realize that the authority and responsibility for openmarket operations, the most important instrument of monetary policy,
is diffused in varying degrees throughout 14 separate bodies, composed
of 128 men? What private business, let me ask you, could be success­
fully managed with such a diffusion of authority and responsibility?
What other public or private business anywhere has such a cumber­
some organization as this for the making of vital decisions of policy?
This system has been described as one of checks and balances. This
is true in the sense that it checks or retards necessary action and
leaves the public interest in a precarious balance. It is a system that
leaves nowhere a clear and unmistakable responsibility for the deci­
sions taken—nowhere a clear and unmistakable responsibility for
the ultimate effect of these decisions on business conditions and
If we really want to make conditions as favorable as possible for
the successful formulation and prosecution of monetary policy, it
appears obvious that the authority and responsibility for such policy
must be inescapably fixed on a small clearly defined body. The
question is, how shall this body be constituted? If the decisions of
this body affected only bankers and no other class in the community,
I would unhesitatingly say that the controlling body should be elected
by bankers. But the fact is that decisions of the Reserve administra­
tion affect the economic well-being of everyone in the community.
As Mr. Aldrich remarked in his recent testimony before the Senate
Committee, “ This bill is not the business of the banks, except as
they are concerned in the welfare of the nation as a whole.”
You, as bankers, know very well that individually you have little
or nothing to do either with the amount of deposits your customers
leave with you or with the use that is made of those deposits. All
you can do individually is to try to make as large and as profitable
loans and investments as you can with due regard to safety. You are

by profession retail or wholesale merchants dealing in credit, and
money; you create as much money as your opportunities for lending
or investing afford and as much in ordinary times as your reserves
will permit. You have no power individually to influence the volume
of money that is created. Your function is a private business function;
but the regulation of changes in the total volume of money is a
public function.
You are told that since the Reserve banks deal with your money
you should have some say in its investment. But this argument will
not stand examination. When the Reserve banks buy securities they
do not do so with existing money; they create new money for the
purpose, and this increases your reserves and your deposits. When
they sell securities, you lose deposits and reserve funds. The Reserve
banks, in other words, are not agencies for the investment of member
bank funds; they actually create and destroy money. Neither are
open-market operations a regional or local matter. Their effect
cannot be confined to a single district, but is nationwide and affects
all classes.
In this connection, I should like to quote from an article by Mr.
A. P. Giannini in the current issue of the magazine Today. He
puts very well the point I have been trying to make. He says,
“ Let us, as bankers, strive to serve the interests of our depositors,
borrowers, and stockholders, as ably as we can, and place the responsi­
bility for the determination of what is really public policy unequivocably in a public body. That is not only the proper attitude
for bankers to take, but from a purely selfish point of view it is the
most prudent. The sooner we recognize that to provide the country
with a sound and flexible medium of exchange is a public trust
and not a private privilege, the better it will be for us.”
The position I am taking is far from recommending that the
Federal Reserve Board be given control over the activities of banks.
On the contrary I want to preserve the opportunity for banks to
conduct their own business in their own way, subject only to a
careful regard to safety. It is only the regulation of changes in the
total volume of money that I believe should be entrusted to a public
It has been said that the banking bill proposes to destroy the
regional autonomy of the individual Reserve banks. This is not true.
In fact, far from destroying their regional autonomy, the bill in
a variety of ways increases that autonomy in all purely regional
and local matters.
Much is made of the fact that it is proposed to give the Federal


Reserve Board power of approval once every three years over the
appointment of Reserve bank governors, but our critics have ignored
the powers that the Board now has and would relinquish under
the terms of this bill. The Board now appoints three directors in­
cluding the chairman of the board. Under the bill, one, and in many
cases two, of these directors will be appointed by the local board,
subject only to approval by the Federal Reserve Board once every
three years. The Federal Reserve Board now has the power of direct
appointment of all the officers and employees in the Federal agents’
and in the chairmen’s divisions in the Reserve banks. Under the
terms of this bill all employees of the Reserve banks will be locally
appointed. Under the bill the Federal Reserve Board will have only
one link with the selection of the personnel of the Reserve banks,
namely, approval of the governor, who will also be chairman of the
board of directors and will be the chief executive of the bank.
I ask you to note carefully that it is not proposed to have the
Federal Reserve Board appoint governors. That is reserved for the
local board of directors. It would not be possible, therefore, for
the Federal Reserve Board to force any person on a Reserve bank as
governor if he were not acceptable to the local board of directors.
If, after a governor has been appointed and approved, the local
board of directors is not satisfied with him, it need not reappoint
him, and the Federal Reserve Board could not force his reappointment.
Without the minimum of authority over the local personnel provided
in the bill the Federal Reserve Board could not discharge its responsi­
bilities in supervising and coordinating the activities of the Reserve
banks and in seeing that national credit policies are effectvely carried
out by the regional banks. The Federal Reserve Board, as you know,
has little or no direct contact with the banks or the public. It works
almost entirely through the Federal Reserve banks and it must have
at the head of these banks men that are acceptable to itself. It is
surely not being too optimistic to expect that there are at least
twelve people in this country who would be acceptable both to the
Federal Reserve Board and to the boards of directors of the twelve
Federal Reserve banks.
It has been stated or implied by critics that the Federal Reserve
Board under the terms of the bill would acquire new powers over
the relationship between the Reserve banks and their member banks.
I want to say emphatically that there is nothing whatever in the
bill that would impair in any way the independence of the Reserve
banks in this respect. The extent to which the Reserve banks make
advances to member banks will continue to be determined by the
boards of directors of the Federal Reserve banks. The Federal Reserve

Board has no power, and will have no power, to force a Reserve bank
to make loans to member banks.
The Federal Reserve Board now has the power and responsibility
of defining paper that is eligible for rediscount or as a basis of
advances. At the present time, however, this power is circumscribed
by rigid requirements laid down in the law. Under the proposed bill
all sound assets of banks may be made available as a basis of borrow­
ing from the Reserve banks. The Board, however, will not have any
authority to determine what assets, in addition to being eligible, will
be acceptable to the Reserve banks from the credit standpoint. The
banking judgment of the Reserve banks will continue to determine
What we have attempted to do in this bill is to work out a proper
division of powers between the Federal Reserve Board and the Federal
Reserve banks, giving the Federal Reserve Board increased authority
and responsibility for the determination of national policies, and at
the same time strengthening the autonomy of the Federal Reserve
banks in matters of regional and local concern. In this connection, I
should like to draw your attention to a provision in the bill which
has excited little comment. It is to the effect that the Board may
delegate the exercise of certain powers to its representatives. It was
inserted for the purpose, among others, of enabling the Board to
delegate to the Reserve banks the exercise of many powers which the
Board is required to exercise now, but which it will be able under
the new law to delegate to the Reserve banks. Such powers include
the granting of voting permits to holding company affiliates, the
permission to directors to serve more than one bank, and many
other matters in which the closeness of the Reserve banks to the
local situation makes them better able to reach current decisions
than is possible for the Federal Reserve Board in Washington.
The attack on the banking bill most frequently resorted to by
its opponents takes the form of raising the spectre of political domina­
tion. It is said that under this bill monetary policy would be formu­
lated by a political body for political ends. The fact is that there
is nothing in the bill which changes in any way the relationship
between the Administration and the Federal Reserve Board. In fact,
various provisions in the bill are expressly designed to strengthen the
independence of the Federal Reserve Board and to insulate it from
pressure to adopt policies on partisan grounds. The term of Board
members remains at twelve years, and under the recent Humphrey
decision of the Supreme Court the members cannot be removed by
the President except for cause. It is proposed to have the Governor
serve at the pleasure of the President, but this has always been the


case. The bill as passed by the House proposes that if the Governor
is not redesignated as such by the President he may either retain
his membership on the Board or resign, and if he resigns he may
resume his banking business without being obliged to wait for two
years. This is designed to make it easier to obtain as governors
capable men with banking experience.
Independence of the Federal Reserve Board will be increased by
the bill in the first place by granting future Board members pensions
and higher salaries. There is also proposed a change in the qualifica­
tions for Board members which should tend to secure the bestqualified people in the country. Under existing law almost anyone
could meet the qualifications for Board members. They must merely
represent industry, commerce, finance, or agriculture. This, in fact,
is not a qualification, but an attempt to have a body representative
of all the different elements of population except labor. It is better to
have all the members of the Board represent the nation as a whole
and to require that they be fitted for their duties by training or
experience. That is proposed in the bill. The fact that the law would
give specific instructions as to the end toward which credit policy
should be directed would also add to the Board’s independence. If, in
the future, the Board should be subjected to pressure to use its
powers for political purposes, it would have the support of the law
in refusing to yield to such pressure. With the additional powers
and responsibility conferred upon the Board, enhanced prestige should
also follow.
I think that any fair-minded person considering these facts would
come to the conclusion that there would be less possibility of the
Federal Reserve Board being swayed by partisan motives in the future
than there has been in the past. And what has been the record in
the past? It is one of which the Federal Reserve Board may well
be proud. Our opponents have had to resort to insinuations and in­
nuendoes; they have been unable to unearth a single scrap of evidence
that the Board has ever been swayed by political motives. Mr.
Ogden Mills, who made a bitter attack upon the bill last week, in­
cidentally stated that from 1921 to 1933 the Reserve Board made a
fine record of independence. He stressed, in particular, that in 1929
the Secretary of the Treasury was consistently outvoted on the
Federal Reserve Board. If, therefore, with lower salaries and no
pensions, and the lack of a specific objective, the Board has made
so fine a record of integrity in the past, I have no doubt whatever
in my own mind that with pensions, higher salaries, a specific objective,
and enhanced prestige, the Board will remain independent from
political pressure of the undesirable sort in the future.


We cannot, of course, stop our critics from calling the Federal
Reserve Board a political body. But if they do that they must call
all our independent commissions political. If the Interstate Com­
merce Commission is a political body and its members politicians;
if the Federal Trade Commission, the Securities and Exchange Com­
mission, the Federal Deposit Insurance Corporation, and similar
governmental agencies are political bodies and their members pol­
iticians, then the Federal Reserve Board is a political body and its
members politicians.
There has been no evidence of this, however, since these various
agencies of the Government were established; no evidence that they
have been actuated by either political or private interests rather than
by the public interest. The men chosen to fill these offices, judicial
or administrative, are chosen by the President, by and with the
advice and consent of the Senate. That is the method we have adopted
in our form of government. That is the method we have adhered to
in the banking bill.
In disposing of the political domination argument, I have, I think,
disposed of many of the other objections to the bill. Thus, it is said
that the purpose of the bill is to compel the Reserve banks to
finance the deficits of the Government. This argument is rather
ridiculous in the face of the fact that the Government is having no
difficulty whatever in financing its requirements and does not anticipate
any. Just as soon as the national income increases sufficiently— and
it is being increased—the Government expects to have no further
deficit. The banking bill would have been introduced in Congress
if the Government had been running a surplus instead of a deficit.
Some people who do not approve of the Government’s spending
program feel that if the banking system were under banker control
it might be made so difficult for the Government to borrow that it
would have to cease spending and balance the budget at once. That,
I assure you, is the most dangerous and irresponsible argument that
any group of bankers could present. Congress, which has the power
to appropriate money, has also the power to find means to raise it.
Make no mistake about that. If you disapprove of the Government’s
policy you must resort to the ballot to make your opposition effective.
To attempt to hinder the Government in carrying out the mandates
of Congress and in raising the funds necessary for the purpose is to
invite disaster for the banking system.
Some of the critics of the banking bill have asserted that if the
German Government had not been able to borrow from the Reichsbank there would have been no inflation in Germany. This is so
incredibly naive that I cannot help feeling that those who advance

this argument have their tongues in their cheeks. If the German
Government were prepared to appropriate the money, do you think
for a minute that it would not have been prepared to change the
Reichsbank law if borrowing from that bank had been prohibited,
or even of issuing its own notes? Both England and France borrowed
heavily from their nominally independent central banks, and the
British Government issued its own notes in the war.
I am not, please note, proposing that the Federal Reserve Board
must be subservient to the Treasury. Far from it. What I am insisting
upon, however, is that Congress, which has the power to appropriate
money, has also the power to raise it. If we are to avoid disastrous
fiscal policies we must rely on Congress and the Administration, and
not place our faith in some legal provision of the banking law that
can be changed overnight.
It has been suggested that the proposal to have monetary policy
determined by a public body marks a radical departure from central
banking practice in other countries. This is a simple question of fact,
and the facts are known. In Japan, Sweden, Germany, Switzerland,
New Zealand, Finland, Australia, and Norway, both the governor and
all, or a majority of, the directors are appointed by the government.
In various other countries the governor is either appointed by the
government or his appointment is subject to approval by the govern­
ment. The Bank of England is always cited as the outstanding
example of an independent central bank. It is common knowledge,
however, that the Bank of England works in close cooperation with
the Treasury and would not attempt to embark upon any policy
opposed to the wishes of the government of the day. Viscount
Snowden, the former Labor Chancellor of the Exchequer, has stated
that, “ I do not see that it would make any difference to the manage­
ment or policy of the Bank of England if it were nominally made into
a state bank— for all practical purposes it is that now.” He further
states that “ No important departure in policy is ever taken by the
bank without consultation with Treasury.” (Mr. Lloyd George’s
New Deal, p. 42.)
Against the provision in the bill which would remove the require­
ment of specific collateral against Federal Reserve notes, it is urged
that this would permit the issue of Federal Reserve notes regardless
of the needs of business, that it would result in inflation and the
debasement of the currency. Such criticism displays a complete
ignorance of the facts. The theory that Federal Reserve notes should
be secured by eligible commercial paper in excess of the forty per
cent gold requirement is an old theory, and a tried theory, and a
demonstrably unsound theory. It was early discovered that there


is no necessary connection between the requirements of the community
for notes, the requirements of commercial borrowers for loans, and the
requirements of member banks for loans from the Reserve banks.
I need not. dwell on this. As bankers, you are perfectly familiar
with it. We are predominantly a deposit-using country, and the
amount of notes outstanding is determined mainly by the needs of
consumers. Reserve banks pay out notes only on demand to member
banks. Suppose the Reserve banks bought $100,000,000 of securities
and paid for them with notes. What would happen? After the sellers
of the securities recovered from their astonishment, they would
immediately summon armored cars and rush the notes off to the
banks. These banks, in turn, would send them back to the Reserve
Some of our critics have admitted that we cannot keep outstanding
more notes than the community requires, but have maintained that
the removal of specific collateral would permit greater open-market
buying operations by the Reserve banks. This is true. But the fact
is !that the restraint on open-market operations by this method occurs
at the wrong time. These restraints do not restrict inflation. In
1919-1920 Reserve banks possessed an abundance of paper eligible as
collateral against Federal Reserve notes. It was at a time of severe
deflation, such as 1931, that the specific collateral provision limited
the power of the Reserve banks to carry out open-market operations
that were needed in order to arrest the course of a terrific deflation.
The purpose of this provision is to remove a condition that has in
the past and may in the future aggravate a deflation. It should never
again be necessary for the Reserve banks to watch thousands of banks
and businesses fail while they wait for Congress to convene to pass
emergency legislation permitting them to place Government bonds
behind Federal Reserve notes.
Another line of criticism of the banking bill is that it would
result in a deterioration of the quality of banking assets. On this
ground proposed changes in the eligibility and real estate provisions
are attacked. The first point to be mentioned in this connection is
one that I, from my experience in banking, have well in mind. It
is that no matter how desirable short, self-liquidating commercial
loans may be, they are not available in sufficient quantity to afford
an adequate outlet for the banks’ funds.
There are, I know, some writers who have a theory that bank loans
should be restricted to such paper, and that the Federal Reserve Act
should be designed with ¿his in mind. But again I would remind you
that we are confronted with a condition and not a theory. We are
legislating not for an ideal system to be constructed anew but for

one that actually exists. If banks are to make a living and serve the
borrowing needs of their communities, they must make longer-term
loans. If they are to be permitted to accept savings deposits, they
should also be permitted to make real estate loans under proper
safeguards. We are simply recognizing hard facts, and are endeavor­
ing to make it as safe as possible for banks to serve adequately their
own interests and the interests of their communities. We most em­
phatically are not proposing that banks should make poor loans.
For the first time it is proposed to write the phrase, “ sound assets,”
into the Federal Reserve Act, and if experience means anything, assets
will have to be sound before the Reserve banks will accept them as
collateral for advances.
As bankers, I should think that you would heartily approve of a
step which looks toward the substance rather than the form of loans;
to their quality, rather than to their maturity. I recently had occasion
to have an examination made of the form of the assets of all national
banks that were suspended in the years 1930-1932, and discovered
that on the call dates immediately prior to suspension, real estate
loans comprised only 11 per cent of total loans and investments;
securities held, 30 per cent.; loans on securities, 18 per cent; and
all other loans, 41 per cent. The bulk of the latter was nominally
short-term. It is obvious that a large proportion of paper that is in
form short-time commercial paper does not protect the solvency of
a bank.
Some people have criticized the objective of monetary policy which
has been suggested in the bill to the effect that the Federal Reserve
Board shall use its powers to promote conditions conducive to business
stability, so far as may be possible within the scope of monetary
action. It has been said that this is economic planning and that it
arouses unwarranted expectations. I fail to see the force of such
criticisms. It appears to me patently desirable that, if Congress
delegates its money-issuing powers to the Federal Reserve Board, it
should also give instructions as to the end toward which those powers
should be exercised. The present objective—the accommodation of
commerce, agriculture, and industry—is vague to the point of mean­
inglessness, and in effect is no objective. I think that all of us, regard­
less of how much importance we attach to the effectiveness of monetary
policy, agree that business stability is a desirable objective. It does
not follow, because we cannot achieve stability through monetary
action alone, that we should not do all we can through monetary
action to promote conditions conducive to stability. The two most
recent central banks, those of Canada and the Argentine, both have
legal objectives similar to the one we are proposing.


As a last line of defense, opponents of this legislation have pro­
posed the creation of a commission of experts who would review the
whole field of banking legislation at leisure and would then make a
report to serve as a basis for reform. The bill, they say, was hastily
and even surreptitiously drawn; there is no emergency now, and
therefore time should be given for further study. I am glad of this
opportunity to state that this bill was neither hastily nor surreptitiously
drawn. It was prepared in consultation with persons who have been
associated with the System for many years, and was based on the
experience of the Federal Reserve System during the past twenty
years, and particularly during the depression. Treasury officials and
leading bankers were also consulted.
Whether there is an emergency now is a matter for difference of
opinion. I should think that the fact that automatic rules and
guides to policy are a thing of the past; that we have the basis of
the greatest banking expansion we have ever experienced; that we
are beginning to pull out of the worst depression we have ever had
and are entering upon a period which, we may be confident, will
differ from anything we have had in the past—I should think all
these factors consitute what may legitimately be called an emergency
in the sense of being a good reason for prompt action in perfecting
the machinery that will be called upon to meet many new and urgent
The proposal for further time to study the bill displays misconcep­
tion of its nature. Its provisions are not such as would be changed
by the collection of more factual data. They either rest upon our
past experience and upon facts that are well known; or they concern
matters of principle, on which we should be as well prepared to have
an opinion today as we would be in five years’ time.
The matter of principle at stake is this: shall we attempt to make
conditions as favorable as possible for efficient control of monetary
policy by a public body in the public interest, or shall we perpetuate
the present system of diffused authority and responsibility, of checks
and impediments to effective control? That, gentlemen, is the issue
on which I should like you to examine carefully and critically the
case for and against the banking bill. If you will examine the argu­
ments objectively and dispassionately, and avoid hysteria and
emotionalism, I am confident that you will accord the Banking Bill
of 1935 your warm support.