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X -9222

For release at 9:50 p.m. Eastern Standard Time, May 25« 1955




The Banking Bill >f 1935
hadio Speech
jf

Marriner S. Eccles
Governor S tho Federal Reserve Board
Saturday night, May 25, 1935,
In thfc National Radio F run
arranged by the Washington
Star • - Broadcast vc-r the
•
notw.«rk jf the National Broadcasting Company.

)

I

I am grateful to the Washington Star for the invitation to speak in this
Forum.
1 should like to talk to you as plainly as I can about the Banking Bill
which i3 pending before Congress.

In the brief time at my disposal I shall have

to confine myself to the most controversial features of the bill and omit discussion of many other provisions of the bill which would, in my judgment, contribute towards recovery, as well as towards the better coordinated and moreefficient administration of the Federal Reserva System.
I shall assume that you believe that in order to have our money system controlled for the benefit of the nation as a whole and not for the benefit of
special interests this control must bn in the hands of a responsible body.

If

after all that this nation has gone through ouring the past five years you still
believe that we can leave our monetary system to chance or to fate, then it would
be futile for me to try to persuade you that our present system can and should be
improved.
With tho banking cataclysm so fresh in our memories, we would be justified
in saying that the Government had failed in its duty if it neglected to correct
at least some of those apparent defects in our banking system which contributed
to bringing untold distress to millions of our* people and threatened to plunge
our entire economy into the abyss. We are told that there is no emergency at
this time which demands prompt action to correct these defects, but surely we
shoula not wait for another crisir; before baking the steps necessary to remedy
obvious defects which painful experience has exposed.

We should profit by the

lessons we have learned fror?. the emergency.
The real problem is the control over the volume and cost of money.
fects which I have mentioned ar

;

The de-

i to the absence of powers of control,but to

the fact that the present responsibility for the exorcise of these powers is so
diffused and divided as to hamper seriously, if not to frustrate, their effective
use.



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We need also to state the objective towards which these powers
should be directed.

At present there is no objective for monetary

policy stated in the law.

The Banking Bill as passed by the House of

Representatives proposes a definite objective which is, in a word, that
monetary policy shall bs directed towards the maintenance of stable
conditions of production, employment, and prices so l a as this can be
'r
accomplished within the scope of monetary action.
I do not wish to be understood as believing that by monetary action
alone we can eliminate all booms and depressions and achieve a permanent
ana unvarying stability.

I do believe firmly, however, that by monetary

means exorcised promptly and courageously we can greatly mitigate the
worst evils of inflation anc aeflation.
iuhat are those powers of control to which I refer?
three principal means of control which now exist.

There are

The first is the power

to raise and lower the discount rate, that iz, to determine the cost
at which banks can borrow from the Federal hi^rrvc banks and consequently
to influence the cost at which the public car: borrow from the brinks.
The importance of this power is apparent.

By lowering or increasing

interest rate-3 it is possible to lower or increase the cost of o.oing
business ^nd, therefore, to hive an influence over the contraction or
expansion of business.

This power is now vested in the Federal neserve

Board at Washington.
The second means of control to which I havo referred is the power
to raise or lower rocervc requirumonts of the barks which are members
of the Federal ftorerve System.




This power more directly influences the

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X-9222

volume of money because under our law the amount of deposits that banks
can create is limited in proportion to the amount of reserves they possess.
Therefore, an increase or a decrease in the volume of reserves tends to
increase or decrease the volume of deposits which are- our principal means
of payment, or money.

Since 1935 this power has been vested in the Federal

Reserve Board, but it can only be exercised when the President declares
that an emergency exists and gives his approval.

The responsibility for

declaring an emergency should not be placed upon the President.

Even if

an emergency did not exist, the declaring of it would almost certainly
create one. The bill proposes to give the Federal Reserve Board the use
of this most important instrument of control without requiring the President
to aeclare an emergency, which might involve insurmountable political
obstacles. Tho Federal Reserve Board shoulc be in a position to exercise
this powc-r in the norral course of events for the very purpose of preventing
an emergency.
The third means of control is what is knov.n, perhaps somewhat
mysteriously, as open-mark' t operations.

Without going into the details

of this techniccl cat:! .<•. op

tiuns roan that the Federal

Reserve banks vrhe:i t\ >:? i i~h to increase LK
by buying Governra i

!

fjr thesn purchases .i
.

ma of money can do so

: i: s i: U • pen m rkot.

The nonoy they pay

• reserves of the r

banks.

Conversely v.'hen the iie serve banks wish to diminish the volumo of member
bank reserves they can sell socuritics oid in effect 1 ck up tho money
paid by the banks for the securities.

In this way they can directly in-

fluence the available volume J£ raonoy. At th<

lent time the control over

this power is uistributud between a committee of twelve governors of



the twelve Federal Reserve banks, who now have the responsibility for
recommending purchases or sales, the Federal Reserve Board, which has
authority to approve or disapprove the recommendations of the governors,
and 108 directors of the twelve Reserve banks, who in turn have the
right to determine whether or not they wi^.1 buy or sell in accordance
with the policy that has been recommended by the governors and approved
by the Board.

A more effective means of diffusing responsibility and

encouraging delay could not very well be devised.
On this point I have recommended that the power over open market
operations be entrusted to the Federal Reserve Board, which consists
of eight members, six of whom are appointed by the President and confirmed
by the Senate, and two ex-officio members, the Secretary of the Treasury
and the Comptroller of the Currency.

The Board would be required, however,

before taking action on open market operations as irejl as on discount
rates and reserve requirements, to consult with a committee of five governors
selected by the Federal Reserve banks.

In this way the responsibility

for action will be unescapably fixed.
To my mind, the all-important thing is to place responsibility for
the exercise of these three means of control in a clearly defined body
and to state the objecti'/e towards the attainment of which that body
shall exercise these powers.

I do not wish to be dogmatic about how

this body shall be constituted.

I have recommended placing responsibility

for the exercise of these powers in the Federal Reserve Board, which
was established by lav. to serve the best interests of the nation in
banking and monetary matters. However, there are powerful groups which
are irreconcilably opposed to this plan and



JJ-

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wish to perpetuate: the present unsatisfactory situation in which these
powers cannot be effectively exercised.
This attitude is by no means characteristic of all of the bankers
of the country.

In all fairness, I wish to emphasize that in discussing

this issue most of the leaders of the American Bankers Association have
adopted a constructive and cooperative attitude. This is in sharp contrast with the attitude of a few bankers and business leaders, particularly
in New York.

Many of the bankers have frankly recognized the need and

importance of the n.ajcr changes proposed in the Banking Bill and have
accepted them in principle.
With these bankers the issue over the banking bill narrows down
largely to a question of the composition of the controlling body.

Thus,

the American Bankers Association pr>poses that the exercise of monetary
powers shall be entrusted to a committee cons.ist.'.ng of the Federal
Reserve Board, which Lhall be reduced to five members, end a committee
of four governors selected by the governors of the twc-lve Federal Reserve
banks.

This plan v o l l £ive the governors of the Foaeral Reserve banks,
/uc

who are selected by directors two-thirds of whom are appointed by private
bankers, four votes u.3 against five votes for members of the Federal
neserve Board.
Thero has been considerable support for another proposal which
would entrust the powers of determining monetary policy to a committee
consisting of the Federal i e - r f Board of eight members, JUS now contsivt
stituted, together with five governors of the Federal Reserve banks.



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Those governors would be selected with reference to a fair representation
of the different regions of the country, one member to represent the
Eastern Federal Reserve districts; one, the Middle West; one, the South;
one, the farftest;and one to be selected at large.
It is not for me to determine in whom these powers shall be vested.
L y recommendation was that they be vested in the Federal Reserve Board,
.
with a committee of five governors acting in an advisory capacity.
have just mentioned two other proposals.

I

It is for the representatives

of the? people of the United States in Congress to determine whether they
want to give these powers to an independent public body, to private
interests, or to a combination of the two. The one principle on which
I feel there can be no reasonable ground for disagreement is that the
powers must be vested in a clearly defined body which will have adequate
authority and full and linescapable responsibility for the use of these
important powers.
As I have said, the purpose of the bill is not to create new powers
but to place existing powers in a responsible body ..hero they may be effectively exercised.
raised.

Against this proposal the cry of political control has been

This is not a new cry.

It was raised against the original

Federal Reserve Act more than twenty years ago.

It was raised by about

the same interests which are now resisting the passage.of this bill —
the same interests that have repeatedly boon against all progressive social
ana economic legislation, such as the income tax, even when it was
proposed to make it as low as 2 percent; against child labor legislation;
against the Federal Trade Commission and the Federal Power Commission;
the Securities Exchange Commission; against pensions of all kinds, both



/

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State and national: in r-hort, against *1I that enlightened legislation
which has lcng since been accepted and now forms the basis of such economic
ana social advance as we have achieved.
If it is fair to charge that the Federal Reserve Board is political,
then the sane accusation must be made against the Interstate Commerce
Commission, against the Federal Trade Commission, and r.gainst other
governmental bodies the members of which are nominated by the President
and confirmed by the Senate. Experience has demonstrated that these
bodies have consistently acted no-t for political advantage but in the
public interest.
Some of the opponents of this bill are raising all the familiar
bugabous that they have so often trotted m t in the pact whenever
any attempt has been made in the interests of the country as a whole
to limit their influence in national affairs.

I think that Mr. Walter

Lippmann well stated the tone and temper of these irreconcilable opponents
when, in a recent article, he referred to their hysterical methods. He
pointed out that they tell us in me breath that we are threatened with
a grave emergency because of the dangers of uncontrollable inflation
while in the next brec.th they tell U8 th*:t no emergency exists which
requires the enactment ^f this legislations designed as it is to enable
us tc deal effectively with just such an emergency.

As Mr. Lippmann

says with reference tj the inconsistency jf these opponents, "It does
not make sense.

If we are faced with these hide . u uj.ngers, are we
.s

not criminally negligent if we fail tj fix clearly tht responsibility
f j averting them?"
>r




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As I say, this cry of "wolf" is not now.

I have had occasion to

delve into the history of banking legislation and I note with some
degree of consolation that the Federal Reserve Act was denounced in
language so nearly identical with that being used today by much the same
organized opposition, that unless you knew the dates you could not
distinguish between what they said more than twenty years ago ana v/hat
they are saying today.
Then, as now, the samo interests were crying inflation ana political
control.

Then, as now, they demanded full control.

Indeed, they undertook

to persuade President Wilson that they should have banker representation
on the Federal Reserve Board.

Senator Glass jf Virginia in his authorita-

tive and illuminating bock on the Reserve System entitled "An Adventure
in Constructive finance", tells of how these bankers made their arguments
to Mr. Wilson, and according to Senator Glass, when they had finished,
President Wilson said quietly, "Will me uf you gentlemen toll me in what civi3.ized country of the
earth there are important government boards of control on v.hich private
interests are represented:
"There was," wrote Senator Glass, "painful silence for the longest
single moment I ever spent; and before it was broken, Mi-. ».ilson further
inquired,
"'which o^ you gentlemen thinks the railroads should select members
of the Interstate C_mmerce Commission?*"
And Senator Glass adds in his book,
"There could be no convincing reply to either question * * *."




C3T-* "

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Let me quote another pertinent paragraph fror. this illuminating
book:
"While the Federal Reserve bill was pending," wrote Senate Glass,
"it was mercilessly condemned in detail by certain interests.

».here

there was any praise in these quarters, it wir. faint enough to damn. This
hostile criticism reflected rut al^no the attitude jf bankers, as the
class which imagined that it was chiefly affected by the proposed readjustment; but it voiced the disapprobation of those business groups Khich
are must readily impressed by banking thought.

This was not surprising,

since the pehnomeoon was and is > frequent recurrence,"
f
Unfortunately this is all too true.
phenomenon again today.

You are witnessing the same

You are hearing the same; cry that the banking

bill means reckless Inflation —

that the purpose it the bill is to

obtain control of the banks so that the administration may be able to
finance an endless series of government deficits. The complete answer
to this bugaboo is that if the administration had such a purpose it
would not need this bill, for this r any other administration will
always find means to raise the funds which the representatives > the
f
people in Congress have appropriated.
As a matter of fact, the administration has at its command, in
the Stabilization Fund and under the so-called Thomas Amendment, more
than 5 billions of unexpended dollars*

Demand for the purchase of

government bonus is sc great that the average interest rate has dropped
by more than 25 percent since the administration took office.

In the

face- of these facts, d^ you believe the opponents of this bill when they




—

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X-9222

tell you that the administration wants the banking bill enacted in order
to enable it to finance governmental deficits?
The organized opposition to the banking bill wants to delay ita
passage, to leave matters as they are.

Our opponents profess to believe

that the issue should be submitted t.- a commission for further study.
But manifestly this is not an issue which will be settled, by further
study.

It is not an issue as to facts which need to be gathered together

and pored over by another commission.

Unless your memories are shorter

than I believe them to be, you know the essential facts. The issue is
plain.

It is an issue of fundamental belief.

It is whether such powers

as we possess over monotary policy, which affocts the welfare jf all ji
us, shall be definitely placed in a body which shell have not only the
necessary means of control but the fixed responsibility for its exercise,
or whether these powers should be left

:

s at present where they can neither

be effectively used nor th< responsibility for their exercise definitely
fixed.

It calls for a decision by cho peoplt ^?. the United States through

their representatives in Congress.
is in the interest >f the banking

It is r y sincere conviction that this bill
a
. stew '. • . : : • because it will enable
.
•

it better bo serve- the public interest.
I thank you.