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Sept. 21, 1944

There is reason to expect that Mr, Patman and his following in
Congress may renew pressure to have the Reserve System finance, without
interest, further increases in the public debt that would otherwise add
to earnings of commercial banks?
Up until last Spring, Mr. Patman and his group had for some years
repeatedly spoken in Congress and by radio in favor of having the Government finance all deficits by issuing non-interest-bearing bonds. He and
his group charged that the Reserve System was dominated by the private
bankers and emphasized the sovereign right of the Government to finance it-*
self without interest if it decided to do so. All of this led me to' ad*
dress an open letter to Mr. Patman on March 21, 19Ul, to counter his argument and point out, among other things, the truism "that someone must pay
for everything", that banks were not making inordinate profits out of
Government financing, and that they could not be expected to operate on a
sound basis with less income* I emphasised that in the 10-year period,
1930*1939* "th® average rate of net earnings on invested capital by member
banks was 2 per cent, which was less than a reasonable rate of return, I
mentioned also the depressed market for bank stocks as evidence that the
banks were not unduly profiting from Government financing*
Time and again, in hearings before House committees, Mr. Patman
had something of a field day catechising me on this general themef Subsequently he moderated his view, and at the hearing on April 5» 19U3* before the House Banking and Currency Committee on the bill to exempt war
loan accounts from FDIC assessments an4 from reserve requirement*, Mr,
Patman for the first time publicly, to my knowledge, accepted as justifiable
a sufficient income for the banks from Government financing to sustain them,
but served notice that when bank earnings from this source reached greater
proportions both from new financing and refinancing than he would consider
justified, he would advocate having the Reserve System absorb without
interest issues that otherwise would yield returns to commercial banks*
It should be borne in mind that Mr* Patman is well-informed,
persistent, and capable of leading a formidable group in Congress as well
as of influencing public opinion on the outside, TNhat seems to be his
present attitude cannot be dismissed as belonging in the crank category.
Despite my efforts to hoad him off, he persistently hammered away, at the
April 5 hearing, on the point that the Reserve System could finance without
interest the Government debt beyond what would net the banks a reasonable
living. He asked whether I had "given consideration to any plan, or tried
to devise or formulate any plan, that would enable the Government to do any
part of its finanoing without the payment of interest11.
He pointed out that if the Reserve Banks could buy up to $5
billions4 as authorised, of interest^bearing debt directly from the Treasury,
there was no reason why it could not buy that much and more of nonrinterest"
bearing debt, "When I sought to draw him off into the question of why,

- 2logically, he did not propose to finance all the debt without interest, he
"There is a good reason for that* I am opposed to that* I am in
favor of selling all the bonds you can sell to the people that have
the money to buy them, or the corporations. I am in favor of considering just as high a tax as possible to pay off as much of this
debt as we can. but after we have sold all the bonds we can to people
who have the actual money to buy them, and we have raised all the
money through taxes that it is possible to raise, a lot of bonds
will have to be sold at about h5 to 50 percent of the amount of money
we use, and that will be obtained by letting the commercial banks
create that money just by a flick of the pen, and we will be in this
position of having a perpetual debt on our hands* If this debt gets
to be $200,000,000,000 or *f 300,000,000,000, as many peoplettiinkit
will, the debt for interest alone will be from #£.000.000,000 to
•7,500,000,000 a year just for interest* It occurs to me that this
Congress will be falling down in its duty if it sits idly by and
permits this money to be created in that way and obligates the people
and the taxpayers to forever pay the,interest» It just does not make
sense to me* ....."
I recurred to the point that bank earnings for the year 19i*2,
despite the large increase in Government holdings, were less than in
and that it did not make up for the shrink in bank loans* He apparently
was satisfied for the time by this line of argument, but continued to
press as to ny attitude in case the picture changed* I stated that:
"There may be a point where the earnings of the banking system are more
than adequate to take care of their increasing expenses, together with a
reasonable return on capital *...M, but that the trend was the other way
at the time and his argument, therefore, academic* *
He insisted that at some point the bank earnings from Government
debt would be excessivef and said he was "disappointed that Mr* Eecles refuses to give consideration to it; lf
he insists on closing his ey99 and not
trying to solve the problem at a!JU He added that he oould not understand
why the Federal Reserve "officials" do1 not "give some consideration and try
to save a large part of that interest. '
I replied that, "When the problem of excess profits of the banks
begins to appear, you will find me just as diligent about attempting to
avoid profiteering on the part of the banks as we have been to prevent
profiteering by anyone else*11
He remarked that "you are not thinking about the taxpayers11, and
after referring to the fact that the capital stock of all banks amounted to
$3*l/2 billions (this would not include surplus and undivided profits), he

-3 "Now, you already have the Government in this position, -which I
consider is a position that cannot be justified, of encouraging the
sale of bonds to the banks to the extent that by the end of the next
fiscal year these banks that have a capital stock investment of 3~l/2
billion dollars will be receiving from 1 to 2 billion dollars a year
interest on the Government obligations they will then hold. Now that
does not seem to make sense to me. ......
"So I am apprehensive that one of these days the banks will have
so many Government bonds upon which they receive interest that there
will be a clamor in this country, 'Why pay the bank* ?"l/2 billion
dollars a year interest when they only have 3"l/2 billion invested
in capital stookj why not take all of the banks over and save that
3"l/3 billion a year interest?' J am in favor of the private bank"
ing system, of free enterprise, and I think the banks are doing something, against themselves when they place themselves in that vulnerable
"lNhat would you suggest," I asked, "to take the place of the
interest that these banks now receive on Government securities?"
He replied, "I would permit them to receive a certain amount
that is reasonable, but I would have the date fixed and, if that was not
satisfactory, I would fix another date."
When I pointed out that the banks then held a large amount of
short-term debt with low yield, Mr* Patman- retorted, "You are talking about
the short-term debt, but you know there will be a refinancing and these
certificates will be refunded probably with long»term bonds drawing a much
higher rate of interest*"
The foregoing, from the printed hearings, reflects only highlights in an extensive catechism in which several committee members of both
parties indicated a disposition to side with Mr. Patman* That the matter
was prominently in his mind, was indicated again on February 9 of this year,
when at a hearing on the Brown-Maybank Bill, he interjected the following
(page 675):
"Well the banks are pretty well taken care of; they are pretty well
provided for, and it won't be long before the banks will be in a very
vulnerable position, when the point is reached, as it doubtless will
be reached, that they will own so many Government securities that the
interest on those Government securities will amount to as much ae their
entire capital stock is. And when they reach that point, they are in a
very vulnerable position, and some fellow might get up over here on the
floor of the House and say 'Why pay these fellows a billion and a half
or two billion dollars of interest* vhy not buy them up and buy the
stock, and save all this interest every year.» ••...."
While Ji*> Patman and his group probably could not get far at any
time with their original program for financing all deficits without interest,
their revised program, conceding the need to sustain the private credit system, but proposing to roly on the Boserve System %o finance the debt without interest once that need has been met, presents issues which can hardly
be ignored in the light of the current situation.