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TENTATIVE DRAFT - C0:',FL2E:-niAL

"GOVERNMENT SECURITIES OUTLOOK" EXPLORED AT SECOND CONFERENCE
Invaluable Pacts Revealed in Discussion
Sponsored by Journal & / x
0

1

Second in the series of conferences scheduled under sponsorship of

2

the Savings Bank Journal was the round table discussion devoted to an explora-

3

tion of the Government Securities Outlook, held at the Metropolitan Club in

4

Washington, D. C* on Monday, February 26, with 28 representative authorities

5

present, prepared to answer frank, basic questions asked by Earl B. Schwulst,

6

first vice-president, Bowery Savings Bank, New York, who acted as moderator«

7

As was true in the first conference, held the previous month, deal-

8

ing with the railroad situation, this “meeting of minds" concentrated upon an

9

agenda drawn up to cover every phc.se of the "Government Securities” subject,

10

with the assistance of Messrs. Schwulst, Gilmartin, Dr* Burgess (vice-chairman

11

of the National City Bank of New York)j Mr. Massie (vice-president, The New

12

York Trust Company) j Mr. Garner (vice-president, Guaranty Trust Company),

13

Messrs. Parker and Harrison, resulted in the throwing of much light on impor-

14

tant factors and conditions, pertaining not only to the present but future

16

status of things*

16

While the opinions were widely divided, in many instances, rang-

17

ing from highs of optimism to new lows of pessimism, the concensus of views

18

as summarzied from a neutral position, cause many controversial points, hereto-

19

fore unclarified, to stand out in bold relief*

20

Any attempt to interpret them in this account of the conferonce

21

would tend to distort or to color*

22

with highlights of comments as actually delivered, enables every reader to

23

analyze and draw his own conclusions on the basis of facts, figures and views

24

expressed*




But presenting a report of the discussion,

-2 Getting under way at 5:15 p.m. with Mr. Schwulst serving admirably

1
2

as moderator, the conference continued until 11:05 p.m., with all conferees

3

entering freely into the discussion and remaining three-quarters of an hour

4

after the agenda was completed to voice further opinions and clarify,

5

realistically, additional angles raised»
Three Divisions of Subject
The conference attempted to approach the discussion from the stand­

6
7

point of the interest of holders of Government bonds and divided the subject

8

into three parts:

9
10

1.

The future price of their holdings, which is tho sano
as saying the future course of money rates*

11

2.

The marketability of their holdings»

12

3.

The preservation of the purchasing power of the prin­
cipal invested in the bonds and in the interest income
derived therefrom.

13
14

Under the heading of the "price of bonds or the future course of

15
16

interest rates", "excess reserves" was considered very fully.

The gold ques­

17

tion was freely discussed, as well as the fiscal policy of the Government,

18

the Gxpension of commercial loans and improvement in general business, the

19

marketability of Government bonds with general questions relating thereto,

20

and the intrinsic value of Government bonds»

21

Colonel Leonard P. Ayres, who had intended to be present at the con­

22

ference, was held in Cleveland and thus submitted answers to certain questions

23

in the agenda.

24

of factual material contained in charts which are reproduced in this issue of

25

the Journal in the order as presented.

Moderator Schwulst opened the conference with a description

Description of Charts
26

CHART NUU3ER ONE (page __)- Compares changes in the central gold

27

reserves of the United States, France, England and the Netherlands and shows

28

graphically the extent to which the United States has accumulated gold, par­
ticularly since the devaluation of the dollar in early 1934.




-3 Mr* O ’Connor added to the facts under this chart a reason he had

1
2

found for the provision in the Gold Act of 1934 wherein the value of silver

3

in relation to gold was established at one to three, or until the monetary

4

price of silver rose to $1.29.

5

was that from 1900 to 1929 the ratio of the value of World’s silver produc­

6

tion to World gold production, was one to three*

7

The reason he believed he had discovered

Mr. O ’Connor gave further facts that in the nine years from 1930

8

to 1938, the ratio of World silver and gold production changed to one of

9

silver to 8.5 of gold.

10

of the Act, this ratio was one to 9.7 and in 1938 the ratio reached one to

11

11.3.

12

The five years from 1934 to 1938 since the passage

Mr. O ’Connor also stated that, according to the Director of the Mint,

13

as of the end of 1938, the Netherlands and Switzerland had larger per capita

14

holdings of gold than the United States, those figures beings

15
16
17
18

United States - $111.00 per capita
Netherlands
- 114.00 "
tt
Switzerland
- 166.00 "
”
Additional figures on gold were given in the course of the discussion*

19

CHART NUMBER Tv«0 (page__) - Presents weekly changes in the volume

20

of money in circulation from 1934 to date, as well as a comparison with the

21

year 1928*

22

CHART NUMBER THREE (page __) - Shows weekly changes in required and

23

excess reserves of member banks.

24

which occurred in late 1938, early 1937 and early 1938, reflect the various

25

changes in reserve requirements that wore placod into effcct during this period*

26

The sharp fluctuations in roquired roserves

CHART NUMBER FOUR (page__) - Shows the offeet that changes in the

27

volume of outstanding public debt have upon the relative yields at which such

28

debt can bo sold.

29

It will be noted thatj during the years 1925-30, inclusive, when the

30

Federr.l debt was declining and staty and municipal debt increasing, the United

31

States Treasury 4^s, 1947-52, sold on a lower yield basis than the IJc\/ York




-4 -

1

State Canal and Terminal 4s, 1946, a prime obligation.

Conversely, in the

2

years 1934-39 inclusive, when Federal debt was rising rapidly and the volume

3

of state and municipal debt remained virtually unchanged, the New York State

4

Canal and Terminal 4s commanded a lower yield than the Treasury 4^s.
It should be observed in connection with the present status of the

5
6

Federal debt, that the Second Liberty Bond Act, as amended, provides that

7

the face amount of bonds, certificates of indebtedness, treasury bills and

8

treasury notes issued under authority of that Act, "shall not exceed in the '

9

aggregate, $45,000,000,000 outstanding at any one time."
A recent press release on the subject of statutory debt limitation

10
11

shows the present debt to be §42,109,751,669 as of January 31, 1940.

12

figuro is classified as gross public debt but the facts seem otherwise as the

13

chart indicates for 1940 it would rppear by deducting the reported gross public

14

debt as of January 31, 1940, from the debt limit of $45,000,000,000, that there

15

would be remaining $2,890,248,331 but this reported debt does not take into

16

consideration the amount of Government guaranteed debt.

17

this guaranteed debt amounted to $5,734,879,091.

18

reported gross United States debt as of January 31, 1940 of $42,109,751,669,

19

gives a total real gross United States dobt of $47,844,630,750, or £2,844,630,-

20

750 in excess of tho statutory debt limitation#

21

This

On December 31, 1939,

Adding this debt to the

CHART NUI1BEE FIVE (page __) - ?/as presented by Harold G. Parker,

22

vice-prosidont of Standard Statistics Co., Inc., at tho stago of the discussion

23

which relcted to probable market action of Government bonds.

24

in chart form, his opinion as to the yield bases on Governments below which

25

various types of investors might cease to buy the different issues and also

26

assuming that a reaction in prices was experienced, the yield bases, which

27

might be counted upon to r evive investor interest#

28
29

It summarizes,

When this chart was presented, a Government representative pointed
out that the assumption that Social Security funds would not bo invested at




-5*
1

rates below throe per cent, was incorreot.

An amendment passed by Congress

2

in 1939 pormits the Secretary of the Treasury to buy for these funds, United

3

States obligations in the open market at his discretion*
A Ballot is Taken
As the discussion proceeded, Moderator Schwulst distributed a

4
5

ballot to each of the conferees, asking them to fill out the answer to the

6

two questions and then return the ballot to him, without any signature.

7

ballot is reproduced herewith:

This

B A L L O T
8
9
10
11

(1)

By the end of 1940, I think the U. S. Treasury 2 3/4s
due December 15, 1965 and callable on December 15, 1960,
and which now yield approximately 2.35 per ccnt, will
sell at prices to yield approximately ....... .per c;nt*

12

(2)

If I were a prophet, I should prophesy that there will
be no material change in the level of interest rates as
measured by the yield on long term U. S. Government
bonds for a period of at least.......
This assumes
that the United States will not be drawn into the war*

13
14
15
16

17

The analysis of the answers was revealing*

18

Quostion Number One:

"By the end of 1940, I think the U. S. Treasury

19

2 3/4s due December 15, 1965 and callable on December 15, 1960, and which now

20

yield approximately 2.35 per cent, will sell at prices to yield approximately

21

........ per cent", showed in a tabulation of answers that, for tho moment,

22

we certainly have a free and open market for U. S. Government bonds*
Pour of the conferees felt that there would bo no change from the

23
24

arbitrary level (2.35 per cent) stated on tho ballot, while 11 felt that the

25

yield at the end of 1940 would probably be higher, and nine felt that the

26

yield would be lower*
However, when the vote was analyzed further, it was found that the

27
28

four v.ho sot 2.35 per cent, wore probably men who were not particularly fa­

29

miliar with daily market prices, because at the date of voting, tho yield

30

on this particular issue wqs 2.39 per cont.




-6 Including in the group those who contemplate little or no change,

1
2

those who indicated that prices would not be more than approximately 10

3

bases points

4

ferees expected that the market would be substantially the same at the end of

5

the year as it was at the date of the meeting*

6

away from the then market, it was revealed that 10 of the con­

Eight of those present felt that by the end of the year this parti­

7

cular issue of U. S. Government bonds would be selling at new peak prices;

8

two of the eight suggested that tho yield would bo two por cent, or a price

9

of approximately 112.10.

10

Of the six who were bcarishly inclined, only two expocted to see

11

this issue of bonds selling below par and tho most bearish forocast was a

12

yield of 2.90 per cent, which was followed by another of 2.80 por cent, one

13

of par, two guesses of 2.65 per ccnt, and one of 2.61 per cent.

14

The spread between the opinions of more than 12 points is interest­

15

ing, but what is oven more interesting to holders is that no single expert,

16

no matter how bearish, made a guess that Government bonds would bo soiling at

17

the end of this year below tho markot prices established shortly after tho

18

outbreak of tho war in 1939*

19

Question Number Two, "If I were c>. prophet, I should prophesy that

20

there will bo no material change in tho levol of interest rates as measured

21

by the yield on long term U. S. Government bonds for a period of at least

22

......

£3

This assumes that the United States will not be drawn into the war."
This second question was mended by the Moderator to define the

24

limits vihich wore to be generally understood as constituting a "material

25

change in irhe level of interest rates" as something greater than 50 bases

26

points.

27

Tho

an sw ers

to this quostion were almost as varied as were thoso to

28

the first question*

29

10 set the limit of their foolinf, of assurance within 12 months, five sug-




One conferoe said "two days"; another “not long;"

-71

gested two years; throe made a guess of from three to four years; one felt

2

sufficient assurance with regard to the situation to prophesy another 20

3

years.

Two of the confereos turned in blanks on this question*
As might bo expected, the expert who estimated that the yield on the

4
5

2 3/4s would bo 2.90 per cent, was the man who guessed two days as the time

6

limit within which we might allow for a material change in the level of in­

7

terest rates*
The two confereos who felt that the 2 3/4s would be selling at 112,

8
9

in one case expectod that there would bo no change for a year, and in the

10

other case for two years.

11

cent basis for his forecast of the price of the 2 3/4s at the end of 1940*

The expert who guessed 20 years used a 2.15 per

Hihilo there was a very wide degree of opinion hold by these exports,

12
13

certainly as a group, they did not believe that an investor should at this

14

time so adjust his

15

ment bond prices any greater than occurred during 1939.

investment policies as to allow for a decline in Govern­

Gifford Springs Surprise
Toward the end of the evening, Congressman Gifford of Massachusetts,

16
17

who is a mombor of the Houso Banking and Currency Committee, stood up and

18

pointed his finger in what appeared to bo an accusing manner at Governor

19

Eccles, stating:

20

I have a

21

over seriously and on a high plane.

little ditty that I give to my audiences after talking the matter
Remember this, won’t you? ~

"Hush, little deficit, don’t you ory,
You’ll be a crisis, bye and byel"

22
23
24

"If I nay make a parting shot about your debt, Governor,

The tenseness of the apparent encounter was promptly broken!
Free Discussion Period
After the discussion of tho agenda had been completed, the conferees

25
26

spent considerable time in free discussion.

27

answored during this period further clarified some uncertainties.

28

questions asked by tho Moderator was "Are the banks’ supervisory authorities,




Tho questions

asked and
One of the

-81

in the event of a declino in Government bonds, likely to permit banking insti­

2

tutions and insurance companies to carry Government bonds at so-called conven­

3

tional values?

Is this sound?”

Governor Ecclos answered this question: "I seo no reason why there

4
5

should bo any change in the present examination arrangement.

6

much in favor of not following what I please to call the »ticker tape’ with

7

reference to sound investment.

8

the present rulings.

9

time of crises we must modify, as we did in 1932 and 1933, the conventional

10

methods that we re in effoct at that time.

11

as a result of depreciation in their Government bond portfolio unless they are

12

forced to sell it."

13

liability?"

14

timo when it has greatly deprociated below their cost, institutions are permitt­

15

ed to borrow at par from the Reserve System, so if they arc a member bank thore

16

would be no occasion for selling Government bonds at a loss."

That had a good deal to do with bringing about

We know, as a matter of practice of experience, that in

Whereupon the

No bank can get into difficulties

Moderator questioned:

To which the Governor responded:

The Moderator then asked:

17

I have boon very

"To meot their

"To meet their liability at a

"And you see nothing that would make the

18

Federal Reserve change its ideas with respect to lending?"

19

replied:

20

policy to continue to do so.

21

of Government bond portfolio, or as a result of a portfolio of high grade in­

22

vestments? the banks got into difficulties a s a result of speculative invest­

23

ments, collateral loans, unsound business and mortgage loans, and not as a

24

result of this type of investment."

25
26
27
28
29
30
31
32
C3

Mr. Goldsmith proceeded with: "I am sure Governor Eccles did not
have a very easy time formulating the present rules for bank examination. If
I remember correctly, it took about a month or five weeks.
The head of one
of thoso examination agcncios assured all and sundry when the market declined
substantially as a result of the increase in reserve requirements, that all
banks should write down their losses in Governments which they had brought
down to par immediately instead of amortizing them and it took about four weeks
before now regulations come out which did not make it necessary for them to
write them down iimrLediately."




To which Mr. Ecclos

"I seo no reason for that and, personally, I think it would be sound
The banks got into difficulties not as a result

-9

1*

Mr. Goldsmith wondered} "if in a change of administration at Washington

2

with a new group of people in office,

2^

whether they would not?"

whether

Whereupon Governor

those regulations would hold, or

Eccles remarked "of course, the

period you mention was prior to the three agencies getting together."

5^
6.

Goldsmith

stated "I was

just

to get together on those

7.

The Governor

saying how diffioult it was

And ^r*

for the three agenci^

regulations and how long it took."

then answered)

"Naturally,

8.

followed

9.

to bring about a change and as to what may

a oertaln practice for a good

when

you take examiners who

many years, it is always difficult
be done in the future it seems to

10.

me it is difficult, of course, to say whether or not they would forget the past

11.

experience and want to undertake to follow a market which in times of depression

12.

is really not a market.

13.

What I mean is, when

there is a large quantity of either

Governments

14.

or other securities that we know are unavailable in times of great depreciation

15.

we should look at intrinsio values rather than quoted values.

16.

experionoo of the past so far as bank examiners and bankers are concerned,

17.

is such that

18.

the examination procedure that was in effect at the time of the last banking

they

I think the

are not going to go back to the unrealistic approaoh to

crisis."

2q #

Mr. Goldsmith

then said

"Mr. Eccles has stated, and I think it is

21.

the general view here, that it would be far more desirable if more Government

22.

securities were sold to actual bona fide savers and investors, rather than to

23.

commercial banks."

With which ^r. Eccles concurred.

24#

Banks and Government Bonds

25.

Mr. Goldsmith followed,

"I

think Governor Eccles will agree that

26.

to the

27.

inflationary tendency.

28.

believe, requested Congress to study the possibility of giving it more power

29.

to reduce excess reserves




extent the deficit is invested with commercial banks, we have
The

Federal Reserve

It seems to mo

an

Board has very forcibly, I

there is a conflict there that the

-101.

Goverix.ent hc.s the power to maintain Governments at high prices, but I

2.

question whether many people in the Government consider that it would bo

3.

desirable to uso these powers to maintain Governments at high prices and

4.

I would like to ask Mr. Eccles whether he does not think that somewhat

5.

higher rates on Governments might facilitate the process that ho thinks

6.

is advisable and that is the transfer of the part of the securities from

7.

commercial banks to bona fide investors."

8.

Mr. Eccles responded:

9.

"I think the opposite.

I on basing what

I say partly on what has been stated here by bankers that if intorost rates

10.

were higher there would be possibly a greater tendency to take Government

11.

bonds.

12.

ment bonds is beca use of the lew rate.

13.

would not only be greater on the part of the individual investors, but it

14.

would likewise be greater on the part of the banks, and therofore it would

15.

be possible to maintain a higher rate based upon a demand."

16.

One of th'e reasons that banks today are hesitating to take Govern-

Hr. Goldsmith suggested:

With a higher rate, the demand

"Unloss you took the excess resorves

17.

out of the way" and Ur. Eccles said "of course, if you took the excess re-

18.

serves out of the way then, naturally, the banks would not be a factor in

19.

the field or would not be investing in Government bonds, and interest rates

20.
21.

thus would likely go somewhat higher."
Intrinsic Value of Government Bonds
The first part of the free discussion, after the agenda had been

22.

completed, explored more fully this question of accepting the intrinsic

23.

value of Government bonds at par regardless of the probable effect of an

24.

impairment of capital by taking market values for the purpose of examina-

25.

tion.

26.

dend policy if Governments materially declined in value?

27.
28.

Also, what would the effect be should an institution continue a divi-

l;r. Lanston opened this part of the conference:

"We have dis-

cussed tho outlook of Government securities fror. the standpoint of money




-111.

as well as the supply and demand for securities. Wo have discussed tho

2.

possible reluctance of banks to further oxpand deposits and henco havo

3.

discussed the deposit - capital ratios.

4.

of loan and investment capital ratios, but I think we have missed the

5.

real point and I would like to know the opinion of others on it.

6.

to me the- real point upon which institutional, commercial bank activities,

7»

There has boen some slight montion

It seens

and Governmental activities will depone1., is tho result of tho risk that

8.

those assets bear to capital, not in terns of soundness today, but in terms

9.

of slight changes in market prices and the ratio at which that risk bears

10.

to each year's income.

11.

"For example, the banking system might have capital funds or a

12.

capital account of about $6,000,000,000.

Roughly, &4,000,000,000 of that

13.

are paid-in capital.

14.

capital accounts.

15.

made to show that if, for any reason, easy money regained, but the average

16.

level of bond prices was reduced five points on long tern bonds that it

17.

would work out in the banking system as a whole to £¡100,000,000 a point.

Two billions arc reserves, surplus, and all other

Various estimates by the Treasury and others have been

18.

”In other words, five points down would mean $500,000,000 nicked

19.

into bank reserves, not reserves after book if the institution had to take

20.

the loss.

21.

a temporary period.

22.

that froi. the point of view of capital soundness there is no quostion but

23.

banks are interested in earnings and they are interested in then from the

24.

point of view of dividends.

The danger is in such market conditions existing for longer than
I have run into this question in any number of places,

25.

"If a bank has been paying out 50 per cont of net in dividends

26.

with a book profit, will it, as a conservative institution, feel willing

27.

able to continue tu pay out 50 per cent of the net if they have a paper

28.

less measured in terms of market, or will tho examiners permit them to do

29.

so?

In other words, there is a limitation on capital, or there is a




-12-

1.

1ini tation to the degree in which banks ce.n expand their investment account

2.

in terns of capital and in toms of earnings, not in terms of excess or

3.

deposit - capital ratio.

4.

"The point has been made that there is no market for commercial

5.

loans and that generally in the past the loans were much shorter in character

6.

than they are today and that such loans were measured more in terms of

7.

quality than in changes of interest rates.

Investments wore longer and had

8.

a greater vulnerability to interest rates.

I want to know, do others feel

9.

that this is the real limitation on bank investments?1*

10*

11.

Mr. Goldsmith also put into Mr. Lanston’s question:

"What will the

bank examining authorities do about permitting banks to pay dividends when,

^2, according to market on Government securities, the capital is somewhat irnpaired?"

14.

Mr. Eccles countered:

"The examining authorities do not control

15.

dividends" and Lr. Lanston stated: "Kay they make recommendations when they

16.

consider them unwise?"

17.

recommendations, but a good bank should not neod them.

18.

without recommendations having to be made."

19.

To which Mr. Eccles said:

The Moderator then said:

"Yes, they may make
It usually knows

"’.Yell you think, therefore, Governor, that

20.

if there were a substantial market depreciation in the Government bond port-

21.

folio that the holding bank ought to be somewhat more conservative in its

22.

dividend policy than it might otherwise be, irrespective of how it might re-

23.

gard those bonds intrinsically?"

24.

To which the Governor stated:

"I think that would depend entirely,

25.

of course, upon its assets other than Governments and upon its capital

26.

structuro.

27.

no different than any other typo of business.

28.

curtail cr reduce dividends.




Some banks follow a conservative dividend policy; but banks are
Lany businesses have to

That is no calamityI"

-13Benson on "Dividends"
1«

Mr. Benson str.tcd:

"Would it not be a pretty serious thing for

2. a bank board to declare dividends if capital were impaired?
3. be illegal?

Would it not

And would it not subject ba.nk directors to personal liability

4. if they paid dividends at a time v/hen the market value of their Government
5. holdings declined to a point where thero was an impairment of capital?”
6.

Fr. Eccles countered:

"No, it would not.

I say this for the very

7.

reason that the only impairment is one of the capital structure itself and

8.

on the recapitulation of tho bank examination forms you will find on the

9 . last page of the recap where any depreciation in Government bonds or in the
XO. four higher grades of securities is not taken into account at all in deter11.

mining tho sound capital structure.

Thus, no impairment would be found or

12. written in by a bank examiner because of a market depreciation either of
13.

Government securities or any of the four higher rated securities.

14.

lowor-rated securitius are taken on a basis of their average over an 18

15.

months period rather than the market upon the particular day of tho examina-

16.

tion."

17.

Hr. Benson then remarked:

Even tho

"We had a case in New York where bank

18.

officers were held liable or charged with taking deposits when the bank was

19.

insolvent.

20.

deposits when they were technically insolvent."

21.

"That is correct.

22.

during tho depression, but that was not due to thoir Government bond hold-

23.

iiigs or their holdings of the four higher rated securities."

I mean taking deposits, not paying dividends, but accepting
To which I'r. Eccles stated:

There were plenty of banks which were in that situation

Effects of Depreciation
24.
25.

tlr. Lanston then asked:

"Is it conservative to ignore depreciation

of the market if it should occur in fee four higher grade securities?"

26.




Kr. Eccles:

"I think it would bo very unsound to do otherwise.

-141» We had a 1 experience of what it did to the banking system.

2»

If that helped

the economy, I fail to see wherein by destroying confidence in the banks

3.

due to a depression situation you either help the depositors, the stock-

4.

holders, or the public.”

5.

Mr. Goldsmith asked:

”Your high grade bonds, Hr. Eocles, could

6.

sell off very

7.

perity.

8.

would be justified to continue its dividend schedule even though its capital,

9.

or a substantial amount of it, was impaired by a decline in the ir.arket in

10.

sharply, not because of a depression, but because of pros-

Do I understand you correctly to say that you believe a bank

high grade securities?”

11.

i!r. Eccles:

"It would depond entirely on other factors.

It

12.

would depend upon its capital ratios and upor. its other investments.

13.

it was due purely to Government bonds, I would say ’yes1, or if it was

14.

due to the four higher rated securities, I would say ’yes*.

15.

banks are amortizing bond premiums out of currcnt earnings before paying

16.

dividends over the life of the securities, it would be sound policy."

17.

I'r. Ihlefeld said:

If

So long as the

"Governor, is it not a fact that the view-

18.

point you express is shared in by the Federal Deposit Insurance Corpora-

19.

tion and by the State Bank Supervisors through the agreement they arrived

20«

at in 1938?

21,

that viewpoint on the treatment of Federal bonds and high grade securities,"

22,

In other words, all supervisory authorities have concurred in

llr, Eccles agreod but he did "not know to what extent such

23,

treatment was shared by the examiners.

24,

authorities."

25,

t;r. Goldsmith then said:

It is concurred in by all the

"I think there is some valid question as

26,

to whether the officers of the Comptroller of Currency would take the same

27,

position on dividends that 2>. Eccles tekes right now."
Eccles "Under Firo"

28,



At this point the Lodorator endeavored to direct questions to

151. someone other than ’’this veteran soldier, Governor Ecclos, who has been
2. considerate and generous in bearing pr g o tic ally the brunt of all the ques3. tions and answers” but I5r. Holton would have none of it and after sane
4. laughter Hr. Eccles remarked "this is like being before a Committee of
5. Congress.”
6.

But Hr. Holton said ho had a rather easy question to ask:

”In

7. support of a decline in a Government market, would it not be just as well
8. to stop a break by pushing the market down rapidly; for example, by two
9. or three points?
10.

Would this not have a tendency to etop the selling?”

The Governor informed Mr. Holton ”that is pretty well what was

11. done in September.

If you will refer to tho record in that month, the

12. marieet for tho longer bonds got up t_ around the high point of 109 and as
13. war became more and more imminent the market worked down and the Reserve
14. System did not at first enter the market at all.

At the time the Reserve

15. System entered tho market it had already declined two points from its high
16. point.

The Federal Reserve did not enter the market until tho day that war

17. was actually declared.
18*

Daring that tine there was an avalanche of orders.

”The Reserve System certainly did not want to be in a position of

19. under-writing profits of the banking system in the Government bond account
20. of over $1,000,000,000 merely for the purpose of having the banks come in
21. at some lr.tor date expecting the Reserve System to sell the bonds to them at
22. a billion dollars less than they had previously sold them.

Consequently,

23. the Reserve System permitted the market to drop about a point a day for the
24. first two or three days.

During that period there was only one day when

25. the System purchased over one hundred million dollars o f securities.
28.
27. less.

"As the market began to get lower, the pressure for selling was
?<hcn the selling had aim-st dried up, the Reserve System withdrew

28. from the rarket for a period of a day or two.




Then, the market broke again.

-16-

1.

The minute tho Roserve System again went back into the market, the market

2.

cane back.

3.

it came back with a bound and the Syster. was unable to purchase any securi-

4.

ties.

5.

securities on a market rebound of norc thc;n half a point.

The instant it was known that the System was in the market,

As a matter of fact, they purchased less than ¿1,500,000 worth of

6.

"To show that the market was very thin so far as selling was

7.

concerned, I may say that when the banks thought thoy could sell, there was

8.

very little selling; the minute tho banks thought the Reserve was in the

9.

market and propaganda was spread that the market was going to decline much

10. lower, there were me.ny who thought they could still soil and then buy at a
IX. lower price.
12.

"However, as soon as the Reserve Syster. entered the narkot again,

X3. they did not want to sell because they had very little profit left.

As

long as there is a substantial profit in the market, certainly the Reserve
15. System should move away from the market very rapidly but the question of how
X6. fast they should move away depends on conditions surrounding the market at
X7.

tho time and also upon the volume of selling as well as whore the selling is

X8. coming from."
X9,

Dr. Currie on "Inflation"

20.
21.

Dr. Currie had been an interested observer throughout the discussion on the agenda.

During tho period ,>f free discussion, I'odcrator Schwulst

22. asked him if he had anything to say or any question he would liko to ask
23. about tho matters contained in the agenda.
24.

Dr. Currie remarked:

"There is one point on which I might mako

25. one or two observations which apparently worries some of you a good deal.

It

26. is a matter on which I happen to have done much work and that is the subject
27. of inflation.
28. departments.




There is a great deal of work being carried on in Government
Luch of it has not as yet boen published.

There has been

17'

1.

published, however, the result of research on capital expenditure, housing

2.

expenditure, consumer debt and foreign loans as well as net government ox-

3.

penditures.

4.

about inflation.

5.

It has all been related to what would be necessary to bring

"Of course, it depends considerably on how much is saved at dif-

6* ferent levels of incone. The savings you take were drawn from the stream
7.

of income, - part of the price of goods, - part of the price of production

8.

and capital investment that just equals the savings, - just restores it»

9.

"Prom various studies that have been made in recent years, it

10.

appears that throughout the 1920s we saved somewhere around 19 or 20 per cent

11«

of the gross national income, - that is the inccr.,c before a deduction for

12»

depreciation«

13.

deal of reason to think that this basic savings pattern has not boon nodi-

14»

fied as a result of the New Deal.

15«
16«

I will not go into the matter deeply but there is a great

wIn 1937, with a $70,000,000,000 national income, we reached
17.18$, I think, in basic savings.

This would seem to indicate that whon

17.

we reach toward $85,000,000,000 or $90,000,000,000 national income per annum,

18.

we probably need something like $19,000,000,000 or £20,000,000,000 of gross

19.

capital investment each year, - capital investment net and capital invost-

20»

ment for replacements to offset depreciation accounts.

21.

sum.

22»

New that is a huge

"In the 1920s, we got up to about -#16,000,000,000 per annum.

I

23,

think you noed not really fear inflation in this country until your capital

24,

exceeds that level and we do not see it now.

25,

field of necessary capital expenditures and making generous estimates such

26.

as $900,000,000 a year for utilities; $900,000,000 a year for railroads;

27.

&4,000,000,000 a year for residential housing, - figures of that magnitude -

28.

in all of it we can only add up to $15,000,000,000."




Canvassing every durable goods

-18Sale of Government Bonds
1.
2.

I.ir. Goldsmith asked Dr. Currio whether ho thought ”It makes
any differoncc if the Governments are sold for such commercial program, c--s

S. Dr. Currio suggested, or whether they are sold to banks or private invost4.

ment from a commercial point of view?"

5.

Dr. Currie answered?

”1 a© trying to put it in different toms.

6.

Kost of the discussion tonight has proceeded on terms of thG mechanics,

7.

quantity of r-.oney versus the quantity of goods.

8.

a different way; viz., money for outlets of capital investment.

9.

were less and consuir.ption higher than the national income, then the fifteen

10.

billion dollars total investment would correspond to the total employment.

11.

That is what happened in England.

12.

I was trying; to put it in
If savings

"The percentage of savings now as contrasted with the great war

13.

has boon cut in half, so the given dollar of capital expenditure could sup-

14.

port a much higher level of national income than it did before.

15.

under the present pattern of savings, as far as wc- can see, it will be

16.

necessary to find outlets for investment, for capital expenditure, housing

17.

oxpendituro, consumer debt, foreign loans, and net government expenditure,

18.

probably in excess of $19,000,000,000 or 4>20,000, 000,000, before you begin

19.

to worry too much about inflation.”

20.

Hr. O ’Connor then interposed:

Therefore,

”l:r. I oderator, in that connection,

21.

I recall a study in England that took 20 percent of the national income por

22.

yoar as necessary for investment in order to keep the machine going and mako

23.

substantial progress.

24.

study indicated iJiat in this country the same percentage would bo required.

25.

This is a very interesting point that Dr. Currio describos.

26.

a bit differently, but I simply desire to givo the other measurement as a

27.

sidelight on what he says.”




You remember that, Dr. Goldenweiser?

Hr. Young’s

He has put it

19X.

D r» C u r r ie th e n s a i d :

2.

nonotary theory is tho rate of interest.

3,

of intorest down lew onough.

4«

capital investment that would be profitable at a two perccnt re.to of inter-

5.

est than at four percent.

6.

not sure but in part the demand would come from residential building.

7.

think possibly in the railroads, utilities, mining and manufacturing and

8.

such fields, probably the rate of interest has very little effect.

9.

"T h o b r i d g e b e t w e e n t h e m e c h a n ic s and t h e

Kence you must foroe your rates

For example, there is presumably a lot no re

That is the way monetary the-iry proceeds.

I am
I

"There are other considerations which seem to be much more import-

10.

ant than a rise in the rate.

We think that housing is still rather import-

11.

ant.

12.

new hone and the rent he is paying, finds that tho rate of intorest is

13.

important; but, apart fron that, economists do not contribute nearly so much

14.

importance to the rate of interest as they have in the past.

15.

the interest rate is the m i n bridge between the money supply and capital

16.

invo strr.ent."

The contrast a person at present can make between the purchase of a

17.

Nevertheless,

Ecclcs on "Savings and Spending Theory"

18.

Governor Ecclos then at length discussed the savings and spending

19.

theory c.s a fundamental issue.

20.

we did not have f.overnment bonds in which to invest at this dbage of our

21.

economy, we would have no savings funds.

22.

a contraction of the total debt structure in a period of deflation.

23.

is a contraction of credit, not only of bank credit, but of credit generally.

24.

He said:

"In tho first place, possibly if

If you will recall, there is always
Deflation

"From 1929, which was in an inflationary period, so far as err.ploy-

25.

ment and the price level wore concerncd, we had a contraction of something

26.

like $40,000,000,000 of tho total debt structure.

27.

r,f the debt, the savings banks, trustees and other investors generally had

28.

no trouble in investing their savings funds, because such funds were likewise




During that contraction

-201.

contracting.

2.

"Yiith respect to the Government's deficit, we have created em-

3.

ployment, have created funds through the banking system, we have been

4.

creating savings so that those savings and the process of buying Government

5.

bonds with such savings, are putting the savings bank into the income stream

o.

where they are now.

This flow of savings can» when the contraction of the

7.

total debt throughout the country had stopped.

8.

tinued, there would be no problem about savings.

9.

present is in -the investments you have made in the past.

10.

If such a process conThe problem you have at

"Taking the economy as a whole, there is an excess of savings.

11.

Otherwise, it w ould not be necessary to place savings funds into Government

12.

bonds or Baby Bonds.

13.

idle funds which havo been created and now belong to corporations or banks

14.

which are seeking investment.

15.

rate, if you desire to avoid a purchase of Government bonds for savings, it

16.

seyms to me that it is necessary for these savings to get out into the

17.

capital market, into the private investment field to the extent that Dr.

18.

Currie has indicated."

There vrould not be such a huge existing supply of

Therefore, if you desire to get a higher

iinrket Dcmr.nd of Savings
19.

The Moderator then remarked that the market must demand the sav-

20.

ings.

21.

market demand those funds itself?

22.

and it is ccrtainly not because the terms are unfavorable,

23.

would say, it is because of Government deterrents.

24.

able to deteot the extent to which tho deterrents are responsible for the

25.

low amount of private investment.

26.

enterprises and know something about practical business problems.

27.

business is turning dow n orders today.




’^hereupon Governor Eccles said:

"That is correct.

Vihy doesn't the

It is not because of tho interest rates
llr. O'Connor

I have not yet been

Yet, I am connectod with many business
No

There is no problem of production

-211.

in any field.

2.

There is the willingness on the part of those who have funds, possibly to

3.

buy consumer goods to some extent.

4.

There is nothing anyone wants that they are not able to buy.

"On the other hand, there is an inability on the part of a great

5.

many others to buy what they would be willing to purchase if they had the

6.

purchasing power.

7.

question of over savings in the corporate sense, as well as 'that of the

8.

individual, because they are unable to put their funds into productive use

9.

on account of the inability to find markets sufficiently to secure an outlet

So, it seems to mo there is something valid in this

10.

for the large amount of savings.

ll.

torrent is responsible for all that.

12.

I do not believe that a Government de­

"I think there is something much more fundamental in the System.

13.

In my opinion, this fundamental thing is the way in which the national

14.

income is divided between consuming buying power on the one hand and savings

15.

on the

16.

has indicated is available for new investment.

17.

other - meaning that part of the national income which Dr. Currie

Socia 1 Security Program Considered a Factor

18.

*1 believe this present administration has contributed through a

19.

Social Security program to that problem.

However, this program has not

20.

given the aged an assurance that they have a pension of an adequate and

21.

reasonable amount; it has not given the assurance of employment; so when we

22.

talk about confidence, we are thinking of confidence as & cause, when as a

23.

matter of fact confidence is on effect.

24.

"The masses of. people when they get employment do not forget the

25.

periods of unemployment. A great many of them say, which, individually is

26.

a fine thing, it is splendid for everyone to be out of dobt and have a

27.

rainy day reserve.

28.

has made corporations and individuals generally feel that whe.t they want to




The result of the depression has been so severe that it

-22-

1.

do is get out of debt, to have a rainy day reserve to take care of their

2. old age and take care of the possibility of unemployment.
3.

"Now, such a point of view was excellent during the time when

4. we were a debtor nation and when we had a rapidly increasing population.
5.

It was fine when other economic factors than the present ones existed, but I

6.

think that fundamentally this problem will not be solved until, in my opin-

7.

ion, we recognize a new approach to it.

8.

Figures on Plant and Equipment Expenditures

9.

MI just received some figures today that are very illuminating on

10.

this question:

these statistics relate to the amount of expenditure for

11. plant and equipment in the United States from 1921 to 1939.
12» 1930, the expenditures were about $8,000,000,000.

From 1921 to

Of that amount,

13» $1,639,000,000 was financed -through new security issues.

In other words,

14.

20 per cent was financed by going to the markets through new offerings.

15.

financing data was taken from Moody's.

The

The information on expenditures for

16. plant and equipment account are the estimates compiled by the Federal Reserve
17.

Board.

18.
19.

"From 1931 to 1939, the expenditures on plant and equipment amounted
to i'4,773,000,000.

The average annual offering of new securities during this

20. period was $322,000,000, or 6.7 per cent.

This is evidence of the extent to

21. which business is not depending at all upon capital markets.

It is dopend-

22.

ing upon its own earnings and its own depreciation reserves, which it is

23.

plowing back.

24.

"The best example is that of 1937, which was a year when the ex-

25.

penditures on capital outlays was about equal to the average of the expendi-

26.

tures from 1931 to 1933.

27.

1930 to 1931, business went to the capital market for #1,600,000,000,

28.

amounting to about l/5 of the total expenditures.

’Whereas, with the same capital expenditures from

29« to the capital markets for $



During 1937, business went

. Yihen capital expenditures approached

-231

the present depression level, new flotations provided approximately eight

2

per cent of the expenditures as compared with 20 per cent in the 1920s*
"I merely refer to that so as to indicate to you what Government

3
4

financing does through the banks in creating funds and how the principle of

5

everybody getting out of debt and building rdny day reserves applies to

6

business generally»

7

the capital markets is the true situation.

8

ings banks, insurance companios and trustees, if they did not have Government

9

securities in whioh to invest, I do not know v/hat would teke their places.

1(

Its determination to do its own financing and not go to
Hence, institutions such as sav­

On Shift of Investments

11

"In the 1920s, there was an investment of about $9,000,000,000 a

12

year in municipals.

13

in municipal securities.

14

nicipals, it makes very little difference.

15

both are public debt.

16

pals for they are not available in any great degree.

17

For the last several yoars there has been no increase
If a shift is desired from Governments into mu­
It does not help the situation -

Furthermore, you could not possibly invest in munici­

"Many individuals desire to invest in foreign securities.

18

speculated in that direction.

19

pals or in foroign loans or in stock market inflationary operations?

20

course, you do not.

21

I'any have

The query is, do you want to invest in munici­
Of

You want to invest in sound business development.

"I pointed out to you that eight billion dollars was invested in

22

plant and oq uipmont during the 1920s*

23

all.

24

to invest in such securities today because if you studied the balance sheets

25

of the corporations, you would ascertain that they do not have to go to tho

26
27

It covers facilities outside, apart frora that.

You have no opportunity

capital markets and thero is no immediate prospect of the situation changing»
How that, after all, is the nub of the problem.
MYou talk about Government bonds and interest rates and excess

28
29

That does not cover the utilities at

reservos, but the real fundamental issue is, Hr. O'Connor thinks, that if we get




-2 4 -

1

a conservative government in Washington, confidcnco will bo restored, Govern­

2

ment will reduce taxes, Government expenditures will be reduced*

3

O'Connor says, 'we will got these expenditures down to less than seven

4

billions even to six and one-half billions of dollars.

5

will not have funds to invest in governments because the budget will bo

6

balanced and we will all go out on a splurge of confidence, vre will employ

7

all the people who had jobs in 1929, plus 6,000,000 more, which is the in­

8

crease in the number of employable people, and will employ enough to overcome

9

technological unemployment created since 1929.’

10

possible.

11

Mr.

Thon privatooapital

I just do not think it is

As a business man, I wish I did.”
Mr. Parker thon offered the following:

"It seems to me that the

12

Federal Reserve's presont power to rcduco required reserves against bank de­

13

posits was the missing linkin the early 30’s, that has since boon provided#

14

In other words, if wo could have provided banks with reserves at tho time

15

they were being drawn on so heavily, they would not have had to dump their

16

securities and thus create a very bad crisis.”
Dr. Goldcnweiser then responded:

17

”1 think tho flexibility of re­

18

serve and the flexibility in the eligibility requirements, the ability to got

19

help from Federal Reserve banks on all assets that are sound rather then only

20

on a very s olected and rapidly shrinking list, are very important factors

21

of safety.”

BREAKDOiftt OF AGENDA
22
23

1.

The Price of Bonds or the future Course of Interest Rates.
A.

Excess Reserves:
The first question under this heading was:

24

1.

Over tho near term

25

prospoct of, say, tho next 12 months, is thoro any likelihood of a substantial

26

reduction in excess reserves as a result of:

27

in reserve requirements?

28

currency?




(c)

(a) Gold exports?

Free use of gold?

(c) Substantial increase in bank loans?

(b) Increase

(d) Expansion in tho
(f) Additional govern­

-2 5 -

1

ment borrowing»

2

borrowing?

3

Reserve banks?

(g) The opening up of the capital market for "new money"

^h) Sales or maturities of Government securities held by Federal

Dr. Goldenweiser was requested to answer this question.

4

He said

5

thet there would be no gold exports; it would be very unlikely that there

6

would be an inorease in reserve requirements; it would fce very unlikely that

7

there would be a freo use of gold; there would be expansion in the currency

8

to a limited extent but not sufficient to make a difference; that a substan­

9

tial increase in bank loans would not make any inroads on reserves that

10

would amount to anything; that additional government borrowing would not

11

likely bo large, if any, in the next year; and that the opening up of the

12

capital markets for "new money" borrowing is not very likely; that sales of

13

Government securities held by Federal Reserve banks is a matter of polioy..•

14

it would be hard to predict but it is not likely that there would be sales

15

enough to make a big difference in the reserves*

16

answers were predicted on the point of view that the European War will con­

17

tinue and th&t the United States will not become a party to it.

Of course, Dr. Goldenweiser’s

18

The second question propounded by Moderator Sohwulst wass

19

the ne&r term prospects of, say, the next 12 months, is there any likelihood

20
21

of c substantial incroase in exccss reserves as a result of* (a) The roleaso
(c) Decline in bank loans?
of gold from earmark? (b) Further gold shipments from abroad?/ (d) Decline

22

in circulation?

23

to the Federal Reserve Bank or to other purchases?

Over

(e) Decrease in commercial bank bond holdings through sales

Dr. Goldcnweiser answeredi

24

2.

"There are likely to be very substantial

25

amounts of gold released from earmark; there are likely to be very considerable

26

imports of gold; there is not likely to bo a decline in bank loans; there is

27

not at all likely to be a deoline incirculation; whether there is going to be

28

a decrease in comercial bank bond holdings, through sales to the Federal

29

Reserve Banks, is unlikely in the present circumstances."




26-

-

Problem of Reserve Requirements
The Moderator then asked:

1

"At the present time, the reserve re­

2

quirements of member banks are between 12 and 22 3/4 per cent.

3

requirements likely to be increased during the next 12 months?"
Governor Ecclos a nswered:

4

Are these

"The power to increaso reserve require­

5

ments is very limited.

6

about one-seventh of the present requirements, thus making an increaso equal

7

to the original resorvc requirements.

8

by such an incree.se vrith the amount of excess reserves as excessive as they

9

are now."

10

It is possiblo to incre%se reserve requirements by

The Moderator then asked:

I can see no purpose to bo accomplished

"Do you think it likoly that Congress

11

may broaden the authority of the Federal Reserve system to increase tho re­

12

serve requirements beyond the limits that they nay now bo increased?"

13

To which Mr. Eccles said:

"I do not think it is likoly during this

14

year...I could not predict as to the future."

15

Colonel Ayres suteiitted a similar opinion that "it is improbable

16

that the reserve requirements of member banks will be increased during tho

17

next 12 months."

18

Tho following question was then asked:

"Through the sale of Govern­

19

ment securities, tho Federal Reserve Bonk could reduce reserves by

20

$2,477,000,000#

21

serves vrould then be reducod by a similar amount; if bought by othors than

22

member banks and paid for with deposits in member banks, excess reserves would

23

be reduced by the amount so purchasod loss the reserves required on these de­

24

posits, which would be somewhero between 12 and 22-3/4 per cent.

25

think that over the next year the System will attempt to raise money rates

26

through the sale of Government securities?"

27

Governor Ecclos stated:

If those bonds were all bought by ncmbir banks, excess re­

Do you

"I do not tliink that over the next year

28

tho amount of the sale of Government securities by the Federal Reserve System

29

would be a factor in its influence on interest ratos."




-2 7 -

Mr. Goldsmith stated:

1

"The Federal Reserve hf.s been soiling securi­

2

ties when the market is strong but they certainly are not selling them at the

3

present time»"
Dr. Stonier thought that "over the next year the System would not

4
5

attempt to raise monoy rates through the sale of Government securities."
The Moderator then asked*

6

"To what extent are excess reserves

7

reaching a

8

factor?

9

where the banks simply will not invest them?"

10

level where they a re losing their potency as a bond market

Ar© the reserves growing in the case of individual banks to the point

To the first part of this question, Mr. Parker answered:

"It is

11

apparently having an increasing effect in this direction."

12

part of the question:

13

reaching the point whore they do not want to further invest in Governments,"

14

Mr. Ball agreed with Mr. Parker«

"There are more and more individual banks which are

The Modorator then asked tho next question:

15

As to the second

"If it is true that

16

further increases in excess reservos are losing their potency, and if it is

17

truo that banks will not invest such further increases, to what extent is

18

this duo to tho fact that banks may be carrying largo bank and foreign deposits

19

against which they nay feel they should be reserved substantially 100 per cent?

20

To what degree is it duo to the declining capital-deposit ratio or other perti­

21

nent ratios?"

22

Mr. Goldsmith answered this question:

"I think it is true that the

23

office of the Comptroller of the Currency has been pressing banks recently,

24

which have a poor capital ratio, to put up more capital.

25

in some cases where the banks are in a highly liquid condition.

26

troller’s office has taken tho position that there was no assurance the banks

27

wore in a highly liquid condition and they should put up more capital.

28

think if such a situation continues, it will have an adverse effect on mar­

29

kets."




They have done that
The Comp­

I

-

Dr. Goldenweiser offered»

1

28"As to the oapital-deposit ratio, I do

2

not know.

My opinion is, however, that it ought not to be a natter to be

3

considered in this connection at all; but whether or not it is, I have no

4

information.

5

deposits, I think that it would exist almost entirely in New York, since the

6

excess reserves in New York are enormous.

7

is a consideration."

With relation to the 100 per cent reserve against foreign

I doubt very much whether that

Excess Reserve Situation

8

The next question asked by the Moderator was:

9

"In your judgment,

10

is the price of bonds so high that even a slight tendency of excess reserves

11

to fall would give rise to psychological or panicky selling of bonds by insti­

12

tutions and other holders desiring to ‘beat the other fellow to tho trough*?"
Mr. Devine did not think it would

13

and said:

"I do not think that

14

evoryono would immediately run out.

It might take some time and would depend

15

largely upon the action of the market at tho start, but I really do not think

16

there would bo any rush to got out of tho securities, because excess reserves

17

are so huge that a slight decrease in then cortc.inly would not have nuch effect

18

on money."
Mr. Schwulst suggested that "wo had quite a drop after the declara­

19
20

tion of war in September and excess reserves fell then."

Mr. Devine answer­

21

ed:

22

wasn’t really caused by any commercial demand or anything of that kind."

"Was that not caused by a panic stricken people because of the war...that

Tho Moderator then suggested:

23

"I think tho inference to be drawn

24

from the question is that when banks see excess reserves starting to contract,

25

then they say - ’Well, hore, boys, this is happening, wo had better start

26

to got out and make some profits.’"

27

Mr. Devino then said:

"You had a pretty good example in 1937.

In

28

the Pall of that yoar, when excess reserve requirements were increased, short

29

term issues wont off first and long term bonds later on.




However, now with

-2 9 -

1

excess reserves two or three times as great as they were then, I doubt very-

2

much whether the decline of one or two billion dollars worth of excess re­

3

serves would create a panic in the Government securities market.*1
At this point, Mr. Morss said:

4

"I should think that if reserves

5

went off a billion or two, we would have to look the situation over in order

6

to determine whether or not there might be a further excess reserve reduction»

7

If it seems to bo temporary, I believe the market would be somewhat lowered

8

for a timej but if it seemed that it was sotting up a tendency which would

9

persist, I would expoct the market would be off rather sharply because it is

10

now so thin.**

11

Mr. Lanston stated:

”1 think it depends entirely upon the reasons

12

for a change in the trend of excess reserves in dollar amount.

13

would have very little bearing, because if you had a prioe iwel of 2-^ points

14

higher lrst Juno with excess reserves a billion lower, that would be material,

15

because the change in the level of excess reserves would bo the dominating

16

factor.

17

a losing game in the last four years, that I think most people are giving it gp ."

Such a change

This idea of ‘beating the other fellow to the trough1 has boon such

What Is Determining Factor?

18

Mr. 3enson was askod:

19

‘'Would the result be anything more than

20

temporary - that is to say, might wc not expect a rebound upward in the market?”

21

He answerod:

22

the declinc that indicated a chcngo in the investment policies of the banks

23

and a revival of business, it would be shown that bonds wore perhaps on a

24

downward trend and yields upward due to changes in investment; but unless it

25

is from some other temporary cause, the robound would be very quick.”

26

”Yes.

It seems to me that if we would analyzo the causcs of

The Moderator asked the next question:

"Will excess reserves have

27

to be practically totally exhausted before we arrive at a position where we

28

might say that we are definitely headed for higher money rates and lower

29

bond prices?”

30



Governor Eccles answered:

"I do not think excess reserves are on-

-301

tirely the determining factor.

2

long range position of interest rates*

3

cffect banks so far as their investment and credit policies aro concerned«

4

I think that interest rates are influenced by the supply of funds in the

5

hands of investors in relationship to the opportunity for investment of the

6

funds.

7

as well as the question of excess reserves; and so long as uninvested sav­

8

ings are greatly in excoss of the opportunity for investment, you will con­

9

tinue to he.vo low interest rates.”

10

One must consider the possibility of a
Of course, the excess reserves

That is a very important factor with reference to interest rates

Mr. Parker added*

"I would say that so long as you have any excess

11

reserves in reasonable quantity that you can hardly have an increase in monoy

12

rates that is not simply a correction of the present rate.

13

rates that exist in certain short-chargo categories.

14

sible to lend and borrow on the excoss reserve fund and these borrowings

I noan normal

It would bo quite pos­

15 would flow to whatever point they happened to bo needed at the moment.

This

16 would intcrfero with all interest rates through the country«”
Colonel Ayres offered the following comment}

17

”If excess resorvos

18 wore being rapidly decreased, interest rates would be moving upwards and
bond prices downwards, before the excess reserves were entirely exhaustod«”




-31The Gold Question
1.

Under this heading, the question was asked:

"Would you say that

2.

as a practical matter, the Treasury will indefinitely buy all gold pre-

3.

sented from whatever source, at $35»00 an ounce?"

4*

Senator Townsend stated:

" I think that if we continue to pur-

5. chase gold at the present rate, by 1943 we will have all the gold in the
6* world.

?/e have 69 percent of it now."

7.

The Moderator clarified tiie question:

"Under the existing legis-

8.

lation, doesn’t the Treasury have to take whatever steps may be necessary

9.

to maintain the parity between gold and the dollar at the ratio of $35«00

10.

an ounce?"

11.

Dr. Goldenweiser agreed and said:

"I do not think the Treasury,

12.

under the present law, could refuse to buy any more gold.

That would not

13.

in any way affect the parity between gold and the dollar.

There would be

14.

nothing in stopping the purchase of gold that would make for disparity bo-

15.

tween tho gold dollar and the paper dollar."

16.
17.

Senator Townsend asked:

"Would the change of price stop the pur-

chase of gold?"

18.

Dr. Goldenweiser did not see how it would "because if the

19.

Treasury should pay more or pay less for gold, tho currency would move

20.

with it so that the parity would continue.

21.

would be discharging his responsibility by keeping gold on tho parity.

22.

is under an obligation to keep it on the basis of $35.00 an ounce so long

23.

as the President’s proclamation of £35.00 an ounce is in effect."

The Secretary of tho Treasury
He

Is There Foreseeable Limit
In U. S. Purchase of Gold?
24.

The second gold question was:

"At the present time, this country

25.

holds $18,035,000,000 out of a total estimated world gold monetary stock

26.

of $26,000,000,000, or 69%.

27.

fixation of the price of gold at $35 an ounce, the net imports of gold havo




Since the devaluation of the dollar and the

-3 2 -

1.

amounted to $¡¡11,120,820,000.

2.

$3,574,151,000 and so far in 1940 have amounted to #383,370,000.

3.

exclusive of Russia, the world production of gold amounted to over

4.

#1,200,000,000.

5.

|35 an ounce approximately $750,000,000 per year.

In 1939, such net imports amounted to
In 1939,

It has increased since we established the gold price of
Are there any fore-

6 * seeable limits as to the amount of gold which the United States Treasury will
7

* purchase?"

8*

Mr. Goldsmith stated:

"We certainly are not going to buy any more

Q

than the other 30 percent plus current gold production.

There are many

people in Washington beginning to wonder whether it might not be more advis^ • able to extend credits abroad than to take more gold.

Perhaps this situa-

tion will become a leading topic of conversation, but it is not now."
Mr. O ’Connor pointed out that there was a question about the

14.

accuracy of the ownership by the United States of sixty-nine percent of the

15.

world's gold, and believed that the percentage was probably around 62 per

16.

cent.

17.

nearer 60 than 69 per cent.

Dr. Goldenweiser thought the figure slightly high —

18.

Mr. Eccles clarified this by stating:

that it was

"You have earmarked gold

19.

and stabilization gold, neither of which is in the monetary stock, so

20.

that with those two included, it may be 69 per cent.

21.

calculation, the percentage would be close to 62 percent."

22.

With them out of the

Commodity Price Level
and Flow of Gold

23.

The Moderator then asked the third question on gold:

24.

likely that a substantial rise in the coiranodity price level in the United

25.

States would tend to make g.old flow from the United States rather than

26.

into it, or are there other factors, such as the need of warring nations

27.

for supplies and the general foreign unrest, which are likely to induce

28.

the continued flow of gold to this country, almost irrespective of the

29.

course of commodity prices?"




"Is it

•35«»
1.

Dr. Goldenweiser answered:

"I think that your question here

2.

includes part of the answer*

3.

belligerents who have to buy goods at any cost, your rise in prices wouLd

4.

not affect the amount of purchases that they make here except that they

5.

would come to the end of their rope a little sooner.

6.

export commodities to South America and to other non-belligerents, I should

7.

imagine if we had a very substantial rise in prices, there would be less

8.

The Moderator then asked:

Congressman Gifford thought not - "that it is high time the reverse process set in and let you and me have some gold."

13.
14.

"In the light of past experience, is

the Treasury likoly to resort again to the sterilization of gold imports?"

11.
12.

But, in so far as wo

gold coming into this country, although it would continue to come."

9.
10.

In so far as purchases are made by the

Mr. Schwulst then asked:

"Would such a course of action be ad-

visable from the standpoint of our banking system?"

15.

Kr. Eccles said:

"It would be helpful to the banks, because what

16.

the banks would get through that process would be interest bearing securi-

17.

ties in lieu of idle excess reserves.

18.

which sterilization processes were undertaken.

19.

by the sale of securities to the banks.

20.

th e ir

excess reserves

It would depend on the extent to
It could only be undertaken

In other words, they would use

fo r th a t p u rp o se ."

Possible Effect of
Sterilization Policy
21.

Hr. Schwulst then asked Mr. Eccles:

"From your position as one

22.

of the supervisory authorities of á very substantial part of the banking

23.

system and having your pulse on the commercial banking system as well as,

24.

if not better, than anyone else, - do you think there would be more of a

25.

feeling of reassurance in the minds of commercial bankers against inflation-

26.

ary tendencies if the Treasury should adopt the sterilization policy with

27.

respect to futura gold inports in place of letting them continue to pile up

28*.

excess reserves?"




-3 4 -

1.
2.

Mr. Eccles replied»

"Yes.

I think banks would feel that if

the excess reserves were protty largely extinguished by whatever means, it

3 * would naturally cause them to feel that further expansion of the means of
payment would be stopped or diminished, so far as the banking system is concemed."
6*
7.

Mr. Gifford then asked the Governor:
authority now to sterilize gold?"

8.
9.
10.

"If the Treasury had the

Mr. Eccles answered:

"The Government has the authority but only

up to $45,000,000,000 at the present time, in which to increase its debt
and thus its authority would be curtailed to that amount."

11.

Dr. Goldenweiser clarified the discussion concerning the question

12.

of the Treasury sterilizing gold by stating:

"I think that if the Treasury

13.

should sterilize the gold, the banks would never have assurance that they

14.

will not cease sterilizing or de-sterilizing; and for that reason I believe

15.

it would probably not give the banks any feeling of security.

16.

sterilization by the Treasury, which has a direct effect on the reserve

17.

position with the possibility of always changing the de-sterilization or re-

18.

sterilization, does have the effect, - which I think would not be desired, -

19.

of taking the management of the domestic money mrkot out of the hands of

20.

the Federal Reserve authorities and putting it into the Treasury."

In addition,

On Circulating Gold
21.

Moderator Sohwulst then asked the question:

"Would it be advis-

22.

able to circulate gold again within the country, and v/hat would be the means

23.

of effectuating such a polioy?

24.

and interest rates?"

25.
26.

VJhat would be the result upon excess reserves

Senator Tovmsend answered:

"I think the circulation of gold

would eventually reduce tiie price."

27.

Mr. Goldsmith reflected some interesting views in Yfeshington on

28.

this question and said:

29.

gold in the first place, - who would be the ‘suckers'.




"A number of officials wonder who would take the
I think it is

-381.

pretty generally the feeling here that the amount of gold which would

2.

actually go into circulation would be very small; that if -the public wants

3.

gold, it would be at a time when the Federal Reserve System would not want

4.

to have the reserves reduced; if gold were available in large quantities,

5.

the public knowing that they could have it, would not take it, so the

6.

general feeling in Washington is that the distribution of gold would not

7.

help much."

8.
9.

Colonel Ayres stated:

”In my opinion, it would be advisable to

circulate gold again in this country.

There are many different ways in

10.

which that could be done and it is not possible to say what the result would

11.

be on excess reserves or on interest rates without knowing beforehand which

12.

method of resumption is determined upon.”

13.

Resumption of Gold
Standard Considered

14.

The Moderator asked the next question:

”Are there any fears in

15.

your mind that the concentration of monetary gold in this country is likely

16.

to militate against the ultimate resumption of the gold standard inter-

17.

nationally?

18.

redistribution of gold?”

19.

What would be the means at our disposal of bringing about a

Governor Eccles commented:

”1 think it is rather difficult to say

20.

to what extent the concentration of gold in this country is likely to mili-

21.

tate against the ultimate resumption of the gold standard internationally.

22.

recognize that most of the gold production is outside the United States.

23.

Of course, the British Empire would be interested in the use of gold inter-

24.

nationally.

25.

We

”Td say what the world will look like after the outcome of the war

26.

is a very difficult thing to contemplate, but with reference to the means

27.

at our disposal for bringing about a redistribution of gold, it seems to

28.

me that we are pretty well limited in bringing it about except through the

29.

loaning of money or the taking of a very large quantity of goods from the




-3 6 -

1.

rest of the world in excess of the goods which we sell to the rest of the

2.

world.

3.

"In other words, we would completely have to reverse our position

4.

of having a favorable trade balance.

5.

favorable balance on a large scale for quite a period of time.

6.

gold loans to foreign countries, they would not be able to stay upon a

7.

gold standard even if they were put upon it, except as we were willing to

8.

take their goods.

9.

to have a favorable trade balance."

10.

It would be necessary to have an unIf we made

We would get the gold right back again if we continued

Mr. Gifford said:

"I want some 'hard* money in my pocket.

11.

agree with 1'r. Eccles.

12.

they know it can be taken away from them again but many people would be very

13.

glad to hoard some of that ’hard* money."

14.

take the pound sterling for the gold."

15.
16.

The public wants that ’hard’ money.

I dis-

Mr. Eccles responded:

Of course,

It . Gifford suggested that we

"When you take the currency of another

country, it is simply a loan without interest."

17.

Colonel Ayres answered:

I do not believe that the concentration

18.

of gold in this country will militate against the ultimate resumption of gold

19.

standards internationally.

20.

redistribution of gold internationally.

21.

for such a redistribution would be an enlightened peace treaty terminating

22.

the war and encouraging international trade."

23.

We cannot do very much toward bringing about a
The most effective factor making

The Price of Gold

24.

The Moderator then asked the next question on the Agenda:

"Would

25.

it be inadvisable to take off the fixed price of $35 an ounce for gold or

26.

place an import duty upon gold?

27#

portation of the metal into this country?"

2g,
29.

Would such action tend to curtail the im-

Dr* Goldenweiser answered:

"At the present time a reduction in

price of gold would mean primarily one thing; and that is, reducing the




-371.

buying power of England and France in this country.

2.

able or not depends on one*s point of view.

3.

tend much to curtail the import of gold, but it would make the amount of

4.

gold, that is

5.

buy less of our goods.”

6.

Yiihether that is desir-

It would not for the present

in this country already or that is available to belligerents,

Dr, Goldenweiser also stated:

”0f oourse, the price of gold is

7.

always the same throughout the world.

The ounce of gold will buy the number

8.

of pounds or the number of franos that will exchange for $35; and if you

9.

change that, then the price of different currencies would change corres-

10.

pondingly.

11.

strictions in movement, has got to be the same everywhere.

12.

Hence, the price of gold in terms of currencies, barring re-

”If the price of gold were reduced here, the price of the dollar

13.

would go down on the foreign exchange by the corresponding amount.

14.

s.odity prices in this country would decline somewhat, but not as much as they

15.

would with uneconomic conditions.

16.

in the price of gold would have an immediate and strong repercussion on

17.

prices; but in view of the situation in the world, it would have very much

18.

less of a repercussion.

19.

Com-

There are conditions whoroby the decline

However, it would tend to depress our price.”

The Doctor and lir. Gifford had quite a discussion about placing

20.

tho imports of gold on a quota basis, but Dr. Goldenweiser stated:

21.

would be impossible.

22.

counodity on which you could not effectually enforce a quota for different

23.

countries."

24.
25.

to. Gifford:

Gold is a very movable commodity.

”It

It is the one

"That is the exact answer, of course,

',/e would like

a quota on Russia but she would simply send it through other routes."

26.

Dr. Goldenweiser: "The gold we get from Russia mostly cor.cs from

27.

other countries.

28.

then Sweden sent it to England; then England sent an equivalent amount of

29.

gold here and you could not identify it.




The original pre-war Russian gold mostly went to Sweden;

Tie could not handle the gold

-3 8 -

1.

import problem through a quota system.”

2.

Colonel Ayres had this to state with relation to the effect of

3.

an international redistribution of gold on world prices, on the dollar, and

4.

on our commodity prices:

5.

specifications with respect to the nature and amount of the redistribution,

6.

and those specifications cannot now be available,”

7.

On Stopping Gold Imports

8.
9.
10.

”It cannot be estimated without having available

Moderator Schvmlst asked:

"What means are there at our disposal

of preventing the taking into our monetary syster. of further gold importations into the country?”

11.

Dr. Goldenweiser answered:

"Technically, we could just rofuse to

12.

take it, but that would have consequences which we probably would not want

13.

to bring about.

14.

and then it would mean that England and France would be deprived of a

15.

very large part of their buying power in this country.

16.

meant not legally but as a matter of policy, the only thing we could

17.

effectively do would be to repeal our tariffs, to stop our exports, - which

18.

wo are not very likely to do - or to make very large foreiga loans, which

19.

is not in the immediate future of probability."

20.

21.

It would mean -tiiat our prices would very drastioally decline

Hr. O ’Connor then asked:

Dr. Goldenweiser:

23.

Hr, O’Connor:

24.

Dr. Goldenweiser:

"That is a method of lending money,"

"Foreign or Ar.erieari securities?"
"That is, pay our own debts rather than lend

to others ?"

26.

Hr. O ’Connor:

27.

Dr. Goldenweiser:

28.

"viould you add acquisition of foreign

securities?"

22.

25.

If the quostion is

"Thrt is right."
"Yes, that is another way, but I do not know

that there is very much of such securities available any longer."
Devaluation of Dollar

29.



Hoderator Schwulst then asked the next question:

"What are

-39-

1.

the prospects for further devaluation

2.

effeot of such devaluation upon excess reserves and the interest rate level?”

3.

of the dollar, and what would be the

Mr. Eccles did not personally think that there was any prospect

4.

for further devaluation, stating»

5.

undertaken, would be to increase excess reserves.

6.

rate

level is concerned, I do not think it would have any appreciative ef-

7.

feet

upon the'£ause of the excess reserves at the present time.

8.

are already so excessive that a substantial increase in either one

9»

"The

effect of it, however, if it were
As far as the interest

Deposits
or both

would have very little effect.”

10.

Foreign

11.

Deposits To Be Withdrawn In Gold

Moderator Schwulst brought out the desire of the conferees to

12.

clarify the amount of foreign bonk deposits in this country that could be

13.

withdrawn in gold.

14*

Dr. Goldenweiser estimated the amount was about one and

a half billion dollars.

Mr. Eccles suggested that this figure should have

15.

deducted from it

16.

necessarily be maintained in the United States.

17.

balances so carried were somewhere ¡..round six hundred millions of dollars.

18#

the amount of a reasonable working balance which would
He thought

that the average

"You would have to assume," Mr. Eccles continued, ”that as long as

19.

we wero doing any international business that if the world were in a position

20.

where it is withdrawing gold from this country, resulting in the reduction of

21.

bank balances, very likely it would be during a tis.e when the nations would

22.

require a substantial working

23.

quarter billions would be the maximum that would be withdrawn."

24.

balt.nog here.

Mr. Lanston then remarked»

In my opinion, about one and a

"If it helps any, the report of the

25.

101 Cities states that the bulk of tho movable foreign deposit fund is

26.

§696,000,000.00."

27.

Probable Public

28.
29.

Reactions On Gold Circulation

The Moderator further

requested information as to what the reaction

o f the public might be with respect to actually availing itself of the privil-




-401

ege of taking gold if it should be circulated again..,would any considerable

z

amount of the people avail themselves of such a privilege either in certificate

3

or metal form and ‘salt* it away so to speak.

4

Mr* Mills thought that a great deal of such gold would be ho c.rd^d

5

not only by citizens of this country but also by foreigners*

6

able in the United States, I think, mould be seized upon

7

the world,

8

thought it would amount

9

10

"Gold if avail­

by people all over

A lot of it would disappear out of circulation,1* he said.

Hc

to between one-half and one billion dollars.

Dr, Goldenwoiser stated that during

the bank crisis in 1933,three

hundred millions of gold was hoarded,

11
12

hoarded gold in large quantities in recent years would have probably hoarded

13

it in London beoause there the gold profit was never confiscated,

14

dering whet hor people who really wantec' to hoard gold in quantity wouldn’t

15

really do so in some place other than the United States?"

16
17
18

Mr. Goldsmith stated»

Mr. Schwulst suggested»

I was won­

"Can’t those people now buy gold with

sterling and hoard it in London if they choose?"
Mr. Parker»

19

win the war?

20

any longer?"

21

nI should think all the people who could have

"Couldn't it be hoarded by Germans if Germany should

Do not these charts here show that England has no gold reserves

Dr. Goldenweiseri

"That isn’t exactly right.

The British equali­

22

zation fund has taken over the gold of the Bank of England,

23

not mean that England has no roserves..,it only means that it does not pub­

24

licize them.

The Bank of England hasn’t the reserves, the Government has them,"
The Hoarding of Gold

25
26

Tho chart does

Mr, Lanston*

"There was a large number of bills of 50 dollars and

over that have been hoarded, amounting to more than ^300,000,000."

He also

thought that if gold were made available, there would be a fairly sizeable
increase ovor the present amount of currency hoarded*
The Moderator asked Mr* O ’Connor whether he would discriminate be­
silver certificate and a v50 gold certificate


tween a ¿50


-4 1 -

1.

if both wore bought in the

2.

open market.

To which Mr. O ’Connor replied«

"*es.

If wo had more monetization

3»

of silver, there would be a greater demand psychologically for gold.

I think,

4.

too, that

5.

the demand for gold might arise.

6.

question of a year or what you will, but the psychological attitude concerning

given certain attitudes about tho fiscal position of the government,
I think it is incalculable.

It isn’t a

7*

the fiscal position of

the government can change overnightj and thus there

8*

would be a demand for gold from all over the world as well as from individuals

9.

and banks in this country."

10.

Mr. Eccles interposedt

11.

Mr. O ’Connor*

12.

"Because of the dangers of inflation?"

"Anything you like.

Psychologically, - the fear

about debt."

13.

Mr. Ball offered*

"I think

the hording might be quite considerable

14.

in amount.

My reflection on that is, - tho bank of which I am the president

15.

is in the small loan business, wo find more customers who are willing to go

16.

into debt than those who are willing to put money in a savings account,

17»

think

18.

question...that it is not understood

19»

Then there is uncertainty as to conditions abroad,

I

the reason for that is the very great uncertainty about this gold

20.

by either the banker or tho customer.

X thijak there is a growing attitude on the part of many people that

21.

»well, let us have a good time while we can have it’; and thus I thimk they

22.

would have more confidence

23.

deposits and thus it would lead to increased hording."

24#

in gold certificates than they would in bank

Chart Showing Markets For Government Bonds

25.

At this point, tho Moderator requested Mr. Parker to submit a chart,

26.

that appears on page ? of this report, entitled* "Markets for Government

27.

Bonds".

28.

at which various groups or types of industrialists would be very reluctant to

29*

say the least to purchase bondsif

3#.,

that I have drawn in heavy black line.




He said* "I submit this chart merely as my opinion as to the rates

the yields dropped below the stated levels

-4 2 -

1#

"On

the one to fivo-year bonds, individuals, benevolent societies,

2#

colleges, hospitals and small insurance companies would not buy such govorn-

3«

ments if they yielded less than 2$; small commercial banks and pension funds

4,

would not invest in less than l|$; large insurance companies and savings

5»

banks would not suprort such government issues at less than lg$; fire and

6.

casualty companies at less than

7.
8*

and large commercial banks at less than

1%,

M0n the five to ten-year maturities, the first two groups would not
support the issue at less than 2 ^ j the smell commercial banks and pension

9«

funds at

10#

than

11.

2%',

less than 2%', the large insurance companies and savings banks at less

2%;

fire and casualty oompanies at less than 2g$; large commercial

banksCafc less than 1-3/4$.

12.

"And on maturities of over ten years, the first two groups or types

13.

of investors would not support government issues at

14.

types would not support the issue at loss than 2 ^ j large insurance companies

lj5#

and savings bunks

16#
17,
18*

less than 3$; the next .two

at less than 2^Jj fire and casualty companies at less than
3$; and large commercial banks at less than

n0n

the right side of the chart are the yields that should attraot

investor support ranging from 3$ to

2^0 for the

19.

from 3 ^ to

20.

the maturities of over ten years.

21.

for the one to five-year maturities;

five to ten-year maturities; and 3jfeS to 2-3/4$ for

”As I understand -it,

the Moderator is asking

that you use these as

22.

a guide to your own viows as to whether we are or are not on a non-economic

23.

level of interest rates."

24.

As explained in the first part of this text, the chart indicatos

25.

an incorrect basis for social security, but it was made clear during the

26.

discussion that the Seoretary of the Treasury ean nowgo into the market ::.nd

27.

buy governments at any yield.

28.

Mr. Lanston stated}

29.

"It is more or less obligatory cn the secretary’s

Part to go into the open market with the funds available from social security




-4 3 -

1.

whenever the market goes below the previous month's yield."

2.

Governments Influencing of the Money Market

3.

The question was askedj

"What means are available to the Govorn-

4.

ments, between Treasury, Federal Reserve

5.

control or influence the money market?"

6.

influence be exercised?

7.

coordination among these various bodies?"

8.
9.
10.

To what extent can that contrcl or

To what degree is there uniformity of action or

Governor Ecoles answered|
debt limit of

System and Governmental agencies to

"The Treasury is liii.itod by the statutory

$45,000,000,000 in its ability to sterilize the existing excess

reserves or -what our incoming gold may add to it.

11.

"On

the other hand, the Treasury did increase excess reserves very

12*

materially by the use of the stabilization fund to pay Government expenses in-

13#

stead of borrowing.

14.

serves would be

15.

profit,

increased to the degree that the Treasury used the silver

Tho deposits in excess reserves could likewise be immediately increas-

16.
17.

To that extent the deposits of the banks and the excess re-

ed by about $1,500,000,000 to the extent the Treasury used the power given it
under the Thomas amendment to issue $3,000,000,000 of currency for the payment

19*

o£ eXpenses#

Instead of borrowing, they could likewise increase deposits

20.

cxoess roserves.

and

Thusthe Treasury, on tho inflationary side, has power to

increase excess reserves and deposits about $6,500,000,000 without any further
22.

authority,

23.
24.

^he deflationary side is almost non-existent at the present time#
"The Federal Reserve has the power," continued Mr. Eccles, "to

decrease exoess reserves by

the sale of existing portfolio, a little over

25#

$2,400,000,000.

26«

by one-seventh of the existing requirements.

27#

In other words, the

28#

$3,500,000,000."

29#

30.

The Board also has the power to increase reserve requirements
This would be about $1,000,000,000#

Board*s power is limited to $3,000,000,000 or

With relation to industries, Mr. Eccles said "the Treasury could reduce their balances with the Federal Reserve System which are running




about

-4 4 -

1.

oigfet hundred million.

It could further reduce them to a working balance of

2.

around one hundred million

3.

means.

and thus further increase excess reserves by such

So, instead of $6,500,000,000, it would be over $7,000,000,000,

4.

On the inflationary side, the power of the Reserve System

5.

unlimited.

6.

which would add to excess reserves and not effect the deposits.

7.

excess reserves would be

8.

9.

is almost

It could decroase the reserve requirements by close to $3,000,000,000
Nevertheless,

increased by that amount,

The System could also go into the market and purchase Government
securities

to almost an unlimited amount and thereby increase excess reserves.

10.

Of course, they would purchase such acoounts by credits, usiftg all the gold

11.

to reserve against those accounts.

12.

extent that Government bonds held would cover 60$ of reserve requirements.

13.

Gold would cover 40% of the requirements.

14.

circulation equalled 35% in one instanoe and 40% in the other; until they

15.

down to that point with the gold coverage, they could continue to buy Govern-

Their limitations would be only to the

Until the deposits, ourrency and
were

lg# ment bonds because such bonds could make up the difference between the &old

17#

coverage and the 100$ coverage,"

18.

Degree of Coordination Between Government Agencies

19.

With respect to the coordination of the activities and policies of t h ^

20.

Treasury and Federal Reserve, that is to what degree he thought there was uni-

21.

formity of action or policy or coordination between the ideas of the two great

0_

agencies ofGovernment as they may affect exoess reserves, money rates, etc.,

23*
24,

Mr. Eccles stated* "It depends entirely upon the issues.

There have been

differences, of course, with reference to policies,— that is a quostion of

oc
public knowledge.
wO |

The question of coordination, of course, would be

2g

enfc entirely

the possibilities of agreement as to policy.

_
¿7#

naturally like any situation •where there is a divided authority.

OQ
60«

itself into quostions of individual points

2q
30*

upon

depend-

It is
It resolves

of view,

"At the present time, the Treasury in its power with reference to
purchase of silver, and other powers which I have enumerated,




as I have stated

-4 5 -

1.

before the Committees of Congress, has not a greater power in influencing

2.

tho monetary policy

5,

than does the central banking system.

"The System's power is very, very small and limited»

4.

that the central banking system

5«

as its actual authority is concerned,

6*

department."

7*

I have said

as for some time been not much more, so far
than that of a glorified transit

To the question "In what way does the financing of governmental

8.

deficits affect the money market?", Dr. Goldenweiser responded» "So far as

9.

direct influence is concerned and in so fur as Government securities are

10*
11.

bought with bonds, the deficits increase deposits and absorb excesses because
it servos to increase reserve requirements#

12.
13.
14*

"So

far as Government borrowings from tho market and not from bonds

may bo used, it does not affect the situation*
fluence.

That sums up the direct in-

With relation to the indirect influenoe*

the

effect on the public

15.

growth or diminution of the debt, that is not susceptible of a positive state-

16.

ment because it is debated»

17.

of any kind."

18*

Sale of Bonds In Open Market

19*
20#

Xn my own opinion, it has had very little influence

To the question on "On the basis of tho recent budget submitted by
the President, to what extent will the Treasury have to sell bonds in the open

21.

market during the next fiscal year?", Mr. Devine remarked»

"The President* s

22.

estimate is too big and the new tax program is supposed to collects

23*

$460,000,000 and Baby Bonds will total approximately $1,000,000,000, with

24*

Social Security receiving another & 1,000,000,000, so we will be able t.- retire

25*

$3,000,000,000 from tho market*

26*

Aside from that, I do not believe between now and December the Government will

27.

have to enter the market.

28*
29.

"This, of course, is also predicated on tho Treasury roceiving a
good portion of the budget of




C 700,000,000 to be Jocaivod from

-461,

Federal agencies,

I do not believe tho receipts will be as much as

2,

1700,000,000 to be collected by —

3,

the agencies; henoe, X think if it does not w>rk out

4*

budget proposes, the

5*

§500,000,000#”

6«

Treasury will come in

Mr, Ianston stated»

as the President’is

the market next December for

"Unfortunately, for the answer to the question,-

7,

between nowand the end of the fisoal year 1941, we will have a Presidential

8,

election and the estimates of the present encumbent may not conoern the new

9,

President, so X think if we get beyond November in our estimates, we really

10,

have to gauge the prospects of a change in the administration next November,"

11,

The Moderator then suggested»

"Assuming

that tor. Roosevelt will

12,

oonsent to be renominated and is re-elected?" to whioh Mr. Lanston responded»

13,

"Wo may expect in the next fiscal year a deficit to be made by an inorease in

14,

the public debt of §1,700,000,000,

15,

about £1,000,000,000 in trust funds from Social Security available to him in

16,

that fisoal year.

17#
._
Xo •

In

order to meet this, the President has

Hence, he would require a total of $700,000,000 of proceeds

from the sale of Baby Bonds,

There is a prospect of raising the money from

this sourco,

19,

"There were large sales of Baby Bonds effected in Deoember and

20,

January but this resulted from purchases by various pension funds under a

21,

loop-hole in the Treasury’s wording of regulations.

22,

have, since January, been stopped.

23*

Suoh sales, however,

In the fiscal year 1939, the sales of Baby

Bonds were §691,000,000,"

24,

If such sales continue to increase, as they undoubtedly will, then

25*

I agreo with Mr. Devine that not only will tho said $1,700,000,000 of deficit

26*

be met in part by the $1,000,O X , 000 Social Security trust fund, but

27,

would be more than met by sales of Baby Bonds,

28,

problem of retiring debt on quarterly periods, assuming again

29,

works out right,"




it

Then you are faced with the
that everything

-47Mr. Currie suggested that Mr. Lanston "Had made a rather cryptic

1

2

remark to the effect that the 4-700,000,000 agency repayments would not work

3

out in the next fiscal year,"

4

pointed out that the agencies would have from July to July to collect and both

5

Mr. Devine and Mr. Lanston agreed that there would be a good chance for the

6

agencies to obtain the 1.700,000,000.

This was clarified, however, when it was

|700,000,000 Agency Repayment Problem

7

8

Mr. Goldsmith then said;

"Mr. Jones, at a secret meeting of the

9

Senate Banking and Currency Committee, was reported to have said that

10

|65,000,000 of the 4700,000,000 was to come out of the Home Oimers' Loan

11

Corporation.

12

gathered that if the H.O.L.C. continues to sell real estate at the same losses

IS

they have been incurring, they would have no capital left, so I am wondering

14

whether that particular source will be available when the facts are disclosed

15

in the Byrd Committee report concerning losses on real estate."

Now on that particular agency repayment item of the budget, I

16

Mr. Currie questioned Mr. Goldsmith’s information*

17

Mr, Lanston introduced another point*

"It is not a criticism of

18

the administration to stato that every party before an election has certain

19

political obstacles to overcome and it would be possible, in the case of

20
21

agencies such as Federal Savings & Loan, F.D.I.C., and perhaps Commodity Credit,
R.F.C., etc., to pull down the capital authorized through repayments, whether

22

or not it means, as Mr. Devine says, that the agencies sell the bonds in the

23

market.

24

but that serves the purpose.

25

still remaining in the fiscal year.

26

may be plowed back again or the next President may add to his expenditures by

27

rebuilding the capital of the agencies, so it really is a means of juggling

28

figures."

Of course, aftor election you have eight months
Circumstances may change so the capital

Mr. Currie took exception to this and said*

29
30

Hence, expenditures would bo reduced under suoh circumstanoos,

"I do not think it is

quite as bad as you put it - that way of juggling figures, bocauso a good




-48.
1»

deal of it will come, as I understand,

2,

those various agenoies in the Farm

3,

overcapitalized*

4,
5,
6«
7#

F* C. A.

You lf^k through^

Credit and you will find they are/groosty

are^ holding millionsof Government securities*

"From yourpoint of view, the sale of those securities will bo the
same asthe sale of securities by the Federal Treasury* .Hence, I think

this

question might be rewarded because some of the $700,000,000 receipts will be (j r * '-^
/y'
either guaranteed «if direct sol»» ef Government securities by these agencies.

9,
10*

They

from the

On the question of Mr* Gifford concerning
fr^m

the probability of receipts

the budget of $700,000,000 from agency repayments, after considerable

comment by

the

conferees,

Mr. Devine said*

"I stated there is a possibility

12*

then that the Treasury may get the amount during

13,

was under the misapprehension that it would be necessary for them to secure it

14,

between now and June*"

15,

The Moderator then asked Mr. Gifford*

lg,

reducing

governmental expenditures and

17,

likely to be raised during

the next fisoal year.

"What are the prospeots for

increased taxation?

the next fiscal

I

Is the debt limit

year?"

18*

Mr. Gifford*s prompt answer was "No."

19*

To

the question "What would be the effect upon me.ney rates and bond

20«

prices of Sur being drawn into the war?", Mr* Eccles stated*

21*
22*

a number

of factors*

"That depends on

Naturally, interest rates is one of them.

drawn into the war, interest rates would go up.

If wc were

It does not necessarily need

23*
to happen, however*

I think it would because I do not believe we would es­

24*
tablish the type of taxes that we should.

War

has the effect, of course, of

25*
greatly increasing governmental expenditures.

For overy dollar of such ex­

26*
penditures made, some people think private oapitdl would cease to

be expended,

27.
but I do not think that would be true."
28*
Financing A War
29»



The Moderator then suggested*

"We could finance the war with these

-49-

1*
2.

excess reserves, couldn’t we 1"
To which

Mr* Ecoles r esponded*

further credit, in theory

at

"You oould finance

least*

We have far

the war with-

3.

out any

more money already

4.

in the form of deposits and currency than we ever had during

5.

Our deposits today in currency are almost double what they were at the time of

the World War*

6«

the last World War.

7*

which to finance the

8*

would use that which exists.

9.

funds without an increase in interest rates if we put on enough taxos and if we

Therefore, so far as more bank credit is conccrned with
war, in my opinion we would not need such oredit if we
The war could be financed by

10.

took away the profits that accumulate as a result of war*

11*

convoy

12.

be done*1*

the use of existing

I do not mean to

that the authorities would do this, but I am just saying that it could

13*

The Moderator then askedj

"Would you approve

the use by tho

14*

Treasury of long-term, non-market securities, similar in type, for example, to

15*

savings bonds — which securities would be issued to savings banks, insurance

16*

oompanies and similar holders.t Would you approve of the

17*

obligations of the type of British Consols?"

18*

Mr* Morss answered this question*

issuance of perpetual

”1 suppose if any savings l>ank

19*

took such offerings they would be putting themselves, so to speak* in hock to

20*

the Government*

21*

question from

22*

would bo desirable from the Government point of view*

23«

institution would want

24*

in hock and that the Government might be ablo to finance itself more cheaply

25*

by granting full market privileges*

26*

You say here they would be non-marketable*

the savings bank point of view*

a

I think of the

I do not know w ether cr not it
I should think that any

considerable higher rate to put itsolf, so to speak,

"As to tho maturity being perpetual, it is only psychological.

A

27*

thirty or forty year bond comes close to being perpetual but the psychology

28*

is such

29*

less uncertain to




that I think

they would wait until the situation is a little bit

test the psychology*”

-50*
1*

Mi4* Emory agreed with Mri Mores*

2i

"Mr* 0*Conncr interposed*

"Before you leave that question, I think

3%

it would be very interesting for some group to consider at some time the

4,

feasibility of a'naiwnatUFitjt^pon-interest bearing security rolated to the

5,

required reserves of banks*

6,

for the sale of government securities*

7*

the maintenance of reserves*

The banks obtain no commissions in this country
We have a publio policy whioh requires

I would like to see the non-market proposition

8«
9^
1CT.

Gcverment rate of the year, but not on a subsidy basis*

11,

blem is going to arise seriously,"

limited to the roquired reserves of banks so that the Government, in effect,
would be saying that

12,

be determined on the highest
I believe this pro-

Possibilities of a "Run"

13,

14#

the interest rate would

To the question "Is there danger in building up a large potential
demand liability

in the form of Baby Bonds?

Under what circumstances do you

15.

think a 'run* might materialize?", Mr* Benson

16.

his money on these bunds, but X oannot oonceive

17.

country-wide where people generally

stated*

"The holder can dem:jad

of there boing a run

would lose confidence in

on

them

Government

10#

obligations and seek to cash

19.

stock market and the holder felt he could get more money by going into the
stock market, r ’ ' ^
might apply as true to some of the holders, but not

20,
21,

to

in on the bonds*

Should there be a boom in the

a very lar^e majority of them, in my opinion,"




-51-

1
2

est rate is so attractive that it would take quite a business boon and quite

3

an increase in rates before there would be an attempt to sell a 2.90 per cent

4

security."

Mr. Devine stated in answer to this question;

Mr. Lanston interposed*

5

”1 think the inter­

"If you hold the savings bond for two or

6

three years, the rate at which you can turn it in is much lower.

7

if you hold the security for three years, you would give up 3.25 per cent,

8

not 2.90 per cent.

9

and then turn it in, you give up 4.25 per cent for the remaining two and one

10

half years.”

For example,

If you hold the savings bond for seven and one half years

11
12

Expansion of Commercial Loans
Improvement in General Business
"Commercial loans of member banks show a net increase of approxi­

IS
14

mately $500,000,000 since early in the Spring of 1939 and have reached a

15

total of $4,330,000,000.

16

the total expansion from the lowest point to the highest point was approxi­

17

mately $1,700,000,000.

18

sion during the year 1940 of as great an amount from the present level to

19

the peak of total loans or equal to the total expansion seen in the previous

20

period or greater?

21

materially drawn upon to meet the requirements of an expansion of business?"

22
23

In the previous business expansion of 1936-1937,

Can we expect or should we make plans for an expan­

In short, is it likely that excess reserves may be

In other words, are commercial banks likely to sell Government
bonds to meet an expanding demand for commercial loans?

24

Mr. O'Connor answered:

"As to the likelihood of it occurring, I

25

have very grave d oubts.

26

abroad that we cannot influence by any policy of ours.

27

It depends, of course, to some extent on decisions

"If the Western front decides to risk the loss of a million lives,

28

particularly England and France, or an attack from Germany takes more nen out

29

of production in factories and farms and mines, it makes more demand on the

30

British Empire and more demand upon us, that would certainly influence our




-52-

1
2

eoonomy.

3

ing abroad, I tfoubt if the expansion would be very great.

4

would say that most of the commentators about the prospect of an increase

5

in demand for commercial loans ought to look at the Candian record.

It would constitute a decision which would be beyond our control.
"Looking at the question domestically and assuming no such happen­

6

Generally, I

"It is very interesting to me to see a banking system, or nearly

7

as strict a banking system as I can think of, where the line for business

8

production goes down, the line of commercial production goes up, and the lag

9

is still 16 months to two years on the rise of commercial loans.

10

if there was substantially increased production, there would be a consequent

11

demand for commercial loans, and hence some increase in excess reserves.

12

Of course,

"I do not see any selling of Government bonds entering into the

13

picture.

There is no prospect of re-discounts where there are excess re­

14

serves.

I think banks learned how to be wary about turning to the Government

15

bond market after the World War.

16

large stun of money was lost.

17

would be scared to d eath to sell Governments in order to expand their com­

18

mercial loans."

19

20
21
22

Colonel Ayres stated:

Even in small institutions a comparatively

No, I think the banks, taking it by and large,

"It seems to me quite improbable that com-

aercial loans of member banks will increase by anything like $1,200,000,000
in 1940.

It seems quite improbable that excess reserves will be materially

drawn down to meet the requirements of business expansion this year."

23
24

Effect of Possible
Entrance Into War

25

The question was then asked:

"If we actively participate in the

26

war, what are the prospects that substantial commercial and governmental

27

credits will bo extended?"

28

connection?"

29
30

Also, what do you think Congress may do in this

Mr. Gifford promptly stated:

"Wo are not going into the war.

Every Congressman and every Senator has pledged his constituents that he will




53-

1

not send a boy to tho European war."

2

Whereupon thG Moderator suggested»

"But let us assume, for example,

3

that the Allies are apparently getting the worst of the situation over there,

4

and assuming we do not go into the war, are we not likely to find a way to

5

lend even in spite of the Johnson Act?"

6
7

To which Mr. Gifford said:

"No, we are not,

We are so frightened

that we are having difficulty in lending Finland."

8

The Moderator then asked?

"Will American manufacturers borrow

9

to invest substantial amounts in additional plants or production of war

10

materials for the United States or belligerents?

11

see American industry in general entering the capital market for new financ­

12

ing?"
Mr. Parker anawered:

13

To what extent do you fore­

"I do not believe that the primary suppliers

14

of war materials would borrow any money to build plants, but tho business they

15

throw to secondary people who may not be able to recognize the source of their

16

orders may result in some additional lending to that type of borrowing*
"To the second part of the question, I do not see any hope, at the

17
18

moment, of American industry in general entering the capital market for new

19

financing during 1940."

20
21

Mr. O ’Connor had no substantial difference of opinion with Mr.
Parker.

22
23

Mr. Parker added:

"Amerioan industry would enter tho capital

market substantially if there were certain changes in Government policy."
Will There Be Advance
In Commodity Prices

24
25

Mr. Schwulst then asked:

26

"Should we allow for an advance in com­

27

modity prices at least equal to the level tha t existed in 1936-1937?

28

what extent do you think we may expect an advance in commodity prices?"

29
30

To

Colonel Ayres did not believe there would "be an important advance
in wholesale commodity prices this year."




-54-

1

Dr. Goldenweiser stated*

"I think that prices of different com­

2

modities will go up very definitely.

3

advance.

4

to the average, it is likely to go up slowly this year, but not anything

5

like as high as it was in 1936 and 1937.”

6

Agricultural prices are not likely to

Some industrial materials will go up and if you want to refer

The Moderator then asked:

"Can savings banks safely reduce the rates

7

of dividend paid on deposits?..»Can Insurance companies safely lower dividends

8

to policyholders?

Or Increase premium rates?"

Mr. Benson answered!"No" to both questions, but he regretted that

9

10

interest or dividend rates ha d to be reduced*

11

reduce dividends but did not think they should for any lower rates than those

12

prevailing are an adequate return on capital."

13

Mr. Ihlefeld agreed with Mr. Benson.

He thought they could safely

So did MT. Morss and Mr*

14

Emory.

Mr. Morss thought such reduotion in dividends should be avoided until

15

it is impossible to continue the higher rate.

16

have so much more competition now than we used to have."

Also, "on the premise that we

How Low Can
Bond Yields Go?

17
18

The Moderator then presented the next question:

19

"How low can bond

20

yields go before Government bonds simply cease to be an attractive investment

21

to commercial banks, savings banks and insurance companies, with due regard

22

to the maturities which are acceptable to those types of investors?"
Reference was made during the discussion of this question to the

23
24

chart referred to herein entitled "Markets for Government Bonds."
Mr. Ball answered:

25

"I can only speak from my experience, represent­

26

ing a bank of about $80,000,000 in deposits.

27

situation has reached that point now for several reasons:

28

we have not learned enough to see through the gold problem.

29

other monetary problems we do not feel we are acqua inted with.

30

conditions abroad we are very much disturbed about and therefore we have been




So far as we are concerned, the
The first is that
There are many
There are

-55-

1
2

making every effort to increase our earnings from other quarters outside of

3

Government bond market of maturities of not mere than five years.

the investment ma rket, so it is possible for us to take a position in the

"Today, we have $23,000,000 in Governments, most of them maturing

4
5

within five years.

6

in loans.

7

loans that Mr. Eccles' examiners force us to write off, earn a reasonable

8

amount for dividends, we,do not caro about the rest of our earnings and we

9

will maintain as short a term as possible.

10

We have over $27,000,000 in cash and about $30,000,000

So long as we can earn our dividends, or first write off these

Mr. Holton declared it as his opinion that?

"Government bonds

11

are always going to be a very attractive investment for us to buy but I do

12

believe that if present rates continue, we are going to buy short maturities,

13

as Mr. Ball has said.

14

difference if Government bond levels remain as they are today or we are

15

forcod to reduce our dividend."

16

It seems to no, eventually, there is very little

Mr. Ihlefeld contributed*

"I should say that Government securities

17

will never cease to bo attractive.

18

in ita power to get all the financing which the Government needs.

19

about dictate the rate it will pay for that financing.

20

I think the Treasury could offer alternatives for financing means that would

21

make Government bonds comparatively more attractive, irrespective of yield,

22

due to the inflationary powers they could use should wo run into any kind of

23

buyers * strike."

24

The Moderator asked:

In an extreme time

"Can trustees justify the purchase of 25 year

Government bonds to yield less than 2-|- per cent to maturity?"

27
28

It can just

On 25 Year Maturities

25
26

I think the United States Treasury has

Mr. Ihlefeld answered:

"At the present time, no, but trustees can

justify an investment in the light of existing circumstances."

29




Mr, Benson answered:

"No.

It would bo very unwise for trustees

-56-

1

to go in for 25 year maturities at less than 2j| per cent,”but Mr. Horss’

2

answer was a bit varied, '•Wo have a trustee law in Massachusetts that permits

S

the purchase of such bonds.

4

plus the law justifying trustees in making tho purchase, would

5

assure purchasing such a bond.

6

is very practioal.

7

resist as long as wo could, but eventually we would buy unless, of coursc,

8

the relatively other investments wero better*”

to

VJhon it comes to savings banks, the reason

It depends on our own oarnings.

Wo would, of course,

lation of the yield on such Government securities to other investments*
The consensus of opinion was that if money investments were to all go

11
12

c o m b in c

Mr. Qnory thought the answer to the question deponded on the re­

9
10

Tho pressure of beneficiaries for income,

down together, a 25 year maturity may be sold at loss than 2-|- per cent*

13

Mr. Parker ”felt they would both go down together, with the

14

immediate short term bonds up to five years probably losing half as much as

15

the long term bonds.”

16

Dr* Goldenwoiser agreed with Mr. Parker, but slightly differed with

”1 am

17

the second part of his answer and said?

18

ing wave would probably affect long term bonds first as it has on tho past

19

two occasions of selling waves.

I think, however, that the question has a

20

pretty far-fetched hypothesis.

In the first place, Mr. Gifford said xto are

21

not going to enter tho war; and in the second place, it is not necessary that

22

if we do, there is going to bo a selling wave, so there are two improbable

23

•ifs’*

inclined to think that tho sell­

Beyond that, your answers nust become quite hypothetical.”

24

Short and Long Bonds

25

The question was askeds

11In the

event of business expansion, would

26

the banks sell their short Government securities and would this be a tip-ff

27

to holders of long bonds that the prices of such bonds might likewise shortly

28

bo depressed?”

29



Mr. Dovine thoughts

”The inclination is to soli long bonds first.

-E6-A

1

I am inclined to foci that people would more quickly got out of long t o m

2

bonds.

3

near thoir high prices.

4

Governments startod thoir decline somewhere around last October and the long

5

terms did not doclino until February of this yoar, but if wo have an ex­

6

pansion of commercial loans, accompanied by increased reserve requirements,

7

it would be good judgment to sell long bonds first.”

They aro watching those bonds a littlo closer today since thoy aro
It was an unusual circumstance that the short term

What Can Change
Budget Picture?

8
9

Tho Moderator then asked:

”Lot us assume that a conservative is

10

nominated for President by both parties at the forthcoming conventions and

11

that the level of interest rates is not at that tine materially changed from

12

what it is today?”

13

chances favor a docreascd supply of Governments and a better outlook for a

14

balanced budgot?”

The first question under that assumption is *Would

llr. Lonston answered:

15

"I do not think that anyone becoming President,

16

regardless of who ho is, whether it is Mr. Roosevelt, or someone else, is go­

17

ing to bring about any immediate change in the budget picture.

18

place, it is a tremendous job to understand.

19

uproot tho social and economic philosophies which the Government has applied

20

for eight years, merely by an election.”

It takes time.

In the first
You cannot

Again assuming a conservative is nominated by both partios, tho

21
22

Moderator asked:

23

of further building up or of decreasing their total Government holdings?”

’’Would institutional investors be thinking along the linos

Mr. Benson stated:

24

”1 believe institutional investors will

25

hesitate to decrease thoir holdings until other and perhaps more profitable

26

investments are available.”
Mr. Morss thought:

27
28

"From a practical light, I do not think that

savings banks in Massachusetts would change their policies very much based
on an election.




They do what thoy must do in order to pay the dividend.”

-5 7 -

Effect of Big
Business Expansion

1

Under tho same assumption, the Moderator asked»

"Would possible

2

big business expansion, development of loans, and consequent inflationary

3

effects tend toward tho

4

total holdings?" And-asked tho conferees to also consider in connection with

5

that question - "Or would littlo material change occur, assuming interest

6

rates like those now prevailing, would actual buying or soiling depond on

7

whether bonds were available at rates which yielded a profit over tho cost

8

of tho money?"

taking of profits in Governments and reduction in

Mr. Ihlefold stated:

9

"I think llr. Ilorss indicated that tho problem

10

should bo looked at from tho standpoint of the individual banks in the lif;hfc

11

of their earning requirements.

12

opportunities in other fields of investment and good bonds were available with

13

desirable maturities, tho institutions would probably shift from Governments

14

to other investments»

15

but in order to increase their ' income return»

16

individual bank would depend

17

be, in taking profits a gainst a future reemployment of their funds on a

18

basis of the return which, together with the profits, would work out well for

19

them."

This would not be done for the sake of taking profits,

lir. Holton remarked:

20

If such institutions found there wore bottor

Howcvor, the attitudo of tho

on its own courage or judgment, as the case m y

"I thin}; the answer to the question would de­

21

pend considerably on what caused the business e:q?ansion.

If such expansion

22

camo from increased business from bolligerents, I would not say there would

23

bo much effect.

24

develop honest-to-God business expansion throughout the country, I believe it

25

would have a different effect*

However, if tho expansion came from a real poacc that would

¿gain assuming that a conservative is nominated and elected, the

26
27

Moderator asked:

28

trust funds (Social Socurity) would provide the needod cash from then on?"




"Would the feeling bo that Baby Bond sales and proceeds from

-581

The Moderator interposed tiiat the question would naturally concern the Gov­

2

ernment budgetary requirements.
Hr. Morss thought:

S

’’There would be an increased feeling that

4

’new cash offerings -would be minimized by the Treasury.’ Therefore, there

5

would be more confidence in securities held.”
Mr. Schwulst asked Mr. Gifford:

6

"How soon, in his opinion, the

7

budget would be balanced?11 He answered:

8

tion.

9

night ’that if a conservative were elected, the trains would be very full

10

out of Washington. ’"

"That depends wholly on the elec­

I would like to remark that a conservative Democrat told me last

11

Restoring of Confidence
The question was posed:

12

"If institutions such as savings banks

13

and insurance companies by some means have their confidence restored, what

14

mediums of investnent are open to them through which they con more actively

15

employ their funds at rates that will make it a good business operation?"
Mr. Emory answered:

16

"As far as life insurance companies are con­

17

cerned, I think that the effect would be largely in the rate of return they

18

would obtain on the new investments.

19

toward buying industrial bonds and perhaps the underlying obligations of

20

reorganized railroads.

21

a prospect of a better return on funds available for investment."

22

There might be some increased activity

Aside from that, however, I think it would be merely

The Moderator asked:

"Would chances of decreased spending and

23

reduced purchasing power in tho tends of the consumer bo offset by increased

24

businoss confidence and restoration of purchasing power through reemployment?"

25

M r . Ecclcs answered:

"Certainly.

At tho present time it would

26

ha ve the opposite effect.

27

goods* and assuredly Government expenditures, whether on the basis of a

28

balanced budget or otherwise, does provide purchasing power.

That which creates employment is ’orders for

Wo have

found that foreigners buying goods in this country with gold, provide pur


-591

"chasing power.

Furthermore, any type of Government expenditures; for

2

example, public works, would provide purchasing power."

3
Y/ill Docroasod Federal
Spending Bring Confidence?

4

At that point the Moderator further explained the question by

5
6

stating:

"Governor E c d e s made it plain that the Government’s power of

7

spending has created purchasing power in the hands of a large section of

8

consumers.

9

power is decreased, do you think it would be offset by businoss confidence

If the Government stops spending and that source of purchasing

10

being restored and thus business employing more poople, resulting in the

11

distribution of purchasing powor in such manner?"
Mr. Benson remarked:

12

"I do not think increasod businoss confi­

13

dence «ill come through decreased spending.

14

through a general feeling that the Government will not interfere with pri­

15

vate business and initiative as much as it has in the recent past and that

16

this private business and initiative will be encouraged; that taxes will

17

be reduced; that the investment of capital will be encouragcd.

18

through private investment aid renewed businoss confidence, in my opinion,

19

there will be reemployment through a rosulting increase in businoss activity.

20

This procedure has built America, over a century ond a half, to the greatest

21

country in the world."

22

Mr. O ’Connor had this to say:

It is more likely to come

Hence,

"If ’decreased spending’ in the

23

q uestion means Government decreased spending, I am on exactly the opposite

24

side to Governor Eccles.

25

resources end energies to work.

26

Government commands by the orderly process of borrowing or taxing, that

27

Government spending is insignificant by comparison."

I agree with Hr. Benson -that we must put private
They are so much greater than anything the

JIT. Ball thought "that private proboction would reemploy workers

28
29

to more than take up any loss of purchasing powor distributed through

30

Government spending."




-59aTho Moderator thoa askod Governor Eccles:

1

"Would

11x0

election

2

of a conservative give impetus to granting tho Federal Reserve System power

3

to put on brakes more effectively than it has tho power at the present time?"
After an effort to define a "conservative" in which the Moderator

4
5

used Socretary Hull as an example, Mr. Ecclo3 thought "that the Government

6

in power has not very much to do with such a situation.

7

fact, tho present administration was favcrable to getting power to increase

8

reserve requirements in whatever a mount was necessary in ordor to extin­

9

guish them.

10

As a matter of

However, it was tho bankers themselves, the conservatives, that

preventod tho Reserve System from having the power that was needed.

11

"So, if bankers are considered ’conservative* (and we judge by

12

the past) and should we get a ’conservative administrator’, I would say

13

there was no chance, based on that pa st experience with the Reserve System,

14

of getting power to increase reservo requirements.

15

office after the next election, also based on past experience, I think there

16

would be a very gpod chance to got the power."

If a ’liberal’ is in

17
Should Practice Be Stopped
of Padding Subscriptions?

18
19

The Moderator then asked several technical questions dealing with

20

the marketability of Government bonds.

21

"Is it desirable to stop the practice of padding subscriptions?

22

could be taken to stop the padding of suoh subscriptions?"




Undor the first question, he asked:
Vihat steps

-6 0 -

1.

Hr. Gilmer tin ansv/ereds

"I cannot see any purpose to be served

2.

by the padding of subscriptions other than the fact that perhaps it affords

3.

good publicity at certain times.

4.

tinued.

5.

»how to discontinue it?»

6.

I think the practice should be disoon-

The important factor, however, is the second part of the question —

’»X do not think I hr.ve any solution, but would offer a few sugges-

7.

tions for further study.

In the first place, I think the method in which

8.

the banks and insuranoe companies are permitted to subscribe could be

9.

changed so that instead of being allowed to subscribe to either the amount

10 .

of their cash on deposit or a proportion of their cash on deposit, or a

11 .

percentage of their capital and surplus, some other unit consistent with a

12.

particular issue of Government bonds might be used as a measure.

13.

"Further, instead of a 10 per cent deposit being required on the.

1
4
.

part of others than banks, I believo that the percentage of such deposit

15.

could bo raised.

16.

delivery of bonds against cash and thus avoid the 15 day lapse period between

17.

announcement and delivery.

Porhaps, arrangements could be made for the immodiato

18.

"I think legitimate doalers engaged in business, not alone those

19.

considered on the list of recognized dealers , might be given an allotment

20 .

instuad of a subscription, based upon factors such as their capital, their

21.

distributing ability, and their volume of transactions.

22

Also, some form of

penalty may be established which would deprive then of the privilege of

23.

allotment for, let us say, a period of a yoar, if they engaged in the prac-

24.

tice of trading in allotments or trading in rights.

25.

would discourage such practice and thus eliminate as many as possible of the

26.

power and simple free rides."

27.
28.

Kr. Devine remarked:

"I do not think the privilego is usod by

banks as much as by individual security firms.




This, in my opinion,

I believe the Federal Reserve

-61
1.

has made some progress in curtailing subscriptions*

I understand there

2.

is in process an idea that henceforth banks will agree not to sell their

3.

subscriptions until the subscription books are closed.

4.

would help.

5.

in new securities until subscription books are closed.

Such a procedure

Moreover, the dealers have agreed that they would not trade
However, the biggest

b. factor under this question is the problem of scrutinizing individual cor7.

porations and security houses that paid their subscriptions.

8.

lieve that the situation is abused by the banks at all.”

9.

1'r. Lonston stated:

10. subscription.

I do not be-

HI do not think there is any excuse for over-

It is true that it makes it successful.

This racket can be

H ^ stamped out by the Federal Reserve and the Treasury.'*

12 .
13.

The Moderator then asked:
grow?"

"How large con the Federal debt safely

It is said that we might go considerably farther than we have up to

14 #

this time in discounting the future growth of the country and therefore the

15 #

ability of the country to "grow up to" a Government debt structure expanded

16 #

far beyond its present proportions.

17 .

Do you subscribe to the economic sound-

ness of this statement?"

18.

K**» Eccles stated:

"It depends, it seems to me, on the extent to

19 .

which the debt is taken by private and institutional investors and commer-

20.

oial banks.

21.

or private , is the inflationary effeot of it.

22.

flationary to the extent that they are brought about by an increase in the

23 .

means of payment in the hands of those people or corporations who expend the

24 #

Further, one can be in-

funds.

25.

2g.

The only danger is an expansion of credit, whether it be public

"Government debt, to the extent that Government debt is purchased
out of idle funds in the hands of individuals or corporations other than

27 ,

commercial banks, considering such bank funds as excess reserves, there re-

28.

suits only a putting into circulation of what otherwise are idle funds and




- 6 2 -

1.

h e n c e c o n s t i t u t e s n o b u rd e n upon e c o n o m y .

2.

" T h e b u rd e n o f i n t e r e s t t h a t w e s p e a k a b o u t , i s n o t o f i t s e l f &

3.

b u rd e n i f t h e d e b t i s h e l d w i t h i n o u r own eco n o m y , b e c a u s e t h e i n t e r e s t

4.

w h ic h i s p a i d a l s o g o e s b a o k t o t h e econ om y a s a w h o le , i n c r e a s e s in c o m e ,

5.

and t h e r e f o r e i n c r e a s e s o u r a b i l i t y t o m e e t t a x e s .

6.

tio n

i s c r e a te d i f th e d e b t i s h e ld o u ts id e o f th e c o u n t r y ."

7,

How H ig h Can O ur G o v e rn m e n t D e b t Go?

8,

Th e M o d e r a t o r th e n p o s e d :

9,

10.

A v e r y d iff e r e n t s itu a -

" D id I u n d e r s t a n d yo u c o r r e c t l y ,

G o v e r n o r , t o s a y t h a t i t made n o d i f f e r e n c e how h ig h th e G o vern m e n t d e b t
g o e s i f th e d e b t w as h e ld w it h in th e c o u n tr y ? "

11 ^ i t

Can i t g o f a r b e y o n d w h a t

is now ?"

12.

To w h ic h M r . E c c l e s r e p l i e d :

"O h , y e s , f a r b e y o n d t h a t .

I am n o t

13 .

s a y in g t h a t i t

14 .

n o t r e s u l t i n t h e same c h a r a c t e r o f i n c r e a s e i n w e a lt h t h a t p o s s i b l y p r i v a t e

15.

d e b t may r e s u l t i n .

16.

ced u re b u t i t

17.

i s d e s i r a b l e f o r t h e r e a s o n t h a t G o vern m e n t d e b t o f t e n d o e s

No G o vern m en t w o u ld c h o o s e t h e G o vern m e n t d e b t p r o -

i s a q u e s tio n o f a l t e r n a t i v e s .

" A G o vern m e n t i n c r e a s e s d e b ts o r d e f i c i t s du e t o a n e c o n o m ic o r

18.

s o c ia l c o n d itio n th a t i t

19 .

a l t e r n a t i v e s a s t o w h e th e r o r n o t t h e s t a t e o f t h e econ om y i s

20.

b e a b l e t o i n c r e a s e t a x e s a d e q u a t e ly t o g e t i d l e fu n d s i n t o c i r c u l a t i o n .

21.

I f w e a r e i n a d e p r e s s io n i t

22.

i n 1932 an d 1933 i n o r d e r t o i n c r e a s e t h e m ean s o f n e c e s s a r y p a y m e n ts .

23.

is c o n fr o n te d w it h .

Thus i t b ec o m es a q u e s t io n o f
su ch a s t o

i s d e s i r a b l e t o i n c r e a s e t h e d e b t a s w as d on e

"N o w , w i t h r e f e r o n c e t o t h e s i z e t o w h ic h t h e d e b t ca n g o , o f

24.

c o u r s e t h e b u rd e n o f d e b t , i f t h e r e i s

25.

i n t e r e s t p a y m e n ts .

26.

m en ts on t h e G o vern m e n t d e b t t o d a y i s a p p r o x im a t e ly w h a t i t w a s f o l l o w i n g

27.

t h e W o r ld w a r w hen o e r t a i n l y t h e w e a lt h o f t h e eco n om y a s a w h o le w as n o t

28.

e q u a l l y so g r e a t a s i t




I t is

a n y b u r d e n , i s m e a s u re d b y t h e

in t e r e s t in g t o n o te th a t th e t o t a l i n t e r e s t p a y -

is to d a y .

-63X.

’’Take the history of England —

a very good example to observe

2.

with reference to publio debt.

3.

except for certain periods, for r. period of 300 years.

4.

standard of living of the people of England up to the time of war was higher

5.

than it had ever boen in its history so that Government debt has not destroyed

6.

England.

7.

The net debt of England has been increasing,
Certainly the

"The public debt of Great Britain is about two and one-half times

8.

per capita of what it is in this country.

9.

stand as much per capita as the British.

Certainly, we ought to be able to
Surely, our per capita wealth is

10.

greater than theirs.

11.

billions of dollars, if it had the sane relationship as the British debt has

12.

to its ooonoBjy.

X3.

By comparison, our debt could reach one hundred

"It is a question of choice - whether you are going to borrow the

14.

funds to put them back into the income stream, or whether you are going to

15.

tax them.

16.

on the middle income groups and on corporations.

17.

tion it seems to no, of whether we choose to borrow the money to meet the

18.

problem of unemployment - the fundamental problem - or whether we choose to

19.

tax the funds and put them back into the income stream or tax then, in a way

20.

that would make the owners put them back into the income stream.

Britain has chosen to have a greater tax than we have, - at least

21.

Therefore, it is a ques-

On Borrowing From Commercial Banks

22.

"Of course, it is a very different matter when we borrow from the

23.

commercial banks.

24.

tunato that we have excess reserves to their present extent.

25.

certainly that rt the time of the Basking Acts of X935, 1936 and 1937, the

2<3.

central banking authority with the cooperation of the Treasury should get

27.

close enough to the money market so as to exercise a control over what wo

28.

may tern, possiblo inflationary tendencies, and it was for that reason I




VJhat I was going to say in that connection, it is unforIt is ray view

-641.

undertook to get power to increase the reserves so that we could as a result

2.

get close enough at all times to the money market to avoid the huge excess

3.

reserves and thus tending to get Government financing out into the hands of

4.

the savers rather than into the banks.

5.

were possible to prevent further commercial bank investments in Government

6.

bonds, for the reason that we already have a very large excess of deposits

7.

and currency beyond our need.”

8.
9.

The Joderator interposed:

Today, I would be very happy if it

"You have a very large excess of un-

digested public debt."

10.

To which Lr. Eccles responded:

"'.Veil, the debt has been digested

11.

so far as the banks are concerned, but they have resulted in the creation of

12.

deposits.

13.

individuals and they p.re on deposit in the banks.

14.

we term the velocity of those funds.

15.

the income stream directly to the owners, if there are deterrents that some

16.

of the people talk about and they were, removed and thus we could be assured

17.

of private investment to the extont of putting these funds back into the

18.

income stream, then, for God's sake, that is what we ought to do.

The situation is, those deposits are now held by corporations rod
Our problem today is what

If we could get the deposits back into

19.

"But to the extent that they do not go baok into the income stream,

20.

then they must get moving there through borrowing, especially if the national

21.

inoomc is down.

22.

through borrowing; but we should not increase the total contribution to

23.

buying power so long as we have a lot of unemployed people."

24.

If this income goes up, then deposits should

£0

back

Problem of Consumer Purchasing Power

25.

At this point the loderator stated:

"It seec:s to me that the

26.

Government is, - through the selling of its bonds to commercial banks and

27.

the creation of deposits, - adding something at least to our purchasing power

28.

one stage of the process.




As soon as such government deposits are

-65-

1,

converted, so as to be paid out to people on relief or people on public

2,

works or on the public payroll in one form or another, it seems the cir-

3,

culation of the purchasing power stops; they go no further.

4,

one process in turn-over of purchasing power and then it quits.

5,

evidenoed by the velocity with which these commercial bank deposits eir-

6,

culate.”

We have but
That is

7,

Mr. O ’Connor then took up the discussion and stated:

’’The ques-

8,

tion of how far the Federal debt can safely grow is a matter of degree.

9,

Governor Eccles’ measurement of the degree is different from mine.

I think

10.

it is a question of how far you depart from the capitalistic system toward

11.

the totalitarian system, because the Government debt will go for some pur-

12.

pose or other.

13.

I do not think the Government is ready to accept any philosophy of per-

14.

petual debt.

15.

experience as to how much debt we can stand because their political system

16.

is entirely different from ours.

17.

under our system a particular administration is responsible to our electorate.

18.

The kind of use to which it is put is extremely important.

Furthermore, I do not find anything in British or French

They are responsible to their electorate;

”1 again believe the Governor went a long distance in my direction

19.

when he talked about removal of deterrents to private investments and private

20.

spending.

21.

recont years on consumer purchasing power draw their fundamental basis from

22.

a llarxian thought which I do not accept,

23.

Fror. my own point of view, such measurements as we have made in

"A Government creates a situation which then justifies the creation

24.

of debt.

I mean in so far as the Government does create a situation.

25.

have some evidence of the Government having created a situation of decreased

26.

confidence as far as individuals and capital are concerned through tax

27.

policy, through regulatory policy, through monetary policy and through
credit policy.




We

- 6 6

1.

" I t h in k i f

G o v e r n o r E c c le s w e r e c l e a r fr o m t h e p o i n t o f v i e w

2 . o f a c r e d i t p o l i c y , s o t h a t w e c o u ld g e t a p r o p e r r e l a t i o n
3 ^ t o c r e d i t p o l i c y , w e m ig h t l o o k a t t h i s q u e s t io n a l i t t l e

o f fis c a l p o lic y

b it d iffe r e n t ly .

4 , U n d er e x i s t i n g c ir c u m s t a n c e s , h o w e v e r , w h e r e c o n t r o l o f c r e d i t p o l i c i e s
5,

is

so p r a c t i c a l l y h e l p l e s s , I s a y t h e F e d e r a l d e b t c a n n o t g r o w much l a r g e r ,

g , b e c a u s e o f t h e p s y c h o l o g i c a l a t t i t u d e t h a t w o u ld d e v e lo p t h r o u g h o u t t h i s
7.

c o u n t r y w i t h am a zin g r a p i d i t y .

8.

e n c o u r a g e an d i n c r e a s e t h e F e d e r a l d e b t , a r e e x t r e m e l y im p o r t a n t .

9.

w e c a n s t a n d a som ew h at h ig h e r am ount o f d e b t ; how much h i g h e r i s a m a t t e r

10 .

H e n c e , t h o s e p o l i c i e s w h ic h j u s t i f y s u p p o r t ,
I t h in k

th a t is v e ry d if f i c u l t to s t a t e ."

11 .

The n e x t q u e s t io n a s k e d w a s :

" W i l l o o n a n e r c ia l ban ks so o n f i n d

12 .

t h e ! ¡ s e l v e s in a p o s i t i o n vi h e r e t h e y w i l l r e f u s e t o ex p a n d t h e i r d e p o s i t s

13 .

f u r t h e r , a s w i l l b e n e c e s s a r y t h r o u g h t h e c o n t in u e d p u r c h a s e o f new

14 .

G o vern m e n t b on d is s u e s ?

15.

ex p a n d t h e i r d e p o s i t s i f b y so d o in g t h e y a r e l i k e l y t o im p a ir s e r i o u s l y

16 .

t h e ir c a p it a l - d e p o s its r a t i o .

17 .

a c c e p t n ew c a p i t a l fu n d s fr o m t h e R e c o n s t r u c t io n F in a n c e C o r p o r a t io n i n

18.

o r d e r t o b e a b l e t o c o n t in u e t o b u y G o vern m e n t b o n d s w it h o u t d i s t o r t i n g

19 .

t h e i r c a p i t a l - d e p o s i t s r a t i o p r o v id e d t h o s e c a p i t a l fu n d s a r e o f f e r e d on

20.

su ch a lo w i n t e r e s t b a s i s t h a t t h e in v e s t m e n t o f t h o s e fu n d s b y t h e b a n k s i n

21 .

G o vern m e n t b a n d s c o u ld be d o n e p r o f i t a b l y ? "

22.

T h a t i s t o s a y , t h o y w i l l n o t b u y n ew b o n d s an d

Tho M o d e r a t o r s t a t e d :

W i l l t h e c o m m o r c ia l b a n k s b e w i l l i n g t o

" I h a ve j u s t r e c e n t l y s e e n a c o m p ila t io n

23.

o f t h e c a p i t a l - d e p o s i t s r a t i o o f th o l a r g e s t b a n k s in Now Y o r k C i t y .

24.

N a t io n a l C i t y B an k , f o r e x a m p le , i s down t o a b o u t 6 p e r c e n t ; t h e F i r s t

25.

N a t i o n a l I t h in k h a s 20 p e r c e n t j t h e G u a ra n ty T r u s t Company i s down t o

26«

14 p e r c e n t , and th e I r v i n g T r u s t Company i s down t o 13 p e r c e n t o r 14

27.

Pc r c e n t.

28.

We h a v e a num ber o f thera a ro u n d s e v e n p e r c e n t o r e i g h t p e r c e n t .

S tu d y o f O p e r a t in g R a t i o s




The

-671.

The reader will bear in mind a study of the operating ratios of

2.

member banks in the second Federal Reserve district recently made public.

3.

The supervisory authorities recognized in the report that some modifica-

4.

tion of the old "rule of Thumb” ratio of bank capital to deposits of one to

5.

ten was necessary in these times of record-breaking excess reserves and low

6.

bank earnings.

7.

formula for the traditional one to ten proportion of oapital to deposits,

8.

which the supervisory authorities have used from time immemorial in judging

9.

the adequacy of the protection given depositors’ funds by stockholders’ con-

10.

The new ratios can be regarded as giving a substitute

tribution to the capital accounts of banks.

11.

President Harrison of the Mew York Federal Reservo Bank pointed

12.

out that the ratio for all member banks in his district averaged 18.5$ in

13.

1939 or a ratio of $1.00 of capital to every $5.40 of risk assets.

14.

of the old one-to-t©n ratio, this percentago of deposits to risk assets

15.

represented a capital ratio of one to sdven in lanhattan and one to eight and

16.

a half in other parts of the s tate.

17.

tcction for that portion of deposits subject to investment risk is greater

18.

than during the two decades ended 1934, when the old one-to-ten standard was

19.
20.

not brought into question.
The matter of Capital Ratios
The attitude of the supervisory authorities toward this matter

21.

of capital ratios is of more than academic interest to the banks.

22.

York State the banking law says that in any ease whero the combined capital

23.

stock, surplus fund and undivided profits of a

24.

not equal ten per cent of its net deposit liability, the Banking Board may

25.

in its discretion require such a bank or trust company at the close of oach

26.

accounting period, to build up its surplus until the capital account does

27.

give the 10 per cent coverage.

28.




In terms

On this basis the present oapital pro-

In New

bank or trust company do

But it is understood that the State Banking Department has taken

- 6 8 -

cognizance of the great expansion of cash items in the banks in recent
years and is prepared, where a bank is sound and well managed, to deduct
cash assets from total deposits in determining the bank’s capital position.
In some cases, it is said, the department may be prepared also to exclude
Government securities maturing in two years from the assets subject to
investment risk in determining ihe capital position of a bank.
Mr. Schwulst continued;

"The point is this, are commercial banks

beginning to get a little bit jittery with respeot to expanding their
deposits further through increasing their Government portfolios because
their deposits are getting beyond where their capital funds can support
them?

Do you think the banks would bo interested if the Government would

say, ’We will see that the R.F.C. supplies you with additions to your
capital; if you can increase your capital and sales of s took in the open
market, the R.F.C. will buy preferred stock fror. you and perhaps charge
you one per cent or \ of one per cent on it, so you can use that money for
Government bonds to meet fiscal requirements•?”
Mr. Ball answered:

"I do not -think the banks will worry about

that, because I have not found anyone yet who can justify fifteen-to-one or
ten-to-orie or five-to-one.

It seems to iue it ht.s to be analyzod with

respect to what ratio should be appliod.
about the capital - deposit ratio.

So, personally, I do not worry

I think the banks are very much con­

cerned about thoir expansion of deposits.

I do not know of any banks that

are reaching out to get -them, even though there are some banks which take
pride in how much their deposits have expanded this year over last year.
I think that is the poorest yardstick a bank can apply.

The banks should

apply the yardstick of how much they are earning year in and year out,
rather than an increase in deposit lia bilitios.
"We observed this problem when our tioe-deposits became very large.




-b 9 -

1.

A b o u t f o u r o r f i v e y e a r s a g o , 60 p e r c e n t o f o u r d e p o s i t s w e r e t i m e - d e p o s i t s •

2.

I n t h e m e a n tim e , o u r t o t a l d e p o s i t s i n c r e a s e d ^ 2 5 ,0 0 0 ,0 0 0 .

3.

tim e - d e p o s it s

4.

b an ks s t o o d a t t h e i r p r e v io u s

5.

One o f o u r o f f i c e r s cam e i n t o my o f f i c e a f o r t n i g h t a f t e r w© had made t h e

6.

r e d u c t io n and he s a i d : ’ T h is p la n i s a f a i l u r e .

7.

$ 2 5 0 ,0 0 0 * an d t h a t i s a l l w e d i d l o s e b u t w e t r e m e n d o u s ly b e n e f i t e d o u r

8.

e a r n in g s .

9.

b y d e c r e a s in g i n t e r e s t r a t e s .

We r e d u o e d o u r

E ve n t h o u g h o t h e r c o m m e rc ia l

l e v e l , we r e d u c e d o u r r a t e t o l||* p e r o e n t .

We h a v e o n l y l o s t

" I t h in k th e d e p o s i t o r a p p r e c i a t e s t h e r e a s o n f o r lo w i n t e r e s t

10.

ra te s .

11.

¿ 5 ,0 0 0 w it h t h e F . D . I .

12.

p r o f i t a b l e b a s i s ’ , and t h a t i s g o o d b a n k in g .

13 .

to ro a ch o u t f o r in c r e a s e d d e p o s it s . ”

14 .

We s a y ,

’ y o u can w it h d r a w y o u r d e p o s i t ;

i t i s g u a r a n t e e d up t o

C . j w e a r e o n ly t r y i n g t o k e e p o u r s e l v e s on a
I t h in k i t i s v e r y u nsou n d

T h e M o d e r a t o r th e n a s k e d D r . S t o n i e r t o com m ent on th e s u b j e c t o f

15 .

th e g r o w th o f ban k d e p o s i t s w i t h r e s p e c t t o t h e i r c a p i t a l fu n d *

16.

"T h e b an ks a r e r e m in d e d o f i t ,

17.

t h e q u e s t io n o f t h e c a p i t a l - d e p o s i t s r a t i o b e tw e e n t h e tw o i s a v e r y

18.

d e b a t a b le m a t t e r and I t h i n k i t

19.

t o - o n e r a t i o a n y b o t t e r th a n y o u c o u ld a n i n e - t o - o n e o r fin e v e l e n - t o - o n e

20.

r a tio .

21.

i n t o t h e m a r k e t a n d b u y G o vern m e n t b o n d s , b u t th e p e o p l e w o u ld r a t h e r p u t

22.

t h o i r m oney in t h e bank and o n ly t a k e on e p e r c e n t a s t h e y a r e d o in g i n

23.

New de r s e y , r a t h e r th a n t a k e a c h a n c e on t h e G o v e rn m e n t m a r k e t . "

24.

o f c o u r s e , b y a u t h o r i t i e s now and a g a in ; b u t

i s p r e t t y d i f f i c u l t t o d e f i n e s im p ly a t e n -

I t h i n k t h e b a n k s g e n e r a l l y w o u ld l i k e t o

Th e M o d e r a t o r t h e n

He s a i d :

s e e i n v e s t o r s comc b a c k

c a l l e d on D r . G o ld e n w o is e r t o comment a s t o

25.

w h e th e r he h ad o b s e r v o d a n y f e e l i n g o f u n e a s in e s s on t h e p a r t s o f th e b o n k s

26.

in t h e c o u n t r y w it h r e l a t i o n

27.

o f G o vern m en t s e c u r i t i e s .

28.

u n r e a lis tic a ttitu d e becau se i t is




t o t h e c a p i t a l - d e p o s i t s r a t i o in t h e p u r c h a s e

He o n sv / ered :

" I t s t r i k e s me a s b o in g a h i g h l y

a q u e s t io n o f t h e c h a r a c t e r o f t h e

-701.

assets in relation to the deposits.

2.

liquid character, then the banks know that they can sell the securities

3.

or borrow upon -their, at par.

4.

themselves about the capital-deposits ratio.

5.

do not concern themselves about it very much except where ill-advised

6.

examiners call it to their attention."

7.

So long as the assets are of a

I do not think that banks need to concern
It seems to me -that the banks

Is Government Bond Market Vulnerable?

8.

The Moderator then asked : "At present levels, is not the Govern-

9.

ment bond market exceptionally vulnerable and is there not a general feel-

10.

ing among holders that such a condition of vulnerability exists?"

11.

Hr. Devine answered:

"I do not think we could say it is vul-

12.

nerable if it is to the extent of two or three points market difference; but

13.

if it goes beyond that point, I would say it is vulnerable."

14.

Mr. Morss replied:

"The market is vulnerable in that it might

15.

go down and it is vulnerable in that it might go up.

16.

it might go either way, but of course with uncertain times, election year

17.

and war and so on, the c.arket is vulnerable; and I think the holders of

18.

Governments are well aware of that.

19.

far as we can see into the future w ith respect to a change in trend par-

20.

ticularly."

21.

Mr. Emory agreed but said:

It may indicate that

I do not think it is vulnerable in so

"Looking only at the domestic

22.

economic forces, I think it might be very vulnerable on the down side with

23.

war developments."

24.

Ifhat if Commercials Carnot Absorb lore "Governments"?

25.

The Moderator then a sked the next question:

"»-fhat resources

26.

would be open to the Treasury if the commercial banks of the country should

27.

in general feel that they can absorb safely no moro Government securities?

28.

TJould the Treasury have to resort then to the direct sale of its bonds to




the Federal Reserve System?

If so, what would be the effect upon Govern­

ment bond prices and interest rates?”
Governor Eocles replied:

”1 do not think that in the present

situation the market is going to have an opportunity to take Government bonds
so that whether or not the banks decide they do not want any is going to
make very little difference,
as a practical matter.

I do not think the question is going to arise

As long as we have the present Social Security system,

which is accumulating $1,000,000,000 a year for investment, and the Baby
Bond system, which does provide an opportunity for investment of funds of
individuals at a high rate in Government securities, there will be such a
demand for Government securities on tho part of institutional investors that
whether the commercial banks take any or not I do not believe is going to
make any appreciable difference in the situation.”
The conferees generally conourred in the answer.
Necessity of Buying New Issues
to Support Market
The question was then asked:

”Is it true that the market for

Government bonds is really a liquid market or is it true that with respect
to long Government bonds in particular the large institutional holders
really have a frozen asset - an asset of which no great number of them oould
divest themselves at any one time?

In short, are not the institutional

holders in the position of having to take, willy-nilly, whatever amount of
new Government bonds may be offered to them out of the fear that their
refusal to do so would bring about such a break in the Government bond
market as to cause very heavy losses through Government bond depreciation?
In short, they must buy new issues to support the market for the ones they
already hold.”




Some of the conferees were inclined to believe from their

-72experience of last September that Governments were not thoroughly liquid,
but Mr. Devine disagreed and said:

*You could not sell any other securi­

ties either and you have a better market for Government bonds than you have
for any other security.

As a matter of fact, you could not sell municipal

bonds at all at any price.

If it took two hours to sell a Government, you

couldn't sell a municipal in less than a week."
The Moderator a sked lir. Morss:

"Do you really feel any sense of

uneasiness about the liquidity of your Government portfolio?"
He answered:

"In reference to my comment on the uncertainty of

the times, that does not necessarily mean that we only visualize a down
trend.

So long as our deposits hold up, as they likely will, there should

be a market for Government bonds."
"Bears By The Tails"
Dr. Goldenweiser summed up this question:

"It seems to me that

the banks have a bear by the tail only in tho sane sense that they have a
bear by the tail in having assets at all.

If the banks try to sell all

their assets, it would break all the markets.

I think this particular

question is directed at a very widely spread misconception on the part of
the banks, and I think for that reason it is a good question.

But, so far

as making any sense is concerned, it does not make any."
Fr. Lanston remarked:

"Can you not put this idea of someone having

a bear by the tail a little bit differently?

If you have to make that

assumption, it looks to me as though you have two bears holding two tails.
The banks are holding the tail of the Government markets and the F. D. I. C.
is holding the tail of tho banks."




-73Mr. Eccles stated:

1

"Is it not a

question of alternatives?

The

2

banks take government bonds because it is the only alternative they have.

3

They do not do it because of patronism.

4

cated hare, because of the lack of any other opportunity to put their funds

5

out on a profitable basis so that they can make the earnings they think

6

they should mak e.

7

they have done it in the past.

8

reference to this subject is not going to change the policy of the bank

9

over any longer period of time if it has no other recourse.

They take bonds, as has been indi­

They will always continue to do that in the future as
So it seems to me that all we may say with

"I would like to make a brief statement with relation to the ques­

10
11

tion that has been put before us about inability to sell the government bonds.

12

Mr. Devine made a reply there which by comparison with anything else is an

13

excellent one.

14

dure is that when a bank has a mortgage loan that is not in default or it

15

has any other loan that looks satisfactory on the face of it, no one measures

16

the value of that loan by its immediate liquidity.

17

happens to be a quotation on the market for a certain small amount of

18

mimicipal bonds or any other secur ities, thai they want to measure the

19

entire value of the portfolios of all the banks on that basis without con­

20

sidering the intrinsio value of the security.

21

sense.n

One of the reasons for changing the bank examination proce­

And yet, because there

Now it just does not make

22
Value of Going Concern
and That of Receiver

23

The Moderator interposed:

24

"In other words, you think there is

25

one value to an institution as a going concern and another value perhaps

26

as a receiver in charge of its assets?”

27

Mr. Eccles replied:

”Yes.

But even a receiver is not necessarily

28

compelled to liquidate tomorrow.

29

cents on the dollar; whereas, if they liquidated on the date they closed,




Many a receiver liquidated at one hundred

-741

"they would have done so at less than that amount,

A liquidator does not

2

have any idea of pegging a government bond market or think that the govern­

3

ment bond market should bo pegged.
"There are two approaches, it seems to me, to the govornnent bond

4
5

market, - one is from a monetary standpoint; that is, to buy and sell gov­

6

ernment bonds for the purpose of affecting the excess reserves, - the money

7

situation.

8

central banking authorities would have that in mind for the purpose of

9

either buying or selling government bonds today.

Certainly under present conditions, no action on the part of

10

the purpose of influencing the interest rates.

11

forced to borrow from the Federal Resorve.

It could not be done for
The banks could not bo

"In the second place, there is such a thing as meeting a panic con­

12
13

dition which has no monetary reason.

To the extent that we are different

14

fron a n y other country with fifteen thousand banks instead of a few banks,

15

it is very nuch easier to create a panic psychology than would otherwise be

16

the case.
"It seons to me that it is important for public authorities to do

17
18

what they oan to help stabilize a

govornnent bond market.

I do not moan

19

that they should over the long range trend try to stop interest rates from

20

going up or going dowi, so long as there is the large excess reserves in

21

the bank, but assuredly they oan moderate the trends so that they are not

22

the excessive typo which would tend to create panic in the markets,"

23
Federal Loan Policy
24
The Moderator again interposed:

"Governor, I understand you now

25
to be talking about buying and.selling governments, - that tho Federal Re­
26
serve would not through its purchase and sale policy attempt necessarily to
27
hold the bond market up to a

level, which, in the light of general market

28
conditions, might be considered to bo artificial.

Now, if I understand you

29
correctly with respeot to the Federal Reserve System’s policy of lending on



-751

“governments, you indioatod - leaving the question of soundness out of it -

2

that the Federal’s policy would be to lend on those bonds.,.that you could

3

not oonceive of a situation economically where the Federal would refuse to

4

lend par on such securities?"

5

To this Mr. Eccles replied*

"No, I cannot, because the situation

6

would be controlled by interest rates.

If the government’s power was to be

7

used for monetary purposes in order to restrict the us© of credit, it would

8

not be refused.

9

eligible paper discounted at its face value, of course at a rate, and there

There has been no time when the Federal would not take

10

is no reason why you should not take government bonds on a bills payable

11

basis at par at a rate."

12

Mr. Lanston commented:

"What I cannot understand is the basis for

13

lending a t par on 2*s of *47 and par on 2-3/4fs of *51.

14

price conscious."

15

To which Mr. Eccles responded:

It makes the banks

"In one area they might be getting

16

7% on the paper and in another they might be getting l%%t and yet you do not

17

change the amount that you loan on the paper discounted.

18

to make advances on any kinds of assets that may be sound and

19

the same to all borrowers.

20

collateral."

We have the power
the rate is

Of course, wo have the right to ask additional

21
Restricting Excess Reserves
and Tightening Money Rates

22
23

Mr. Goldsmith asked Mr. Eccles whether he oould conceive of any

24

conditions in the business world where he would think it advisable for the

25

Federal Reserve to use its powers to restrict the excess reserves and tighton

26

money rates.

27

To which he answered:

"I can conceive of a situation of that sort.

28

A condition of reasonably ftill employment where merely a further increase in

29

the expansion of bank credit would only bring about an inflation in prices




-761

*and would in no m y increase the production of wealth.

Under ai ch circun-

2

stances, there should then be a restricted money policy, a tightening of

3

rates, and everything possible should bo done to stop a further expansion

4

of crodit on the part of the banking system."
In response to another quostion, Governor Eccles could not now

5
6

conceive of a rise in prices and a shortage in skillod labor or a boon

7

psychology where a n expansion of credit on the part of the banking system

8

7/ould call upon the reserve fixcilitios.

9

of using a monetary itiecha nisa to deal with a problem which is not monetary."

He stated:

"I could not conceive

In the Event of War - What?

10

The Moderator then asked:

11

"In the event we are brought into the

12

war, to whom would the Treasury look for the absorption of the largo amount

13

of new bonds that would have to bo issuod?

14

to be used for the purchase of such Government bonds bo a likely possibility

15

in view of the present size of the Federal Government’s debt?"

16

Schwulst addod:

17

giving somo consideration to the question of forced savings."

And Hr.

"I road in the paper recently whore the government was

Mr. Eccles:

18

Would a system of forced savings

"Only in case we had full employment.

If so, then it

19

soems to me that you would want to resort to a tax on consumption so that you

20

could release savings for the purpose of prosecuting war to the oxtent that

21

you still had a

22

ities.

problem of the unemployed and the utilization of your facil­

"Certainly you would not want to restrict consumer buying power.

23
24

You would then either want to borrow for tho purpose of financing or you

25

would want to tax what would appear to bo excessive savings.

At present the

26

British are talking about a reversal of their taxing power.

They anticipate

27

a condition of fUll employment.

28

standard of living or consumption on the part of their people so that the

29

energies of production from their people can bo diroctod into the prosecution




With this condition, they want to reduce the

-771

of war.
"An effective way to do that is to tax those people and reduce

2
3

their standard of living; to direct what they earn into the investment of

4

war production.- I can well conceive, if we have a condition of full em­

5

ployment, ishore we may want to resort to exactly the same tactics.
”If you read Dr. Schacht’s speech before he left Germany, you will

6
7
8

find exactly the same type of policy that was advocated in Germany during all
the period up to the tine he left.
“There was no inflation in Germany for the very reason that here

9

10

a totalitarian state prevented inflation because they forced idle money into

11

circulation through taxation.

12

lation to taxing and doing other things, you create a totalitarian state,

13

you have an example of a totalitarian state doing exactly the opposite...

14

at least for a five-year period."

Therefore, when llr. O ’Connor speaks with re­

15
III.

INTRINSIC VALUE OF GOVERNMENT BONDS

16
17

Moderator Schwulst then asked the last question in tho agenda:

18

"Are there fears in the minds of bond holders that the Government’s fiscal

19

policies ar« definitely out of hand and that only through forced inflation

20

of commodity prices and wage levels con tax receipts be brought up to a

2]

point where tho budget can be definitely balanced?

22

with it a reduction in the purchasing power of the principal invested in

23

the bonds and the interest collected thereon, with the consequent forcing

24

of the prioes of such bonds downward?"

25

Ur. Benson answered:

"No, I do not think that the fiscal policies

26

of the government are really definitely out of hand.

27

are that bad.

28

prices, we can balance the budget.

29

yet see a trend in that




Will not this bring

I cannot say that they

I still hope that without a forced inflation of cormodity
I think this has to be done.

I do not

direction; however, but I am still hopeful that con­

-7 8 -

1

ditions will improve before a boon that would get fiscal policies beyond the

2

control of the government.

3

"I think it is true that increased taxation, if that is necessary,

4

will bring about inflation and will reduce purchasing power of the principal

5

invested in governnent bonds as well as all principal and interest.

This

6

would certainly tend to reduce standards of living in this country.

All of

7

those who work end produce have to boar tho entire burden.

8

think tho theory of governnent expenditures taking the place of private

9

investment is wrong.

That is why I

I do not bolieve that governnent spending takes the

10

place of private spending in any way.

11

non-productive purposes, increase tho burden of debt a nd reduce the standard

12

of living.

13

think it is tine we saw a change in the opposite direction unless wo do go

14

too far."

Most governnent expenditures are for

However, I do not beliovo wo have gotton that far.

But I do

ilr. Morss agreed with Mr. Benson and thought it was by no means a

15
16

hopeless situation.

17

nischance we will work toward a crisis in which event there would be a reduc­

18

tion of bond principal.

19

orisis rather than to spend our tine fearing it.

20

fiscal policies that is unsafe can bo modified to the point of reversal.

21

is true I do not see any change in this trend as yet."

22

He renarked:

"Yet, there are fears that somehow by

Certainly, wo ought to bend every offort to avoid a
I think that any trend in
It

Mr. Emory agreed.

23
Public Estimate
of Fiscal Policies

24

Dr. Stonier remarked:

25

"I do not think that tho fiscal policies of

26

the government are suoh that tho people have lost complete confidence in them.

27

However, I do think that in the next six or eight months there will bo a vory

28

groat test on that point, as to whether or not the people in this country

29

think that the fiscal policies have been able to restore enploynont and that




-7 9 -

1

the issue is going 't0 be fought out very largely along fiscal lines.
"There are situations; such as, preparations for war, which,

2
5

if the Allies are on the losing side for tho next six months, will result

4

in a groat deal of thought boing given toward furthor encouragement of debt .

5

for war preparation.

6

cide the issue, there is going to bo considerable interest in this country

7

in war money, - money being spent by government for war preparation and

8

regardless of there being one political party or another in control, I think
9

Vilhothor or not wo might get into the war to holp de­

that such a situa tion will continue.

10

"However, I would say that there is greater lack of confidence

11

now in presont fiscal policios of the government than there was two years

12

ago.

13

today are more on tho defensive then they were a t that time."

Those who have been responsible far tho fiscal policy of government

On Budget Balancing

14
15

lir. O ’Connor offered*

"I do not think that the government fiscal

16

policios are completely out of hand.

17

disturbing trend.

18

practical-minded people.

19

enforced inflation.

20

years ago to got used to the level of seven billion dollars budgetary ex­

21

penditures...now wo are asked to get used to a level of around nine billions.

22

However, I think there is a distinctly

Such a view is widely held among conservative-nindod and
I think the budget con be balanced without

I would say tho President in offoct asked us a few

”1 think if the budget were sonewho re around 6^- billions of dol­

23

lars, the tax system would be able to work without an unendurable burden.

24

I do not think if it wero much higher than that a tax system could be made

25

to work.

26

of taxes is in relation to national income in this country, - federal,

27

state and local, - it is practically twice as much in dollar amount in

28

taxes now as the government reoeived in the World War, end in relation to

29

income, exactly twice as much.




Wo ought to recognize tiaat so far as a so-called Wor 1d-War-Love1

On a per capita basis, it is something like

-801

fifty percent more."
Hr. O ’Connor continuedt

2

’’The distance tho Federal Government

3

can go without encroachment on state and local resources, and therefore

4

the more dependence of state and local governments on the Federal govern­

5

ment for hand-outs without the loss of their local autonomy, is a very nice

6

question.
”As far as our calculations go, we think the budget can bo balanced

7
8

with about six and one-half billion dollars expenditures.

9

a modification of rates of taxation will probably produce more revenues.

10

believe Governor Eccles presents a hopeless picture, when ho talks about

11

fin a n c in g ,

12

tion in the event of war.

13

you can do this.

14

that increased taxes will moan a b a l m cod budget.

15

Mr. Hoover ran into a deficit, the country accepted taxes, end there was

16

a very substantial incroaso in tho level of revonues, but it only resulted

17

in more spending.

18

the country is likely to accept a very high tax program to reach a balanced

19

budget.”




Yio also think that
I

and secondly when he talks about high taxes to reduce consump­
That is rather disturbing.

I do not think that

Even a conservative government has to givo assurance
You reoall that when

Vie must soo a reduction in Federal expenditures before