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^ B


ce Lorresponaence
Governor Eccles






_ . ,
Mr. Goldenweiser,


MAR 2? 1939
• ro

I am sending you a statement about Mr. Willis1 position on
the Banking Act of 1935, and, beginning with page 7, some quota-


tions of his earlier statements in connection with Federal Reserve
legislation. His general position is perfectly clear. He believes
in the Federal Reserve System being limited in its operations to
emergency functions based entirely on self-liquidating paper. General monetary control or regulation is a concept which does not enter
into his thinking. He considers

the problem purely from the point

of view of extending credit required by industry, trade and agriculture. Supervision by the Federal Reserve Board is in his view merely
a matter of coordination and prevention of abuses.



It is important in understanding Mr. Willis1 views on the banking
legislation to note that he is against any banking legislation at the
present time and furthermore, that it is his belief that all banking
legislation under the present Administration has been/ and incompetent."
His criticism of Title II of the banking bill of 1935 is consistently
adverse. To him the bill is a deliberate plot of the Administration to
bring the Federal Reserve System under complete political control, through
the changes proposed in the Federal Reserve Board and in the boards of
directors of the Federal Reserve banks. The proposed changes in the
functioning of the System, that is in eligibility requirements, openmarket operations, reserve requirements, and collateral for note issues,
are all looked at in the same light. The Administration is merely providing the means for politicians to use the System for political purposes.
In view of the fact that Mr. Willis1 criticisms of the bill hinge
so completely on its presumed political effects, and he is using the term
political in the most undesirable sense, the best way to comment on his
criticism is to quote him.
Mr. Willis repeatedly and forcefully points out that the bill aims
at complete political control of the System through the provisions relating
to the appointment of the Governor of the Federal Reserve Board and to
Board approval of the governors of the Federal Reserve banks.

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"However, it is not true that, even of recent years,
our Reserve System has been run upon the low political level
which is now proposed under the new legislation."
Commercial and Financial Chronicle
February 9, 1935
"We now have a measure which professes nothing of the
kind*l/lt is a bare-faced usurpation of the control over the
entire banking assets of the nation. It provides for opening
the door to political favoritism and control of the worst kind."
New York Herald-Tribune
February 10, 1955

"The present proposal is the fusing of all central banking
j powers in the hands of the Federal Reserve Board at Washington,
i and of making the Board itself the direct executor of the will
I of the President of the United States."
Commercial and Financial Chronicle
February 9, 1935
"As the President already has two political appointees on
I the Board, he would thus be able at all times to make sure of a
| third; and, as the history of the Board has shown, would invariably
be able thus to carry any policy he might desire should the Board,
as in rare cases it has been, be somewhat recalcitrant. So far
as the Board is concerned, provision for early reorganizing it is
made through a new policy, which permits present members to retire
on full pay upon reaching the age of 70. As there are three
Members who have reached or will shortly attain that age, it may
be expected that within less than two years the complete reorganization of the Board will be effected."
Commercial and Financial Chronicle
February 9, 1935
"This measure would convert our Federal Reserve Board into
a direct personal agency of the President. It would convert the
boards of directors of our Federal Reserve banks into direct agencies
of the Federal Reserve Board•"
The American Banker
March 19, 1935

1/ Refers to comment that earlier changes have been made
under the guise of improving the System. See quotations
on page 6.

"Under the new act it is now intended to have the governors
of Reserve banks replace the chairman — thus combining the making
of policy with the actual execution of it and placing the operation
of the banks under the immediate Influence of the Reserve Board at
Washington* . W" The proposed act, however, would have the Reserve
Board practically originate the appointments of the governors, while
the board itself is to be mare than ever under Executive control."
New York Herald-Tribune
February 10, 1935
"There is no concealment and no dount about what is being
sought* It is an effort to take over our banking system
although without paying for it, and to run it as an agency
of the Government, primarily in behalf of its own financing
and secondarily, in behalf of those industries upon which the
Government looks with favor*"
The American Banker
March 19, 1935
"It is a bare-faced act of usurpation — an act which could
result in meetings at Tammany Hall to fix the future Federal
Reserve Bank discount rates*"
Baltimore Sun
February 22, 1935
The power of the Board to approve the governors of the Federal
Reserve banks is seen by Mr* Willis as a means of depriving the Federal
Reserve banks of their entire autonomy in local credit matters* In his
opinion, Government control of banking will be changed to Government
operation of banking.

"It is a government-operated central bank* Although
the measure does not call for the acquisition of the stock
in Federal Reserve banks, it might quite as well do so; however,
the present method is far cheaper than the plan originally contemplated would have been*"
Commercial and Financial Chronicle
February 9, 1935



"The power, however, of banking direction and of the
distribution of credit is located in the White House, by e system
especially devised for that purpose. This brings out into the
open the long-festering controversy between centralization and
local self-government in finance."
Commercial and Financial Chronicle
February 9, 1955

Put in a nutshell, this simply means that the idea of
a local self-governing board is to be superseded by that of
an advisory local board, operating the detailed administrative
machinery of a bank which is actually controlled and directed
by a person appointed from Washington and removable on orders
from that place* The Reserve bank must and will, in such
circumstances, become wholly subservient to the wishes of those
who name its Governor* It ^.11 be a local financial despotism,
since the Governor will in no wise be responsible for his
appointment, duties, powers, or ^ake his reports to the bank
Commercial and Financial Chronicle
February 9, 1955

We now have definitely before the country the question,
whether one who happens to be President of the United States
shall at any given time be able to change, direct, supervise,
and control, the volume and character of the credit of the country,
the rates of interest that are charged by financial institutions
and, above all else, the degree of safety which may be allowed to
the savings and the property of the people•"
Commercial and Financial Chronicle
February 9, 1955

(The proposal is for)
'/a reserve banking mechanism which is fully authorized
jto appoint clerks, pay rent, buy stationery, etc., but which in
iall other activities shall be controlled by the political
(authorities at Washington."


New York Herald-Tribune
February 10, 1935
In view of the part which Mr. Willis played in the preparation
of the original Federal Reserve banking act, it is important
that he interprets this legislation merely as one more of a number of
steps that have been taken since 1915 to bring the System under political
" the original draft of the Federal Reserve bill it
was proposed to give the Reserve banks themselves a controlling
place on the Federal Reserve Board, so that the whole system
would have been a self-governing banking agency."
Commercial and Financial Chronicle
February 9, 1955
"Political considerations led President Woodrow T/ilson to
change this composition of the Board, making it an all-government
group of politicians•"
"Under this fundamental error there has grown up from time
to time, and of late years more or less continuously, a political
menace to the safety of our deposits and to the structure of our credit.
"There was a change after the war but it did not last long,
and the practice of directing and controlling the discount rate
and the general policies of the System as the sale of Treasury
notes required became settled."
Commercial and Financial Chronicle
February 9, 1955
"With the Federal Reserve Board constantly subordinated to
the Treasury Department, and with its membership steadily chosen
for political reasons, it has never been able fully to carry
out the purposes of the Federal Reserve Act itself."

Commercial and Financial Chronicle
February 9, 1935

"The tcne of the proposal and its interpretation in the light
of actual experience is far more important than its actual provisions*
It is an old saying that, even the worst of laws, through good
administration, can be made tolerable and workable*

i"The Federal Reserve act as originally drafted had many flaws*
Some of them were due to inexperience in central banking? others to
political compromises which were made necessary in order to secure
the adoption of the measure at all* The passage of time has resulted
in aggravating these errors* and the multitudinous amendments
that have been made to the Federal Reserve act* in the score and
a half of modifying laws that have been passed by Congress* has
defaced the original me*sure in essential particulars, and has
greatly lessened the safeguards against maladministration which
were originally set up*
"It is fair, however* to add that the twenty years which have
passed since the adoption of the Federal Reserve act have not
resulted in a material change in the admitted purport and underlying
thought of the legislation* Even those who have found its restrictions
irksome and likely to prevent the attainment of their desires, and
even the ignorant and ill-advised administrators whose lack of
knowledge of central banking has made them restive under the restraints,
which in other countries would have gone as a matter of course as
a result of long-established custom', have always^made their onslaughts
upon the system under the guise of an effort to improve it and to
make its provisions more adaptable to the actual needs of the community.
"We now have a measure which professes nothing of the kind. It
is a bare-faced usurpation of the control over the entire banking
assets of the nation* It provides for opening the door to political
favoritism and control of the worst kind. • *
"The theory of the act had continued unchanged up to the act
of January 50, 1934, when the Secretary of the Treasury was vested
with the power to use a stabilization fund of $2,000,000,000 in
buying and selling government bonds, foreign exchanges, and practically
any kind of marketable paper that he saw fit. . •
"The new bill, taken in conjunction with the act of January 50,
1954, must thus be regarded as a complete repudiation of the entire
conception not only of the Federal Reserve act but of central banking
as it is practiced today in central banking countries. It substitutes
politics for knowledge, government guaranties for salability of
assets and irredeemable gold certificates for coin."

New York Herald Tribune
February 10, 1935


In analyzing the provisions of the bill other than those affect-


ing organization of the System, Mr. Willis is primarily concerned in
pointing out the usefulness of the changes for political purposes.
The quotations below are selected to show his emphasis on the adverse
political features of the provisions* The comments which are descriptive
of the nature of the provisions are not included.

...we now propose to substitute a politically controlled,
'frozen' and inflationary banking machine for the Federal
Reserve system as we have known it in the past."
New York Herald-Tribune
February 10, 1955
"In short, therefore, the nev; bill is essentially a measure
for freezing the assets of member banks, admitting them freely
to discount at Reserve banks, and shifting reserve requirements
to meet the resulting situation—whatever it may be."
Commercial and Financial Chronicle
February 9, 1955
"There is thus no reason why we should not have an issue of
reserve notes limited only by the volume of assets owned by the
banks and safeguarded by a reserve which may be lowered or raised
i in amount at the will of the President and his financial vassals
on the Federal Reserve Board; and which, in any case, has behind
it only irredeemable gold certificates representing gold stored
1 in the Treasury and paid for at any price the Secretary of the
Treasury may from time to time choose to name."

New York Herald-Tribune
February 10, 1955
"Member banks are enabled to go broadly and with little
restraint into two businesses, namely, operating and speculating
in government securities and real estate finance."
Nev; York Herald-Tribune
February 25, 1955
"Governor Eccles of the Reserve Board has himself given the
reason for these proposed changes. He says that they are intended



to permit the more comfortable financing of the Government by
placing the bonds of the Treasury in the banks when and as
desired and that they are also intended to permit the existence of a planned money and banking control designed to
stabilize the price level and to bring about thereby a better
distribution of credit."
The American Banker
March 19, 1935
"Put in plain language, this (proposed open-market committee) means that an appointee of the President of the United
States, selected as he may see fit, and supported by two satellites, is to have control of the open market operations of the
system and to prescribe such operations as he may choose on the
part of every one of the Reserve banks.
"...The meaning of this provision (eligibility requirements)
evidently is that the governor of the Reserve Board (appointed
and removed at the pleasure of the President of the United States),
shall have power to operate Reserve banks on a rediscount plan
which shall admit any assets, bonds, stocks, commercial paper,
mortgages on real estate, that may be owned by a member bank,
provided that the 'board,' constituted as heretofore indicated,
has designated them as 'sound.'
"...The language of this provision (reserve requirements)
is obscure, but apparently would imply that it may release
member banks in a favored Federal Reserve district from all or
any part of existing reserve requirements, at the same time
that it maintained and increased them in others, perhaps that
any individual bank may be most favored."
New York Hei&l i-Tribune
February 10, 1935
The proposed elimination of collateral requirements comes in for
special criticism. His final pronouncement on the subject is that under
the bill, "we shall have neither a sound and elastic, nor redeemable,
"Then, (in 1913) as a matter of expediency, democratic
politicians were permitted to make the notes a liability of
the Treasury Department which guaranteed them, and in order to
protect the government against this guarantee it was agreed to
place assets in trust behind the notes. Such assets were made


to consist of short-term commercial paper, it being the belief
of the originators of the Act that bank currency should expand
and contract according as business expanded and contracted.
This phase of the Federal Reserve Act was never given a trial,
for almost immediately the outbreak of the World War led to
modifications which permitted the placing of bond-secured paper
and, eventually, government bonds behind the notes, so that in
effect they have been almost as truly bond-secured notes as
were the national bank notes themselves....


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"Now, it is proposed to sweep away all of the protection
behind the notes and to make them straight unsecured obligations
of the Reserve banks. This they in effect really are and should
be, since they are in theory no different from the deposit credits
on the books of the banks. Unfortunately they remain also
government legal tender notes with Reserve banks the holders of
two and a half billion dollars of government bonds, their chief
current business consisting of government bonds, and now making
industrial loans and authorized to discount 'any sound asset1 of
a member bank, the whole conception of liquid currency disappears,
and the reserve notes become confessedly, as they have in fact
been—low-denomination obligations of the government without

I v*

Commercial and Financial Chronicle
February 9, 1955
(of political control)
"This philosophy/is definitely worked out in the present
measure. The law as thus amended no longer seeks to maintain
liquidity, safety, protection of the depositor, convertibility
of assets and the like, but it undertakes to convert frozen
property of doubtful salability direct into legal tender currency,
without any protection to the holder of the latter, except the
irredeemable gold certificates which were created under the act
of January 30, 1934."
New York Herald-Tribune
February 10, 1935
Of course, Mr. Willis follows along with the other economists
in suggesting that legislation be postponed until experts in the field
have an opportunity to study the matter exhaustively.

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