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Bay 2, 1938

t y dear Hr» Chairman*
X am returning herewith corrected copies
of ay testimony before your Comittee* X enclose
also a separate set of ay answers to the questions
which were , asked l y Mr* Pataan and .other members of
the Committee and were left for me to answer subsequent to my appearance*
The same answers have also been typed Into
the corrected copies of the transcript.
Sincerely yours,

H. S. Socles,
Honorable Henry B* Steagall, Chairman*
Banking and Currency Committee,
Boose of Representatives,
Washington, D. C«



Hay 2, 1958

By dear Mr. Patman:
Z have returned to Chairman Steagell
corrected copies of my testimony, supplying thereon also the answers to the questions asked by you
and other members of the Committee which X was requested to reply to subsequent to my appearance
before the Committee*
X enclose a separate set of the questions
asked by you as Yell as by other members of the Com*
mittee and my answers thereto*
Sincerely yours,

M*S. Scales,
Honorable Wright Patman,
House of Representatives,
Washington, C* C«

I r Pataan. Sext, on Febmiy 16 of last year, follow-*
tag the Increase in reserve requirements, you testified that
yost did not believe this action would raise long~ter» interest
rates. Sithin aix weeks Government bond prices declined about
fiwe points with an increase in the yield to maturity on those
issues of almost one hslf of one per cent- Was this demoralisation of the money mxket due to the fact that the representatives of the Federal Iiessrve hr.nks on the Open Market
Committee refused to

age in prompt open-aarkot purchases?

(the answer subsequently furnished by Hr* Eccles ie as
When 1 said that 1 did not think long-term interest rates
would advance, I did not mm that there would not be temporary
fluctuations and perhaps some upward adjustment in those rate*,
which were exceedingly low as compart with all past standards.
The average rate of long-term government bonde had gono down to

per Gent end a readjustment in those rates end in rates cm

high-grade corporate bonds was not surprising. The readjustment
that took place laet March was not necessitated by the action on
reserves. As X hare previously explained, the comparatively few
banks in Sew Tork that did not have enough excess reserves to
meet the increase had a wary large profit in government bonds and
decided to realise the profit on these bonds, which, of course,
bad an influence on the long-tera rate at that time* Had these

hanks b&m mnmm&d sierely wi1th acting the reserve require-*
caenta, they could h a w permitted aoj&e of their holdings of ehorttera paper to m m off or thoy could have reduced their call loans
or bankerst acceptances, nhich would not have had the aaa* effect
on long-term r&tes and at the aaae tiae would have provided them
with such additional r^aer^ea as they scight naed. the entire
estimated shortage of ra&erwe* assounted to not core than one
hundred million dollars for the few Hew Xork money sarket banish
which I bate aentioued and did not exceed twenty-two million
dollara for hsmka outside of Sew lork, yet, ell told, the bank*
cold approximately one Mil ion dollara of bonds in the firet half
of 1957. There had already been a fell in bond prices in England
beginning in October of

ehich exceeded the drop in oar

si&rket and* of eonr^e* there wae no increase in reaerte reqairesanta in Eagland, Ms a matter of fact, the federal Heoorre %eta&
meted to temper the decline. During March and April of 1057 the
Syateu purch&aad t r hundred and tro million dollara of bonds and
diapoaod of one hundred and aix million dollara of itn ahort-tera
holdings* Subaequently prices rose #osaawhat and ainee the end of
last year long-teno Treasury bond yields have averaged approximately £§ per emit*

Aa to t a position of the tenk representatives on the
Open Iferket Oosas&ttee, ae y w bow, 1 aa on record aa favoring their removal from the Ooiaaittee* However* it would not
be fair to the bank representativesf who, of cawse* are not
a aejority of the Coaiaitte© in any case, to give the taprosslon
that because of a refusal or obstructive attitude they had
felled to act or hud prevented prompt action at this period.

Sr# F t e t * The first question is that the law prohibits
tbe Federal Resarvo System froa buying bonds directly from the
Treasury* X wonder If you are In favor of changing the lav, so
that you em buy bonds directly from the Treasury?
(The answer subsequently submittedfcygr. Eccles is as
The prohibition against direct parohases of securities ty
the Federal Reserve banks from the Treasury M s put in the &&nk~
lag Act of 1355 not on our recommendation* Apparently those who
placed it there believed that it would prevent the federal Ke~
serve banks from financing Treasury deficits* As a matter of
fact, the provision would mt provent this, as the Federal Reserve
banks may time their purchases of Treasury securities in the open
market with sales by the Treasury. The only effect the provision
has in practice in this regard Is to make it necessary for the
Bes*rve banks to pay coaaissions to brokers* It also makes it
impossible for the Reserve banks to accept short-term certificates
of indebtedness from the Treasury ta anticipation of tax receipts
during quarterly financing and income tax payment periods* Such
advances were previously used to avoid large temporary fluctuations
In the volame of bank reserves* In view of these considerations,
Z would be glad to see the provision taken oat of the lew*

Petman* the next* question is, did yon take into
consideration the money that nas being paid to the veterans
on their adjusted service certificates commencing June IS,
1956, when the Board ordered the reserve requirements to be
raised in the summer and fall of 1056?
Is it not a fact that you took that into consideration,
and you were making an effort to offset those payments?
(The answer furnished later by Mr* Eccles is as
In determining upon raising reserve requirements in July,
1930, the Board was guided by the fact that there was a large
amount of member bank reserves brought about by gold imports
and was in no way influenced by the payment of the veterans*
adjusted service certificates • the payment of these certificates had no direct relationship to the reserve position of
member banka ami ima not a factor in the Board's decision*

Sr. Patman. The next question is, 1 want you to insert
in the record a definition of the word "inflationary**
(The answer furnished by Mr. Eccles is as follows*)
It id not eagy to define HafXationajy11* Someti®so the
word Is need to mm anything that resalte in a rise of
activity or an advent in prioeaj often it is Halted only to
mo&etery deirelop&ents that result in rising prices. I would
say that the word ^inflationary®1 describes conditions where a
large element of speculation comes into the picture so thai
activity la motivated in peart by the expectation of advancing
prices and coats* It io usually characterised by excessive
forward buying and inventory accumilation* I would distinguish
such conditions sharply from those where expansion of activity
Is orderly in character, and promotion la motivated by and
geared in with the current requirements of consumption* The
latter set of conditions can be longer sustained and result in
a rising standard of living* the former are usually shortlived and invariably have a painful aftermath*

Mr. Glfford. Because the Federal Reserve Board is compelled to m s k is harmony with the policies of the Treasury*
does that deter them from proceeding with plans of their own*
(She answer subsequently furnished is


The Treasury and the federal Reserve Board have many
questions in conaon and aa a regular thing have consultations
on th&m problems, tir* Bansom and I have regular meetings with
the Secretary of the treasury and it is the Secretary1* custom
to invite the ©ambers of the Executive Coarsittee of the Open
Earket Committee to meet with hia when problems of Treasury
financing are discussed. tdiewise, in considering the adoption
of measures that way affect the Treasury, there is consultation
with the Secretary. The two bodiee are independent* however* and
the Board i* not obliged to follow Treasury suggestions.

ir* Ford. that effect would an amendment to the Federal
Reserve let providing for the aegregation of demand deposits
and time deposits* eo far as reserve requirement6, have? For
instance$ they could make the reserve requirement on demand
deposits different fron what it la nowt hat leave the reserve
requirements on tla*e deposits «hero it was prior to the reserve
requirementa being raised.
My question is, what effect wuld that have?
(The anawer subsequently submitted ia aa follows?)
Time deposits and demand deposita now have different reserve requlreisesta* Under the tarsal of the Banking Act of 1955
it ia possible for the Board to vary, within limits, the re~
quired reserves for time and desand deposits separately, and it
h&a done ao*

Mr. Crawford. What inducements, if any, has the Board to
offer nonmeaber Stat© banks in order to bring then into the
Federal Ksnerve System, and this question is directed to the
impression 1 got that Chairman Bcclos Is opposed to the pro-*
visions of the Paim&a bill T,hich rould bring into the System
present nonamber State banks.
1 juet t&row that question in.
(Jh© answer subsequently submitted is as follows*)
The principal inducements that the FederalfieserveSystem
offers to nommhor brinks lto, first, the prestige of membership,
growing out of public knowledge that member banks mist conform
ta established standards, are subject to Federal supervision, and
can report to the federal Keserve banks for assistance in case

and* second, the definite a^mirance to the banks the®-

selves that they can always obtain accomodation froa the federal
Reserve banks* It is well known that correspondent banks are
likely to be under pressure th&aec&TCs at a %lm when their
correspondents want help and that it ©ay be difficult for thm
to get help in that way* In addition, facilities for clearing
and collection of checks and other items and for obtaining
currency are provided to member banks. It is true that in aost
cases nonaatmber banks aay obtain similar facilities through ci^r




eorreBpoadenta, but the correspondents &re aided in providing
then by being me&berts of the Beaerve System* Balaneee r©~
quired to be carried by ccnmtry banks Kith city correspondents
in ord^r to obtain those privileges have resulted in building
up the Importance and do&lnxmce of largo city b&nka in our
financial otracture. As 1 understand the P&t&an bill, it would
not bring State nonraefsber b&n&e into tho Sye ten, but on the
contrary wuld resove all inducements for their joining because
it would m h e it poaaible for thea to got « H the privileges of
membership without joining whenever they chose to hold their re©errea with the Reserve banks, the b&aks would, therefore, be
able to go in and out at their owa

and pleasure, and mxxy

banks not? belonging to the System sight withdraw froa iscsabarahip.
This would weaken the ability of the Systm to serve tho publie

Br. Williams. Kbat effect* If any, on the or>en-5aarket
policy of the Open Market Comiaittee have these five members
representing the banks of the country had?
What has been the effect or the remIt of their being
on the Open Market Co-salt tec, whether they have affected the
Board*a policy or not?
(The answer of Governor Eccles is as follows:)
The Federal Reserve bank representatives on the Open Market
Committee are five individuals each one of whoa 1ms a vote and the
right to his own opinions. They taring to the aeetings a knowledge
of conditions in different parts of the country and the Hew York
representative in particular is faaili&r with conditions in the
j»oaey market. As 1 have said before* I a® in favor of placing
the Open Market Comittoe's functions with the Board of Governors*
which is a public body appointedfcythe President and confirmed ty
the Senate* to represent the public interest. I do not wish to
imply that the bank representatives are leas conscientious than
Board noabers or that they do not act in good faith and with the
beat of intentions. But since they are presidents of the Reserve
banks and are elected by the directors of those banks* two-thirds
of whoa are in turn elected by the aeaber banks* their viewpoint
necessarily is likely to reflect that of i e a e banks. I feel
that a committee which is entrusted with monetary policies ae
important as those given to this Committee should consist entirely
of persons re presenting the public interest.

Broadly* it m ® m to m f there are two important considerations in tl^is commotion. O&0 is that the Open llarket
Qmmittoe shouldfeein a position to act promptly in m
eukergdacy* o c it is not always possible to
iroia all over the country

a eo&&lttee

a ssa&ont1 o notice• FurUiuraore,

the problems before the Co&aittee ©hoold bo constantly studied
aad diacu&aad by

body charged with the responsibility of

deoiaio&a* and yet this

iupo&nlbX® vhaa the M^bers

The wcoiid* and periiap^ tha aoro i&pori&nt, ctmsider&tXoa
that the Board of Governors has full authority over ch-ragea
la r&s^rva requirements* diacoum, r&t&s* ta&rgin requirements, and
j a t s u a interact r&taa on idsm deposits* To have one of tha most
important instruments of credit policy in the hands of a different
body farm the Soardt ishlch has authority over the other instruments*
could result in a policy adopted by tha Board being nullified iy
the Ckmittee* To be sure* the Board has a majority of the
Cow&ttee* but thi# means that the Board, in order to make Ita
policy prevail ag&inst the unanimous opposition of the bank representatives on the Opm Market Coaaslttee, mat be utuuaiaoua itself. The Board aight, for example* reduce reserve r^uiresenta

end thereby increase excess reserves. It night conceivably do

a vote of S to 2* The Op mi U&r&st Comittso s&ght be

opposad to an iz&rmm in reserves* and by coabiuing the five votes
of the presidents with the two minority votes of the Bo^rd, &igbt
decide to rc&uco the opea market portfolio by m amount sufficient
to offset the d-eermm in reservs retirements. Whether this
coarse of events is probable or not, it is cort&ioly possible
under the ^xlstiug 1m*

Is my opinion it should not be possible.