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BOARD DF GDVERNDRS DF THE FEDERAL RESERVE WASHINGTON 25. D. SYSTEM Z-2171 (On o f f i c e copies only) ADDRESS OFFICIAL CORRESPONDENCE TO THE BOARD C. November 26, 1947. Dear S i r : The Board of Governors has requested me t o send t o each o f the members of the Federal Advisory Council a copy o f the Board's r e p l y t o t h e statement submitted by the Council w i t h respect t o the r a p i d expansion o f bank c r e d i t . Accordi n g l y , a copy o f the r e p l y i s a t t a c h e d . The C o u n c i l s statement has been submitted t o the J o i n t Committee on the Economic Report as requested by the Council• The Board's r e p l y has a l s o been g i v e n t o the Committee• Very trul S. R. Carpenter, Secretary. Enclosure TO THE MEMBERS OF THE FEDERAL ADVISOR! COUNCIL BOARD OF GOVERNORS OF THE FEDERAL SbSERVE November 25, 19^7 SYoTEV RELATION OF BANK CREDIT AND INFLATION Reply by Board o f Governors o f the Federal Reserve System tip statement issued by Federal A d v i s o r y C o u n c i l The F e d e r a l A d v i s o r y C o u n c i l , composed o f one banker f r o m each o f t h e twelve F e d e r a l Reserve D i s t r i c t s designated under s t a t u t o r y a u t h o r i t y t o advise t h e Board o f Governors, o f the Federal Reserve System, was r e c e n t l y asked by the Board f o r an e x p r e s s i o n o f t h e C o u n c i l ' s views as t o the present c r e d i t s i t u a t i o n . The Board s t a t e d t h a t i t " i s v e r y much concerned about the r a ^ i d expansion o f bank c r e d i t . The Board, therefore, d e s i r e s t o have the views o f the C o u n c i l as t o the f u r t h e r steps t h a t might be t a k e n t o c o r r e c t t h i s s e r i o u s s i t u a t i o n through monetary or f i s c a l means." The C o u n c i l ' s r e p l y , which has been r e l e a s e d f o r publication by the Board and presented t o Congress by the Chairman o f the Board, s t a t e s t h a t the C o u n c i l f i n d s " n o t h i n g i n b&nk loans themselves t o suggest t h a t growth o f loans has been an a c t i v e i n f l a t i o n a r y f a c t o r . It rather appears t o have been a r e f l e c t i o n o f the v e r y h i g h l e v e l o f business a c t i v i t y and h i g h p r i c e s . " n h i l e the Council shares the apprehension o f the Board w i t h r e s p e c t t o i n f l a t i o n dangers, i t b e l i e v e s t h a t " t h e causes o f i n f l a t i o n are l a r g e l y o u t s i d e the sphere o f monetary p o l i c y " . t h e l e s s i t recognizes t h a t " t h e Reserve System has a s p e c i a l Never- responsibility f o r bank c r e d i t and i n t h i s s i t u a t i o n should take a l l reasonable care t o assure c o n s e r v a t i v e c r e d i t p o l i c i e s . " The Council expresses the vi.ev* t h a t i n t h i s s p e c i a l area p r e s e n t powers are ample, w i t h o u t new l e g i s l a t i o n , t p place a l l r e s t r a i n t s on c r e d i t expansion which the System and the Treasury may consider necessary. - 2 - Recent c r e d i t expansion The r a p i d expansion of bank c r e d i t , about which the Board i s concerned, i s i n d i c a t e d by the growth o f bank deposits h e l d by businesses and i n d i v i d u a l s a t a l l commercial banks i n the United S t a t e s , \»hich i n creased by l U b i l l i o n d o l l a r s from the end o f 19U5 t o the end o f October this year. The growth exceeded 7j b i l l i o n d o l l a r s i n the l a s t f o u r months and i s c o n t i n u i n g . This growth was on top o f a n e a r l y t h r e e - f o l d wartime expansion i n deposits and currency which was g r e a t l y i n excess o f needs and has been an important basis of postwar i n f l a t i o n a r y pressures* The basis of t h i s continued expansion i n bank deposits has been p r i m a r i l y the growth i n bank l o a n s , which has been a t a more r a p i d r a t e than a t any time i n American banking h i s t o r y , amounting i n the aggregate t o 10 b i l l i o n d o l l a r s since the end o f 19U5* Other f a c t o r s i n the deposit increase have been an a d d i t i o n o f n e a r l y 2 b i l l i o n d o l l a r s t o bank holdings o f s e c u r i t i e s o t h e r than those of the Federal Government and gold a c q u i s i t i o n s amounting t o about 3 b i l l i o n s . T&ese increased loans have been made to businesses, t o holders of r e a l e s t a t e , and t o consumers. Only loans on s e c u r i t i e s have d e c l i n e d * This decrease is due t o l i q u i d a t i o n of loans made t o purchase Government s e c u r i t i e s i n war l o a n d r i v e s , b u t loans on other s e c u r i t i e s have a l s o f a i l e d t o advance. This i s an e x c e p t i o n a l s i t u a t i o n f o r a p e r i o d o f i n f l a t i o n a r y development and i s i n l a r g e p a r t due t o the Board*s r e g u l a t i o n o f margin requirements # I t i s t r u e , as the Council p o i n t s o u t , t h a t banks have reduced t h e i r holdings o f Government o b l i g a t i o n s as loans have increased. This d e c l i n e , however, f o l l o w e d a temporary peak reached d u r i n g the V i c t o r y Loan Drive and r e s u l t e d almost w h o l l y from Treasury use o f i t s excessive balances - 3 - a t banks t e m p o r a r i l y b u i l t up t o a h i g h l e v e l during the d r i v e . I t has not had any e f f e c t i n reducing p r i v a t e d e p o s i t s . I n f l a t i o n a r y impact o f bank loan expansion The Board agrees w i t h the Federal Advisory Council t h a t the basic causes o f i n f l a t i o n l i e p r i m a r i l y o u t s i d e of the area o f c u r r e n t monetary and banking developments. However, the Board b e l i e v e s t h a t a l l p o s s i b l e measures and p o l i c i e s should be adopted by Government, business, farmers, and workers t o produce more, consume l e s s , and save more, and to avoid c o s t - and p r i c e - r a i s i n g a c t i o n s . Furthermore, the Board considers t h a t the most e f f e c t i v e means o f d i m i n i s h i n g the basic causes o f i n f l a t i o n i s maintenance o f the l a r g e s t p o s s i b l e surplus i n the Government's budget. This important means of d e a l i n g w i t h the problem i s e n t i r e l y ignored by the C o u n c i l f The Board a l s o recognizes t h a t i n d i v i d u a l banks i n making loans are no doubt being guided by the aim o f meeting the necessary and construct i v e needs o f borrowers, and t h a t many banks are aware of the dangers in the present s i t u a t i o n and are e x e r c i s i n g some r e s t r a i n t on borrowers. Ex- pansion i n l e n d i n g has t o a l a r g e e x t e n t been necessary t o supply working c a p i t a l needed by business t o m a i n t a i n o r increase p r o d u c t i o n a t prices. rising As accumulated cash balances are drawn down funds must be borrowed. Consumers a l s o borrow t o supplement incomes and purchasers of homes borrow more than s e l l e r s repay because o f advancing r e a l e s t a t e p r i c e s . I n the Board's o p i n i o n i t i s not c o r r e c t t o contend t h a t because i n f l a t i o n c a l l s f o r t h an increased demand f o r bank l o a n s , these loans do not c o n t r i b u t e t o i n f l a t i o n * The economy now i s caught i n a p a r t l y self-* generating $ p i r a l o f r i s i n g wages, c o s t s , p r i c e s , and p r o f i t s supported by - u - a c t i v e use of p r e v i o u s l y accumulated l i q u i d assets and by expanding bank loans. C r e d i t i s c o n t r i b u t i n g t o the c o n t i n u a t i o n o f i n f l a t i o n a r y pressures. As was w e l l s t a t e d , i n a recent Monthly L e t t e r of the N a t i o n a l C i t y Bank o f New York: " R a p i d l y accumulating debt i s b o t h a cause and a consequence o f the i n f l a t i o n a r y pressures, f o r i n a wage-price s p i r a l , business c o n s t a n t l y needs more and more money t o keep going and t h i s leads t o the incurrence o f more and more debt by business and more and more spending by the i n d i v i d u a l 9 To check t h i s k i n d o f s p i r a l l i n g - ^ - v / h i c h i s t o the u l t i m a t e b e n e f i t o f no one and t o the i n j u r y o f a l l - r - i s n o t simple Although each l o a n , taken s e p a r a t e l y , may a i d i n the p r o d u c t i o n and movement of goods, y e t i n view of the l i m i t e d s u p p l i e s of goods a v a i l a b l e , a l o a n t o on© business or i n d i v i d u a l t o f i n a n c e the purchase or holding of goods permits the borrower t o b i d a g a i n s t someone else who has or i s able t o o b t a i n f u n d s . C r e d i t expansion thus i s c a l l e d f o r by p r i c e increases and provides the basis f p r f u r t h e r i n c r e a s e s . This process, unless checked by p o s i t i v e l i m i t a t i o n s on the a v a i l a b l e supply of c r e d i t , could e a s i l y lead to c a t a s t r o p h i c collapse. Bankers, businessmen, farmers, wage e a r n e r s , who i n t h e i r u n w i t t i n g l y c o n t r i b u t e t o the r i s i n g s p i r a l o f i n f l a t i o n , cannot be h e l d r e s p o n s i b l e f o r i t s course. operations individually That course i s the r e s u l t o f r e l i a n c e on the f r e e - e n t e r p r i s e , c o m p e t i t i v e p r i c e system i n a s i t u a t i o n where demand, supply, and p r i c e are not i n e q u i l i b r i u m and where a r i s e i n p r i c e s can be prevented o n l y through the maintenance o f a harness of c o n t r o l s by Government• For these c o n d i t i o n s , the bankers are not responsible e i t h e r i n d i v i d u a l l y or as a group. Their job i s t o meet the c r e d i t needs o f • - 5 - t h e i r communities c o n s t r u c t i v e l y , c o m p e t i t i v e l y , and p r o f i t a b l y ; they are not i n d i v i d u a l l y i n a p o s i t i o n t o refuse the l e g i t i m a t e , sound c r e d i t demands o f t h e i r customers. They f i n d themselves i n a s i t u a t i o n i n whiph they can r e a d i l y meet u n l i m i t e d c r e d i t demands from the p u b l i c and i n which the p u b l i c ' s c r e d i t demands are v i g o r o u s l y s u s t a i n e d . That s i t u a t i o n was created by w a r , by the n e c e s s i t i e s o f war f i n a n c e , and by premature abandonment of c o n t r o l s , thereby r e l e a s i n g i n f l a t i o n a r y pressures. Respon- s i b i l i t y o f the i n d i v i d u a l banker f o r developments can go no f u r t h e r than observance of prudent p o l i c y i n the extension o f c r e d i t and the maintenance of proper soundness of loans and l i q u i d i t y and s a f e t y o f i n d i v i d u a l banks. R e s p o n s i b i l i t y o f Government f o r c r e d i t expansion The Federal Advisory Council s t a t e s t h a t Government agencies have been making loans t h a t banks r e f r a i n e d from making. Except i n the f i e l d of f o r e i g n l e n d i n g , the volume of loans by Government c r e d i t agencies i s v e r y small r e l a t i v e t o the volume of bank loans and the t o t a l has not increased. I t i s t r u e t h a t some of the a c t i v i t i e s o f Government agencies, f u r t h e r i n g o b j e c t i v e s set f o r t h by Congress, have encouraged unhealthy c r e d i t expansion i n the f i e l d o f housing, p r i m a r i l y t o a i d v e t e r a n s . Foreign lending by the Government has expanded because of the urgency of r e s t o r i n g p r o d u c t i o n abroad and the d i f f i c u l t i e s and i n a d v i s a b i l i t y o f o b t a i n i n g p r i v a t e c r e d i t s f o r these e s s e n t i a l purposes. The Council r e f e r s to the Board*s request f o r a u t h o r i t y t o guarantee loans i n cases where c r e d i t i s needed but cannot be obtained from banks. The Board wishes i t c l e a r l y understood t h a t i t i s requesting - 6 - merely an amendment of an e x i s t i n g p r o v i s i o n . o f law, f o r the purpose of r e s c i n d i n g a power which the Reserve Banks a l r e a d y have t o make loans and r e v i s i n g somewhat t h e i r power.to guarantee l o a n s . Ifader e x i s t i n g c o n d i t i o n s these powers are not l i k e l y t o he used but some such power w i l l be needed a t times i n the f u t u r e t o provide f o r small business a source of capital, which l a r g e c o r p o r a t i o n s can o b t a i n through sales of s e c u r i t i e s i n the market. Amendment of e x i s t i n g law has been recommended t o enable the System t o r e t u r n c e r t a i n funds to the Treasury and t h i s provides an approp r i a t e o p p o r t u n i t y t o make other long •••needed r e v i s i o n s . With reference t o t h i s b i l l the Federal A d v i s o r y Council expressed i t s views on November 18, 19^7 # as f o l l o w s t "The Council i s cognizant o f the i n v e s t i g a t i o n o f the a c t i v i t i e s and powers o f the Reconstruction Finance Corporat i o n now being made by a Congressional Committee. Until Congress has determined whether the Reconstruction Finance Corporation should be continued, and, i f c o n t i n u e d , what powers t o make or guarantee loans should be g i v e n i t , the Council f e e l s t h a t no a c t i o n by Copfress should be t a k e n on Senate B i l l 1±08. The Council f e e l s chat Senate B i l l Uo8 should be considered o n l y as an a l t e r n a t i v e t o l e g i s l a t i o n c o n t i n u i n g the present l o a n and guarantee powers o f the Reconstruction Finance C o r p o r a t i o n . I f the Congress should decide to continue the Reconstruction Finance C o r p o r a t i o n w i t h o u t g r e a t l y c u r t a i l i n g i t s l o a n and guaranteeing powers, the Council would be opposed t o the passage o f Senate B i l l i+08. The m a j o r i t y o f the Council would p r e f e r Senate B i l l I4.O8 t o the c o n t i n u a t i o n o f the Reconstruction Finance C o r p o r a t i o n powers, b u t i t should a l s o be noted t h a t a m i n o r i t y of the Council i s against g i v i n g any guarantee or commitment powers t o the Federal Reserve Banks under any circumstances, as proposed in Senate B i l l U08»w • 6a Means of r e s t r i c t i n g inflation The Board cannot agree w i t h the C o u n c i l s view t h a t the Reserve System and the Treasury have ample powers to place a l l r e s t r a i n t s on c r e d i t expansion t h a t the System may consider necessary. As the Board has p o i n t e d out i n i t s Annual Reports f o r 19U5 a ^ d 19i±6 and i n o t h e r statements, banks are i n a p o s i t i o n t o provide any a d d i t i o n a l c r e d i t demanded by borrowers and the System cannot prevent such expansion. This i s the case because commercial banks of the country now h o l d 70 b i l l i o n d o l l a r s of United States Government s e c u r i t i e s , any p a r t o f \vhich they can r e a d i l y s e l l in order t o o b t a i n funds t o make l o a n s . When banks s e l l Government s e c u r i t i e s , the Federal Reserve, which provides the u l t i m a t e market f o r Government s e c u r i t i e s , must purchase them i n the absence o f o t h e r buyers i n order to prevent a breakdown o f the s e c u r i t i e s market. Federal Reserve purchases create bank reserves which can be expanded by the banking system i n t p more than s i x times as much i n loans and investments. - 7 - The Council suggests t h a t the System can r e s t r a i n i n f l a t i o n a r y c r e d i t expansion through use of e x i s t i n g powers, i n c l u d i n g a u t h o r i t y t o increase the d i s c o u n t r a t e , t o s e l l s e c u r i t i e s i n the open market, and t o r a i s e reserve requirements a t c e n t r a l reserve c i t y banks. None of these powers can be used e f f e c t i v e l y i f banks continue t o s e l l Government s e c u r i t i e s t o the Reserve System and thus create a d d i t i o n a l bank r e s e r v e s . I n f a c t attempt t o use these powers would increase sales o f Government s e c u r i t i e s i n the market by banks and o t h e r s . I f the System refused to purchase any more s e c u r i t i e s , bond p r i c e s would d e c l i n e s h a r p l y , The t h r e a t of such a p o l i c y would induce a wave of s e l l i n g of marketable bonds, and i f p r i c e s on these bonds d e c l i n e d there might be widespread redemptions o f savings bonds, which are redeemable on demand. The Reserve System would have to purchase s e c u r i t i e s i n order to meet the drains on the Treasury, and new reserves would thereby be c r e a t e d . Recent measures by the System and the Treasury t o r a i s e interest rates on s h o r t s t e r m Government s e c u r i t i e s have diminished somewhat the inducement t o banks t o s e l l s h o r t - t e r m s e c u r i t i e s and t o purchase l o n g e r term h i g h e r ^ r a t e .issues. have b u t l i t t l e , t o make l o a n s . Higher r a t e s on s h o r t - t e r m s e c u r i t i e s , however, i f any, i n f l u e n c e i n discouraging banks from s e l l i n g them Moreover, a recent increase i n c a p i t a l demands has put some pressures on the l o n g - t e r m s e c u r i t i e s market, and has r e s u l t e d i n a d e c l i n e i n bond p r i c e s . This places a l i m i t on the e x t e n t t o which shorts term rates may be p e r m i t t e d t o r i s e w i t h o u t causing an undue drop i n Government bond p r i c e s . - - 8 - The Board has proposed a means of curbing the a b i l i t y o f banks to create a d d i t i o n a l reserves by s e l l i n g Government s e c u r i t i e s t o the System and o f reducing the amount of c r e d i t expansion t h a t may be p o s s i b l e on the basis of reserves thus created or a r i s i n g from a continued g o l d inflow. This proposal c a l l s f o r g r a n t i n g t o the System a temporary a u t h o r i t y t o r e q u i r e a l l banks t o h o l d a s p e c i a l reserve i n Treasury b i l l s , certificates and notes or i n c e r t a i n cash a s s e t s , i n a d d i t i o n t o ; p r e s e n t basic r e q u i r e d reserves• This measure would enable the System t o impose some r e s t r i c t i o n on undue c r e d i t expansion w i t h o u t d e p r i v i n g banks o f earning a s s e t s . It would permit a r i s e i n l e n d i n g rates t o new p r i v a t e borrowers w i t h o u t r a i s i n g the i n t e r e s t cost on the outstanding debt of the Government, which i s not now i n c r e a s i n g , I t would not prevent banks from meeting e s s e n t i a l c r e d i t needs o f the economy b u t would discourage u n r e s t r a i n e d expansion of c r e d i t f o r any purpose. Use of an instrument such as the one proposed would enable the System t o curb c r e d i t expansion w i t h much less burden on banks and less t h r e a t to Government c r e d i t than would r e s u l t from attempt to use e f f e c t i v e l y any o f the e x i s t i n g powers mentioned by the Federal Advisory Council. STATEMENT OF FEDERAL ADVISORY COUNCIL ADDRESSED TO THE BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM NOVEMBER 18, 19U7 I n q u i r y o f Board The Board i s v e r y much concerned about the r a p i d expansion o f bank c r e d i t * The Board, t h e r e f o r e , d e s i r e s t o have t h e views o f the C o u n c i l as t o t h e f u r t h e r steps t h a t might be taken t o c o r r e c t t h i s serious s i t u a t i o n through monetary o r f i s c a l means* Answer o f C o u n c i l "» i • " • f' •. The Council has reviewed t h e q u e s t i o n o f the volume o f bank c r e d i t b o t h i n t h e aggregate and as shown i n the banks w i t h which t h e y are f a m i l i a r , 'de do not know what " s e r i o u s s i t u a t i o n " i n bank c r e d i t the Board has i n mind* For t h e past year the t o t a l volume o f bank c r e d i t ( i . e . the a v a i l a b l e arount o f bank money) as measured by a d j u s t e d demand d e p o s i t s has shown o n l y a moderate i n c r e a s e . As bank loans have i n c r e a s e d , the banks have decreased t h e i r investments• rfe f i n d n o t h i n g i n bank loans themselves t o suggest t h a t growth o f loans has been an a c t i v e i n f l a t i o n a r y f a c t o r . I t r a t h e r appears t o have been a r e f l e c t i o n o f the v e r y h i g h l e v e l o f business a c t i v i t y and hifrh prices. To a l a r g e e x t e n t growth o f loans i s a d i r e c t r e s u l t o f government p o l i c i e s • For example, an increase o f n e a r l y U b i l l i o n d o l l a r s i n t h e r e a l e s t a t e loans b y i n s u r e d banks since t h e end o f t h e war r e f l e c t s d i r e c t l y the purchase o f FHA and GI mortgages i n t h e housing program. The R e c o n s t r u c t i o n Finance C o r p o r a t i o n i s encouraping bank l e n d i n g by guaranteeing r i s k y l o a n s . Commercial loans are i n f l u e n c e d by h i ? h p r i c e s and a c t i v e movement o f a g r i c u l t u r a l and manufactured products f o r the f o r e i g n a i d program, High wages and h i g h costs o f m a t e r i a l s have meant t h a t business needed more money t o take care o f i t s customers. There i s n o t h i n g i n t h e f i g u r e s o r our experience t o suggest t h a t t h e r e e x i s t s any s u b s t a n t i a l l e n d i n g f o r s p e c u l a t i o n o r f o r unnecessary uses. Loans f o r c a r r y i n g s e c u r i t i e s are much reduced f - 2 I n t h i s p e r i o d the government, through v a r i o u s agencies, has been making loans t h a t t h e banks r e f r a i n e d from making because o f t h e i r s p e c u l a t i v e nature« The Reserve System i t s e l f i s asking f o r more power t o guarantee l o a n s on t h e presumption t h a t bank l e n d i n g i s t o o c a u t i o u s . The causes o f our present i n f l a t i o n are n o t i n c u r r e n t banking p o l i c i e s b u t are found i n the great war-time expansion o f buying power t o g e t h e r w i t h unusual events and p u b l i c p o l i c i e s since t h a t t i m e * Among r e c e n t i n f l a t i o n a r y causes may be l i s t e d the f o l l o w i n g : The f o r e i g n a i d program A c y c l e of wage increases i n excess o f increases i n e i t h e r the cost o f l i v i n g or p r o d u c t i v i t y A s h o r t e r working week A s h o r t corn crop Veterans bonuses and r e l i e f payments A g r i c u l t u r a l p r i c e subsidies U. S. Government spending o f 36 b i l l i o n d o l l a r s a year Housing s u b s i d i e s I n the face o f these developments a s u b s t a n t i a l increase i n bank loans was i n e v i t a b l e and the banks have shown r e s t r a i n t . The dangers i n the present s i t u a t i o n are understood by bankers and t h e r e i s h a r d l y a bank i n the c o u n t r y which has n o t been warning i t s customers against o v e r expansion. The loans being made are m o s t l y f o r d i r e c t p r o d u c t i o n . The f i r s t t h i n g t o do i s t o reconsider government p o l i c i e s wjiich are i n f l a t i o n a r y and e s p e c i a l l y excessive government spending and subsidies. •ie recognize t h a t even though t h e causes o f i n f l a t i o n are l a r g e l y o u t s i d e the sphere o f monetary p b l i c y , the Reserve System has a s p e c i a l r e s p o n s i b i l i t y f o r bank c r e d i t and i n t h i s s i t u a t i o n should take a l l reasonable care t o assure conservative c r e d i t p o l i c i e s . I n t h i s s p e c i a l area we surgest t h a t the System and t h e Treasury a l r e a d y have l a r g e powers, w i t h o u t new l e p i s l a t i o n , t o place c r e d i t under broad r e s t r a i n t s . One o f these powers i s t h e d i s c o u n t r a t e wh^ch i s a recognized instrument f o r s e r v i n g n o t i p e on t h e p u b l i c o f t h e need f o r r e s t r a i n t i n the use o f c r e d i t * - 3 S i m i l a r l y by open market o p e r a t i o n s the System can c o n t r o l the reserves o f the member banks and l i m i t t h e i r l e n d i n g power. The Board also s t i l l has t h e power t o r a i s e reserve require-*ments i n C e n t r a l Reserve C i t i e s and so t i g h t e n money. The Treasury by the p r i c i n g o f new issues and the h a n d l i n g o f i t s balances has g r e a t i n f l u e n c e on the r a t e and volume o f money. I n t h e past year t h e System and the Treasury have used these powers e f f e c t i v e l y . The money markets and t h e p o l i c i e s o f business men are today so s e n s i t i v e t o a c t i o n o f these s o r t s which t h e Reserve System and the Treasury take t h a t present powers are ample t o p l a c e a l l r e s t r a i n t s on c r e d i t expansion which t h e System and t h e Treasury may consider necessary. The Council wishes i t c l e a r l y understood t h a t i t shares t h e apprehension o f the Board o f Governors w i t h r e s p e c t t o i n f l a t i o n dangers. I t does, however, most s t r e n u o u s l y o b j e c t t o t h e s i n r l i n g out o f t h e increase i n bank loans as a p r i n c i p a l c o n t r i b u t i n r f a c t o r ; and i t has attempted t o p o i n t out above, the v a s t l y more important elements o f i n f l a t i o n ^ o f which bank loans are a barometer. This i s n o t t o say t h a t t h e r e have n o t been unwise bank loans i n some cases. A f t e r a l l ^ banking i s a form o f human endeavor, operated by human b e i n g s . I t would be amazing i f t h e r e were n o t some e r r o r s i n judgment• But we submit t h a t , on the r e c o r d , t h e r e i s no evidence o f bank c r e d i t expansion beyond t h a t w h i c h c o u l d be expected under a l l the circumstances. There i s every evidence t h a t loans are today doing a wholesome and c o n s t r u c t i v e work i n t h e i r intended p l a c e i n t h e economy. The C o u n c i l has s t u d i e d the increase i n consumer c r e d i t i n r e l a t i o n t o t h e t e r m i n a t i o n o f R e g u l a t i o n vr# / h i l e consumer c r e d i t has increased s u b s t a n t i a l l y , much o f t h i s r e f l e c t s t h e a v a i l a b i l i t y o f a u t o mobiles and household appliances• There i s so f a r too l i t t l e experience on which t o judge t h e e f f e c t o f the t e r m i n a t i o n of R e g u l a t i o n W. The American Bankers A s s o c i a t i o n i s u n d e r t a k i n g w i t h considerable success t o ensure maintenance by banks o f sound l e n d i n g standards• This e f f o r t towards v o l u n t a r y cooperation seems t o t h e C o u n c i l the s e n s i b l e and t h e democratic method o f d e a l i n g w i t h t h i s problem, b o t h w i t h r e s p e c t t o the banks and o t h e r l e n d e r s , The C o u n c i l i s opposed t o l e g i s l a t i o n g i v i n g the Board new r e g u l a t o r y powers i n t h i s m a t t e r * - U Suggestions i n the P r e s i d e n t ' s message t o Congress w i t h r e s p e c t t o c r e d i t c o n t r o l i n d i c a t e the p o s s i b i l i t y t h a t t h e F e d e r a l Reserve Board may present t o Congress t h e proposal i n i t s 19h$ Annual Report f o r a r e q u i r e d bank reserve o f s h o r t term government s e c u r i t i e s • The C o u n c i l t h e r e f o r e wishes t o s t a t e i t s views on t h i s p r o p o s a l . The p r o p o s a l as we understand i t i s t h a t banks should be r e q u i r e d by l a w t o m a i n t a i n , i n a d d i t i o n t o cash r e s e r v e s , reserves o f s h o r t term government s e c u r i t i e s i n a percentage r e l a t i o n s h i p t o d e p o s i t s , t o be f i x e d from time t o time by the F e d e r a l Reserve Board. The C o u n c i l i s unanimously opposed t o t h i s scheme f o r the f o l l o w i n g reasons; l m I t i s i m p r a c t i c a l * The o p e r a t i o n s o f banks are so d i f f e r e n t , r e f l e c t i n g as t h e y do a d a p t a t i o n t o the v a r y i n g needs o f t h e i r communities and customers, t h a t no percentage o f s h o r t term government s e c u r i t y h o l d i n g s can be a p p l i e d f a i r l y or p r a c t i c a l l y t o a l l banks• Any percentage h i g h enough t o o f f e r any measure o f r e s t r a i n t on a s u b s t a n t i a l number of banks w i l l have d i s a s t r o u s e f f e c t s on many o t h e r banks, compelling them t o l i q u i d a t e sound and necessary loans and thus a c t u a l l y check p r o d u c t i o n . The v e r y banks which have served the business i n t h e i r communities most a g g r e s s i v e l y and h e l p f u l l y would be hardest h i t . Such a p l a n would s u b s t i t u t e t h e e d i c t s o f a board i n Washington f o r the judgments o f the boards o f d i r e c t o r s of 15,000 banks throughout t h e c o u n t r y as t o t h e employment o f a s u b s t a n t i a l p a r t o f the funds o f t h e i r banks• This i s a step towards s o c i a l i z a t i o n o f banking* 3* As i n d i c a t e d e a r l i e r , the Federal Reserve System and t h e Treasury a l r e a d y possess l a r g e powers o f c r e d i t c o n t r o l n o t now b e i n g f u l l y used* Such new powers as those proposed are not necessary*
@FedFRASER