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ESTABLISHED "Emm ISQ7 VMmmNianuK^MMAs^wL 3694 PALE MNNRNM c. L. H U F S M I T H , PRESIDENT 9 TMXAM December 4 , 1947 Mr* M a r r l n e r 3* E c c l e s Chairman F e d e r a l Reserve Board Washington, D. C* Dear Mr. E c c l e s : I have j u s t f i n i s h e d r e a d i n g y o u r statement t o t h e j o i n t Comalttee o f Congress, and I must say t h a t I admire y o u r wisdom and oourage ~ t h e o n l y t r o u b l e I s t h a t you d l d n f t go f a r enoughs When e v e r y banker I s r a i d i n g h i s c o m p e t i t o r f o r more demand d e p o s i t s — c u t t i n g I n t e r e s t r a t e s t o g e t more l o a n s with t h e r e s u l t t h a t John Doe can borrow a t l o w e r r a t e s t h a n U n c l e Sam — I n c r e a s i n g t h e r a t e o f I n t e r e s t b e i n g p a i d on demand d e p o s i t s b y " g i v i n g " a l a r g e r amount o f s e r v i c e t h a t c o s t s more t o produce — I n c r e a s i n g t e t * l loans d u r i n g a m a j o r I n f l a t i o n p e r i o d f a r beyond t h e p o i n t w a r r a n t e d b y p r e s e n t c a p i t a l accounts — t h e s e , and many o t h e r r e a s o n s , demand t h a t l e g i s l a t i o n and t h e r e g u l a t o r y agencies t a k e t h e r e q u i r e d a c t i o n t h a t bankers themselves w i l l f a l l t o t a k e * I t stems t h a t we bankers have f o r g o t t e n 1929 - 1933 • W© c e r t a i n l y act l i k e I t * I n o t e t h a t t h e F e d e r a l Reserve A d v i s o r y Committee recommends t h a t t h e s o l u t i o n of c u r r e n t problems be l e f t t o t h e jud&aent o f t h e o f f i c e r s and d i r e c t o r s o f t h e 15,000fbanks» I n w e i g h i n g t h i s s t a t e m e n t , I suggest t h a t t h e Co§malttee c o n s i d e r s t h e f a c t t h a t d u r i n g our l a s t I n f l a t i o n a r y p e r i o d - 1928-29 - t h e r e were 3 1 , 0 0 0 banks h a v i n g a t o t a l c a p i t a l account o f 9,062 m i l l i o n d o l l a r s , and a t t h a t t i m e t h e bankers f a i l e d t o d i s p l a y t h e t y p e o f judgment r e q u i r e d t o a v o i d t h e t o t a l d e s t r u c t i o n o f 16,000 o f s a i d banks* Now, we have I S , 0 0 0 banks w i t h t o t a l c a p i t a l o f 9,288 m i l l i o n d o l l a r s and t o t a l d e p o s i t s o f 147,364 m i l l i o n * and we f i n d o u r s e l v e s I n a n o t h e r p e r i o d o f I n f l a t i o n w i t h I n d i c a t i o n s t h a t I t w i l l become more v i o l e n t t h a n t h e one o f 1928-29* I n t h i s p e r i o d o f I n f l a t i o n , we f i n d t h a t bank Mr* M a r r i n e r S* Socles December 4 , 1947 c a p i t a l has i n c r e a s e d o n l y 206 m i l l i o n d o l l a r s w h i l e d e p o s i t s have I n c r e a s e d 85,884 m i l l i o n * When we c o n s i d e r t h e s e f u n d a m e n t a l f a c t s and what happened i n 1929, i t seems t h a t t h e Adv i s o r y Committee has d i s p l a y e d v e r y p o o r wisdom i n s u g g e s t i n g t h a t t h e s o l u t i o n o f t h e c u r r e n t p r o b l e m be l e f t t o t h e bankers themselves* The h i s t o r y o f b a n k i n g d i s c l o s e s t h a t we bankers always f a l l t o do t h e t h i n g s we s h o u l d ; l e g i s l a t i o n o r r e g u l a t i o n s must always s t e p i n t o do t h e j o b * I t h i n k I t w o u l d be good f o r t h e c o u n t r y , and a l s o good f o r t h e bankers themselves, i f Congress w o u l d r e q u i r e t h a t 60% o f a l l demand d e p o s i t s be p l a c e d i n and k e p t i n U* 3* B i l l s , o r some o t h e r s h o r t - t i m e , l o w - r a t e g o v e r n ment bond* T h i s w o u l d reduce t h e c o s t o f s e r v i c i n g t h e n a t i o n a l d e b t * A l s o , i t w o u l d be w e l l f o r everyone concerned i f cash r e s e r v e r e q u i r e m e n t s were i n c r e a s e d * We now have an o p p o r t u n i t y t o i n s t i t u t e c e r t a i n s e n d - d r a s t i c measures w h i c h m i g h t a v o i d t h e n e c e s s i t y o f h a v i n g t o employ v i o l e n t l y d r a s t i c measures l a t e r on* I n d e t e r m i n i n g t h e p o l i c y t o be pursued under p r e s e n t c o n d i t i o n s , we must t a k e i n t o c o n s i d e r a t i o n t h e f a c t t h a t we bankers have always f o u g h t v i g o r o u s l y e v e r y p i e c e o f l e g i s l a t i o n , o r every r e g u l a t i o n , w h i c h wfcald c o n t r i b u t e towards c o n t i n u o u s l y sound b a n k i n g * It seems t o me t h a t t h e t i m e has come when a d d i t i o n a l , r e q u i r e d l e g i s l a t i o n be crammed down our t h r o a t s * I am c o n v i n c e d t h a t a f u n d a m e n t a l s t u d y w i l l d i s e l o s e t h e reason why we bankers r e s i s t e v e r y f o r m o f c o r r e c t i v e l e g i s l a t i o n — we a r e a f r a i d t h a t I t w i l l a f f e c t our n e t p r o f i t p o s i t i o n * I fehirifc th&fcic we bankers w o u l d I n s i s t upon d o i n g t h i n g s t h a t w o u l d c o n t r i b u t e t o t h e w e l f a r e o f our n a t i o n I f we were n o t a c t i v a t e d b y t h e f e a r t h a t our p r o f i t s m i g h t be m a t e r i a l l y reduced, p a r t i c u l a r l y a t a t i m e when t h e y shcwld be i n c r e a s e d * F o l l o w i n g t h i s l i n e of thought, the next step i s t o examine t h e p r o f i t f o r m u l a t h e b a n k e r now a p p l i e s t o h i s p r a c t i c e o f demand d e p o s i t b a n k i n g — can i t be improved o r s t r e n g t h e n e d so t h a t h i s p r o f i t p o s i t i o n w o u l d n o t s u f f e r f r o m t h e c o r r e c t i v e measures you a d v i s e * When we r e a c h t h i s s t e p , we f i n d l i t t l e , i f a n y , c u r r e n t knowledge upon t h e s u b j e c t , because t h e demand d e p o s i t banker cannot s t a t e i n s i m p l e language t h e p r o f i t p o l i c y he now a p p l i e s t o h i s p r a c t i c e o f demand d e p o s i t b a n k i n g * Mr. M a r r i n e r S . E c c l e s December 4 , 1947 I f you w i l l t a k e t h e t i m e t o s t u d y t h e f a c t s and l o g i c p r e s e n t e d i n t h e e n c l o s u r e s , I am c e r t a i n t h a t i t w i l l g i v e you a much c l e a r e r p i c t u r e and u n d e r s t a n d i n g o f t h e cock-eyed p r o f i t p o l i c y we bankers now a p p l y t o t h e demand d e p o s i t o p e r a t i o n , and I b e l i e v e t h a t you w i l l g a i n an i d e a o f how c u r r e n t p o l i c i e s can be improved and made more e f f e c t i v e . Bankers themselves may be r a t h e r slow i n c o r r e c t i n g t h e i r p r o f i t p o l i c y a f t e r t h e y a c t u a l l y see t h e need f q r c o r r e c t i o n * Your Board i s i n a p o s i t i o n t o a c c e l e r a t e t h i s c o r r e c t i o n b y r e - e s t a b l i s h i n g R e g u l a t i o n ^Q* i n i t s o r i g i n a l f o r m — a form which complied w i t h b o t h the l e t t e r and t h e s p i r i t o f S e c t i o n 19 o f t h e F e d e r a l Reserve A c t * I f you H i l l p r o h i b i t t h e banks f r o m p a y i n g i n t e t f e a t b y t h e method you now a p p r o v e , t h a t i s , making payment i n t h e f o r m o f bank s e r v i c e s , t h e c o s t of w h i c h i s i n c r e a s i n g day b y d a y , t h e p r o f i t p o s i t i o n o f t h e bankers w i l l be improved wonderfully. An a n a l y s i s o f t h e c o n s o l i d a t e d statement o f a l l banks as o f December 3 1 , 1946, shows t h a t , out o f a t o t a l o f 104,268 m i l l i o n d o l l a r s o f demand d e p o s i t s , 73,577 o f them were a c t u a l l y employed. The average i n t e r e s t , o r e a r n i n g s c r e d i t , r a t e was a p p r o x i m a t e l y 2% p e r annum. T h i s means t h a t t h e banks o f f e r e d t o pay 2% o f 73,577 m i l l i o n , o r 1,300 m i l l i o n d o l l a r s , t o t h e demand d e p o s i t o r s p r o v i d e d t h e y H o u l d t a k e i t i n bank s e r v i c e s , t h e o n l y medium o f payment a l l o w e d . I n o t h e r w o r d s , t h e banks o f f e r e d t o pay t h e demand d e p o s i t o r s a sum e q u i v a l e n t t o 14$ o f t h e combined c a p i t a l a c c o u n t s . Of course a l l demand d e p o s i t o r s do n o t t a k e a l l o f t h e i r i n t e r e s t i n s e r v i c e s , t h e r e b y p e r m i t t i n g t h e banks t o r e t a i n t h e u n t a k e n p a r t . T h i s p a r t t h e bank can r e t a i n i s d e c r e a s i n g day b y day and i s one o f t h e p r i m a r y causes o f d e c r e a s i n g bank p r o f i t s under p r e s e n t p r o f i t p o l i c i e s . I know t h a t you and t h e r e s t o f t h e Board have a s i n c e r e i n t e r e s t i n g i v i n g our n a t i o n a t y p e o f b a n k i n g w h i c h i s c o n t i n u o u s l y sound and n o t m a t e r i a l l y d i s t u r b e d b y p e r i o d i c d e p r e s s i o n s . A knowledge o f t h e p r i m a r y and fundamental f a c t o r s i n v o l v e d d i s c l o s e s t h a t t h e a b i l i t y l i e s i n y o u r hands. I hope f o r t h e sake o f b a n k i n g t h a t your Board d e l v e s i n t o the p r o f i t fundamentals I have i n d i c a t e d — t h e rewards would be enormous f o r e v e r y o n e . I do hope t h a t you w i l l a p p r e c i a t e t h e i m p e r s o n a l a t t i t u d e w h i c h I have i n t h i s m a t t e r . Mfy o n l y d e s i r e i s t h a t we have b e t t e r b a n k i n g i n a b e t t e r c o u n t r y . CLH:LTS http://fraser.stlouisfed.org/ E n c l s . Federal Reserve Bank of St. Louis December 1 2 , 1947. M r ; C. L . Huf s m i t h , P r e s i d e n t , The F i r s t N a t i o n a l Bank, P a l e s t i n e , Texas. Dear M r . H u f s m i t h : I r e g r e t t h a t because o f t h e p r e s s u r e occasioned b y t h e n e c e s s i t y o f almost constant a t t e n d a n c e upon C o n g r e s s i o n a l h e a r i n g s , ; I have b e m unable t o acknowledge- a t an - e a r l i e r date t h e r e c e i p t o f your v a r y i n t e r e s t i n g l e t t e r o f December 4* 1947* and e s p e c i a l l y your comnient upon my statement Before t h e J o i n t Committee on t h e Economic R e p o r t . As a banker o f l o n g e x p e r ience before I entered t h e service of Government, I ha^e a veJ*y l i v e l y a p p r e c i a t i o n o f t h e p o i n t c o f vietir df^bankers t o which you r e f e r i n y o u r l e t t e r and, as you say, t h e Board i s * s i n c e r e l y i n t e r e s t e d i n promoting a sound banking system. I n o t e d w i t h i n t e r e s t your comment upon t h e c u r r e n t p o s i t i o n o f t h # F e d e r a l a d v i s o r y C o t a i c i l and i t has o c c u r r e d t o me t h a t you. wdiHd be e s p e c i a l l y i n t e r e s t e d i n r e a d i n g a statement which I made b e f o r e t h e J o i n t Committee oil t h e E c onoifiic Report oia Wednesday, December 10, 1947* on page 2 o f which I q u o t e d ' t h e p o s i t i o n t a k e n by t h e F e d e r a l A d v i s o r y C o u n c i l j o i n t l y w i t h t h e P r e s i d e n t s o f t h e F e d e r a l Reserve Banks and t h e Reserve Board i n December 1940 i n f a v o r o f a, p r o p o s a l f o r i n c r e a s i n g r e s e r v e nquirements which would have been much more r e s t r i c t i v e t h a n t h e one now under c o n s i d e r a t i o n . Very s i n c e r e l y y o u r s , M. S. E c c l e s , Chairman. Enclosure CM; am
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