Full text of Marriner S. Eccles Papers : Statement of Hon. Marriner S. Eccles, Governor, Federal Reserve Board, Resumed, Box 15, Folder 4, Item 2

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HOUBSJ Of
Committee on Banking and Jurrency,
Jfetrch 5 , 1935.

Draper




The Coomlttee mat a t 10*30 o ' c l o c k a . su* Ron* Henry B .
5 t e a g a l l » Jhainaan. p r e s i d i n g *
The Jhainaarit

Gentlemen, we w i l l come t o order*

Governor

^ c c l e s . the Oorraaittes w i l l be g l s d to have you resume your d i s c u s s i o n of T i t l e II o f the "bill*
, without

interruption.

G0!ESRSCB9 S&DSa&
r. . c o l e s $

You may proceed a s f a r as

BOARD»

1 taade a general statement y e s t e r d a y , and

I t occurred t o me that I t slight be h e l p f u l t o the meabers of
the corani t t e e If I discussed* more or l e s s i n f o n a a l l y . and po@*
a l b l y in more d e t a i l * some of the f e a t u r e s of the b i l l .
I t Is proposed t o coufblne the o f f i c e of the Chainaan of
the Board of
Batik*

virectors and the Governor of the i%deral itesexve

t the present ticae.eacn of t i ^ twelve He serve

Imre nlr« d i r e c t o r s *

hanks

. ix of those d i r e c t o r s a r e e l e c t e d by

the stockholders of t h e banks* which are Easafcer banks i t h r e e
of them are appointed by the federal

»aserve Board*

The tarsi of o f f i c e of those d i r e c t o r s i s t h i s *
appointed for three^year terms*

They are

Of the s i x d i r e c t o r s appointed

or e l e c t e d ^y the member banks* t h r e e of those d i r e c t o r s are
bankers 9 known a s *&* d i r e c t o r s } t h r e e must be s e l e c t e d from
o e a n t r c e , a g r i c u l t u r e or i n d u s t r y .
appointed by the federal

One of the three d i r e c t o r s

taserve Board t known a s a : i a s s 0

d i r e c t o r * i s s e l e c t e d or appointed as Jhalman o f the Board of

c




Directors of each i%ail®ml £®%®3rm hmmk*
agents*

Tlm& mm &X&Q j$&<laral

Ba&gr &r« f u l l - t i m * , h i g h l y paid offleiaJtof

origin-ally i t was ©otnceiwd tiiat t h ^ - would fee the exocu*
tim

haax* of e&eh Sadeiml B@s5©rim Bank*
the Goroarttora hat® not d^aigoatod i n tm

% d e m l ftoaainre

:hu MH pr©vid©0 t i m t the d i r e c t o r s of t i » bank s h a l l
c; rush offi>'i«irf» mnd ^is^lo^e©^ a s ar^ ««c©si5«r^ t o a

re- if the lmfc«
o f f i c e o.f Crovarri«»r wsa & e r e c t i o n giv^y t© the

bcink*

la j?r?*ctic5^9 Mm p o a i t i w i of the Ctereraer haa

an outs tend ing and l^pcrir^i pdcitSou, ?«i In
stance ha l^t bscone lisa hs-s;d ©a? tha 'bs«aiE#

m*r\y
Hs i s 1101

t»i* af Mai lNMHfe| tal i s €<laeted %jr tfea l-oiir.1? of

a i r e ,

tli* risto faettftiore of 1ho l?osrc^ of Uirectors*
Th» Pectoral is^t?#rve E®f^pc* l M R« l # g » l relaticmahip with
tha Governor of ti>n ban^c, h».s no r e e p a r ^ i b t l i t y in M B
tioci*

Ttet rc?Xatiari£hi|* with ttm *b&t*k. l a through t h e

rjB^i tu'»dt the Pader&i. .'i^ie.t'v^ i|^at«
i t i s 9*4p*a*£i ! • MMNi legieXsitiott, tta a
efficier.oor &ed coordlfiation ar^d ge«<J o r 0 a , a i s s t i e a i t o do
h t h i s $XLU1 rel&tionahip arni ew*>ln^ IJw btt%9* of i>overr*ox*
tlmt 0f Dtoair^jua, imking t.ho c«9¥«rAar and -.Si&inaaa a
Glass 9 d i r e c t o r •

SHI l o c a l hcMri^ at thA 'boi.«rc o f

:» w i l l sel^iot the
g

toveraor

att6. ?;h©

ji that WQI mist btsi ea1>4aat t o tJ»

the .-'sciarsl Hoa^rTa board*
^Tou w i l l I h M M t h a t Mai >ioara» the ^federal a®©arrs Board*
w i l l then n©t h&T© the pc^«r c«f appol&t&atit of tlm ChalraHyit
iiav© giveii to tha l o c a l bo*r& t h i a pov«r uf appointaant of




the chairman» combining i t with that of the Governor, subject
©r*ly to thoir approval*
Efclg n U l aa&a for better coord ination, mstko for econoqy,
will H swy with tha possibility of cleava^, by reason of the
dual mpttlM&tM of the 3bnirmn, appointed by the Board la
, and tHa Ctevwrnor, ml*v$mf\ >.# the local board*
th& directors of th* bftnk« «r» appointed for a
period of tbrne ^ a r n on\^$ in pr^ott^s a «;nat a»n,y of the
>^V^B S«V«5<1

ninety that beginiaintrj of th<t l^deral B®&®r?e

I t i» thought 4dyiaal^l« to limit tlis term of of floo
of a l l of the directors to two consecutive terms9 totalling a
period of six yfiaro*

this is proposal to a^roid the crystallisa-

tion of control or authority in any one ^roup or combination.
It is felt that, in aaoh iAtdoral Bmm*rvm

d s t r i c t , there

are m&m able sen to represent the bank mntoGrn and also coaaerce aud indwstry, as well a« the Board, at Washington, who
appoint tfm ttirmm Class 0 dlraetorsf and that the public imture
of the

eserve system is &uch that i t would be to the interest

of tfee v.yutwm to !mve & limit upon th« terms of the ofritters*
It is recogolzed that there ma? be soae loss of some very
able tmn as the result of this restriction, but i t is believed
that there will be more g*i&*d as a result of this policy than
will be lost*
Xt is interest lug to note toat two, &nd I bella?e three of
the ?«deral

Ksserve Bmfci have adopted as a poliQy9 without

i t being le^al, a requirement to l i a i t the term of their 3las* A
directors, that i s # the bank directors, to three years*
mm tork backt t^«

the

^ l l a s batik and I think the Atlanta bacik ro-

tate tta- offloege of their Jlass A directors*

They find that

1^ the interest of harmony among their asaiber banks| and i t i s

c




f e l t tfctftg i f i t I s in the public Interest to do that in the
ca^@ of those bank®, i t would bo well to do that in the oas© of
a l l banks and to reeogpisse tUfc as a provision of law as to the
limit at ion of nix y e a r s .
ince t h i s proposal was nade, there has been considerable
discus©ion t and X find that, almost universally, i t i s looked
upon with a great &®ml of favor by tins banks throughout the
country.

I find that there 1® considerable f e e l i n g among

w*v& of them that there has been a certain amount of a r y g t a l l i ssatlon of control in small groups*
I rast with a group of b&nk&rs on Friday* and without e x caption* tliey were a l l vsr^ fmrormble to that r e s t r i c t i o n .
Admission of insured rio»»ta©fit>er bankst

X am discussing

t h l s 9 briefljr t in the order in whloh the^ ^ipear in th© b i l l as
and the M U H t M of insured hocdaosiber banks i© in Section 202 f
arid It i s rooogt^lssed that aai^r of the ooa-caasiber batiks could
tKit readily q^alif^r as wmbers of tit© rteserve - ysteci, and that
a ?m& ^reat hardBliip and iiijiaitieo would be Is^ised i^on tfaem,
i f th&& ware requlzed t o bee one oaembara of the

edsral Beserre

System und.ar the present l e g i s l a t i o n , and under the rales and
regulations for astabershlp$ and i t i s , therefore^ proposed that
the federal ^aser?e Board oari waive the capital requiraisents*
And I eugg@st#d ^@sterdajsrf i a oonneotion wit*i this par*
t l c u l a r feature of the b i l l , that the authority for the $aderal
Beserve Board to waiire tlm capital requirements for admission
in Insured banks into the egrstsm, prior t o Jul^ 1, 193? t when
- t » i a baii^ a in order to be insured« are required to be mmfemrm
of tha iaserire ^ysteta, i t is suggested that t h i s might be
broadened, no aa t o euithorise thm Beard t o waive act only the
capital raquimaieats, but a l l requirements, aad t o permit

o




bank® to continue permaently with their present o&pi*
t a l , provided i t is adequate i s relation to t m i r l a b i l i t i e s .
1 think i t i s desirable to Imm unification of the backing syste% and I recognise that possibly the ssost likely wmjr
of prltfM i t i s , tlirou^-i a l l banks "being members of the Federal

In zaariy instaooes, the capital of banks, rioa«*9M0Eter banks,
is lass titan the aszount required of #50*000, sad their "relume
of business is suaii timt they uo not require und mm not possibly
use and support a capital of

50,000 with *& adequate surplus,

which is also desirable*
i t Is ale© reoagiiis&c that cert*in of the rules and
lations for mn&enihl]? would smke i t imtsf difficult

for

to qualify under those rules and regulations! and It i s ,
« t m dotiiro of ths i%4eral rasarre Board to e© aodlfy
the law and i t s rales and regul&tioas as to jaake i t possible,
itadar rec^ortable eircuo6t&nee&# for aori-*meaber banks to get
the bdiiefita of aeniberehip*

1 believe those benefits are rmt&

Iarticula4# would that be true i f the present law tm
in &®m& of tls© pkrticulare as, provided for i s ttie pir&*
bill*

I refer to the diunge in the present e l i g i b i l i t y

a loo fkm reo&^iitlon of tlie desirability &f using
tha Mflte0l B*£ tUne fUr.?ds In longer torus lomiiog, or i s the
reel estate laan f i e l d .

Hasso provis5*ot^ would give to sar^y

of the nan*i»aiber state banloB tim support -that otheiase would
not be umilabla to thmn, i f i t ^ere pm&thl® for the® t o reon In as non^asflfeer bftalMktf
In Action 203# i t i s recognised thAt i t would be desirable
to ©3mn@e tJs® present Ifm&mga with ret^mmm to the
tioas for membership on the Board, mad this i*§ tee to the

c




th&t the functions and duties of ttie .federal Bamrm
ar« such aa to make It a body representing the n&tiont
ratl«er th&n Hi© representatives of Mgr group of eoslsin&fciau of
^roupsf &&d in. recognition of t h a t # i t is provided that

future

appointive members of the Bogard should be sets who are quail*
ft#d by education or e^erienea 4*> porticipata la tJ»
of too seonotsic maeataar^ policios, «tfileli oaims to a» to be
oatitral and mmt important functions of

I t is n*eoi!«i&@4 t t e t aoi^orship on thct K
Board i© on® of 'ths asat iiaporiant, r^apo^rolo and
positions of th© nation*

It is> tlaoEafora* baliof^d

toat

position should a t t r a c t , bjr reason of th® ia^ortanca ar^l re*
^ o n a i b i l i t j of i t f the b«ot qualified mmn in the nation to deal
with theeo nonetaiy and eoonotaie prabie^r*

I t is folt that

on the Bomrd should be iadependant and, therefore* i t
(.

is

that their coospeosatio-'.} should ba auoh fits to enable

thea# without having to hate an independent^ p r l m t e income > to
li^

In

ashingtoti in the oiftnner that their position would r e -

ciuiKj*

i t it? proposed that tho compensation for future ap*

pointi^m members be increased to ^15,000 per yeer f mid after
that, tiiat thej ^

peusioriad, t>'tat tliere be a pension or r e t i r e *

nmnt provision* so il±at meaibera of the Board who hs^re severed "
tiieir cooriGotiotis aid serrod in this position, will not feel a
dency tiiat otherwise they ma,y feel«
"he pezjaior* provision provided for in the b i l l * I do not
fully &B& adequately aoets the situation! i t provides

that B**y or tiit-3 present zmmhmB w&& r e t i r e at the agi of sevent
and that
80*90nty*

future appointive ?uem'bere wist r e t i r e a t the a^e of
It also provided tliatt upon xetixemeut* they will r e *

c




eeiv* a paneion ©f r12#G00 per ,r©ar# wbea they i»ve served the
f u l l period af twelve year** fir sure* ««& a pr0p<$£ti»tmt0 amount
when they hm-m aeroed not X#ss thaw fin© y*nu»s»

It would seem

to n@* In order t o a t t r a c t &r*& iiidti&e t&e ableat .taen efetalnablwfor t h i s p o s i t i o n , mire them w i l l i n g to %ec®pt thep«eltlon ^t
tl*la Board a© a efw*er f s@^ar a l l oonn&otlene, ^a3c® thoa thus
lsdependentt th&t a petielon sh<ml<5 be
of ^ie &g® period, for future i^p point IT©
It &«®tas to OB that t h i s would bare tJh» e f f e c t of c a l l i n g
on tlieae w&n to actsapt a position ®f thl» HVl during |toi fiaost
a o t l ^ i arid r#flRiiierati"r@ periods of their liveaf etherw1.ee» tiiey
sight not be willing t o &e<j«spt»
rsori to aae&pt a position and aerve for twal?e
t

we w i l l na^y from t>»&g©s <if 43 to 60 f at the end

of tb® period of twsl^m years * i f he i s aot r@a^@iBt#dr ha
has than got t o go out M i ui-idertaloe to taste® connections which
im asveredi iMff ^® ha^ been free for a period of twelve years*
It would seem t& ae tliat, in the public i n t e r e s t , i t would
be well t© provide that # i f tm i s net reap pointed, he would
recall© the f u l l pension* if he has served a f u l l term &t l©ng®r$
or i f he i« offered a ramppointiaent and prefers not to e@r^et
tlien of course ha eheuld not be giTan a pension*

I believe

tiiat would rmka for greater independence on the part of the m®m~
ber© of tlm Board •
i f to tim term of the office of Governor of tbm Board#
there has been a good deal said about the provision In tha proposed legiBl&tion, tiiat is» tliat tha term of ti^i Governor as
a member of the Board expires when he i s no longpr dosignatad as
by the ^resident*

Ti» l@sr providea that t t o

s h a l l be appoititdd ban tha ?.maident to serve a t h i e




8

pleasure* appointed from one of tna Ifcderal iteaerre Board
"bers.

AS a pmetle&l flatter

t

*iidn the Oowmor i s mo

designated aa Cto?ernor T& the President, i t ie beeause
President ia desirous of Isaving st^s^ona e l s e serve as
usually cos© about with chan.^19 In administration*
GoldaTboroushi

s I undiemtand i t # j"oa ^prore of that

i s that?
You txgprorm the provl©ioo allowing
to reu^Ye the Oovarcor* wheneTer he s e e s f i t f
Hr* J c s l e c j

wall, 1 *mtra «o efejeetlon to i t *

I think

im a pxuctical ^attar # i t is necessary and
la mm

of tim otlisr central baa^est t&ere are

with reference ta the %3s»outiTe heads of the banks.
It sae$ae! to e» that an adminiatr^tion le ohRTgedf liieti i t
fioen Into powar9 with the economical and s o c i a l problems.
T j i | t t 1 « • f l r^ctliiiig ^sre or las« than dealing witli thseeonomioal
and scicial pro^?^»s«
ueal with. theis f It

To ba able to succeed and i n t e l l i g e n t ! ^

SO«HB

t o ai© timt i t wotild ba extreatXar d i f f l -

vn*li for ftryf Hdainiotration t o d© so aatirely free and apart
fro© the tmney syfclsjmi tfeyrci is^^t be a little01* b©t^@@a the ad*
idlnletration a^a the ttoney ^ s t e R , ox a rs* spans lire

relationship*

That do®e riot &oo!»s&ax>ily tusai* poliiio©.! aontrol in ^ie uetise
It ie often thought of»
tbat annner your |iiastlon # 'lr* ;3Qld3bi»*ouglit
Groldi5b«*Tsrk?£ni

» ^erolesi
vbalraan?

T#©| IM> thr/t standpoint* 1 think i t

^ f o r r i n g again to the term of of floe • • •
Si^paan you l e t me aslc a question right

Is r»*f>t the ftfMtlaal eltuatloii such that tbm

c




9
tr&tion has that power aod may exercise it* but undor t&is b i l l
thai© will be a technical recognition of that power and & definite fixing of responsibility, at least within limitations?
lir* Boelesi

©11» the only change • • I do not think i t

will be material, but the only change in this b i l l over the
present legislation la that, when the Governor i s no longer
designated as Governor by the ^resident, his term as director
expired*

At the present» «hea he is no longer designated aa

director, it does not provide tliat hi© term as director expires,
whieh would ae&a that, If he i s no longer designated mm 1
sliould hwm said OovBrnor, tmd not director — when he i s no
longer designated as uovsrnor and he did not resign as director,
there would be no vaoancar on the Board for the President to
designate a GoTsraer, unless Im designated an existing mes&er
of the Board as Governor! aiid in practico, i t has been true*
in tiis past history of the b&nic, that whett a Goveraor is no
longsr desi^mted as Governor, he r e s i g n as director as well.
there i s this disadvantage, however, that when he i s no longer
designated as governor and he resigns as director, whieh i s the
only thing that a Governor could do and a person that would not
do that would certain^ not be a proper $9T&&a to act as
Governor — he i s precluded for a period of two years from entering the banking field*

That i& a detcrent in the present

law In iti4uolr^ mn to take tiiat office # for the reason that
they are required* if they are taken from the banking field, to
sever a l l conaectlor-s with the banking business for an indefinite term, that i s , for the period of as long as they are designated as Governor, and that may be for two or three or four
years, we will say} and when they are no longer Governor, designated as Governor* they resign as director, so they have not




10
fulfilled their terms as directors and thay are precluded for
a term of two years afterwards, because they have not finished
the tana, of entering the banking field again.

If they have

fulfilled their term a* directors, they can inaediateiy enter
the private field*
i*m0 what I should like to propose here i s , that their
terms as directors do act expire* tft&t ia, leave turn lav as i t
is with reference to tiiair term as director, and provide that,
when they are no longer designated as Governor, if tiia^ choose
to resign as directors, that their terms as directors will be
considered to have be«n fulfilled*
$r* -loll is t e n

that is not what this new statute says,

is it?
r,

-cclesi

Bo} I an asking this as a suggsstion, as a

change, such as thiss

That whereas sow they automatically

cease to be tmdbern of the Board when they are no longer dooigoated as tJcirerncr, and idmt I am suggesting or proposing is
what 1 stated, and there is no change in that feature, out this
addition*

that i f they do not choose to continue to serve as

directors, in other words, i t is their optionf and that, «ke«
they are no longer designated as Governor, they would then be
free to enter the banking field, without taking a two-?ear
•vacation, we will say*
*>• Joldsborough*

Your view i s , that they should resign

voluntarily, and the two-year application should &pp&y, but if
they are removed as Governor and they sse f i t
+ Bcclest

It should not apply,

Ooldsborou^t
* icelesi

—

It should not apply?

That i s right*

Ooldsborought

that see me to as to be sound*




llr« iSeelMt

It seme to be fair mnd will remove a de~

terrents and i t seen© to at that i t will accotaplish the object
of Making i t a move attractive position in the future than i t
has been in the past*
%r* Kolllstert

.ould, i t not also attract souse thing else,

or aoeoe^lish 0 oc»t hi ng elses

This i s drafted to give the

President the opportunity, i f he oaree to do so, to make a
dean sweep, to c o l l a t e ly clean up tha whole S&der&l Beserve
Board in a few days, does i t not?
Mr* -cclesi

«ell, of course, I think that 9 if we are

going to conceive of a President that would resort to what would
be cofioidored sharp practice, he would possibly have movB direct
ways of cleaning i t up than that*

I think a President that

would resort to that sort of thing would possibly have other
ways of moating the situation*
Mr* i o l i i s t e r :

Presidents have* in the past, unfortu-

nately, done things that some of us would not back up, but as
a Matter of fact, as the b i l l is drafted, i t permits the Presi*
dent,if he cares t o , to remove successively erary meaner of
the

ederal

iioamTve Board, appoint him as Governor and un-

designate him* wliareupon, he immediately retires from the Boardf
r*

ieclesi

'/es| tiiat i s correct*

r*

ollisten

So the euggp stion you aaake would at

laast eliminate tlid possibility of that happening, whon we had
a man in tha

hite House tliat mi^it adopt such sharp practloots?

Mr* Kcclest
Sir* Orosss

Yes*
Sir* Jhairaaii, as^r 1 make a suggestion as a

of the Joanittee?
The chairman*
'r. Jroess

Certainly*
I would Him to malas this suggsstions

That




12
Hr* .ecles be permitted to go ahead and f i n i s h his statement*
and then that ha submit the aiaerKltaenta that he would suggest|
mad that when he gets through with h i s statement, j u s t as Mr*
Goldsborough suggested the other day, each saeisfcer of the wommittee be given a chance to ask questions, because every aeaber
has ffl&r^ questions, or a nuatoer of questions, on t h i s section
that they would l i k e to ask*

1 am afraid that* i f we s t a r t

Him t h i s * we w i l l ne*»r finish or get anywhere.

the 3hairoant

That i s

e l l , 1 carta inly expect that every raember

of the Jonmittee w i l l have an opportunity &s you refer t o , and
I w i l l recognise the ntiabors in an orderly way# so that evaxy
osater w i l l be given an opportunity t o ask questioss*
Mr* Crossi

Th» point i s f we w i l l aot have a coordinated

idea of t h i s by going in and out, arid I think i t i s Ntjfc bet*
ter to l e t him f i n i s h , and then l a t e r on l e t him bring h i s
proposed amendments t o the b i l l , and then we oan tatee up those
aasndmsots and l e t him discuss those amendments l a a auoh more
uniform way, and every menftwjr w i l l get a grasp of the b i l l *
That seeas to as to be the b e s t way t o proceed•
Th» Jbairniani
T. Bodies t

All r i ^ i t , i^r« Kooles, you isay proceed*
Assi^Basnt of duties t

There i s no oontro-

-mr& over that question, and i t i s just a practical way of
the Board being able to meet the problems of increased reaponsi
b i l i t y tlmt are placed upon them, by being able to delegate to
others marar of the routine d u t i e s , so long as they do not in*
volve the question of determining p o l i c i e s .
-pen market operationst

Inasmuch as t h i s was covered

quite fully in m statement yesterday, I do not believe that X
can add very such to i t *

There w i l l l i k e l y be a good many

c




that n i l l develop in eermeetion with th&t# because,
that Jbsaaitig, the «hel$ ojuteatio-n of imzm1mt& o&atfol
up.
1 explained joetard&y %hm «ay tti© open market operation
is now organized, s^nd tiie M i l provides for i t to be operated,
and the agendas ata suggest additions to the proposals In Urn

dieeount*

Sn© e l i g i b i l i t y requirements

of th© present M i l do not sees to ©e to w&&% the cimn^id coaditio?^s t l » t we amr have in the nation, co^ursd with the cond i t i o n tlmt 03tist#d a t the tim» the 7«d»ral reserve waa
ameimt of eligible paper available* a@t held
f

Is a mr& ataall part of the t o t a l re©ouroes of the

in 19291 i t wan slightly oimr 12 per cent of the
odBiy I understand i t i© lets® than S per csut.
saataly

2ttX)OfCH>0,000 i s the total amount of the

wo$ld be conBidered eligible by tfm banks the^s@lve®«
Mi

It was

found, idien the depression oosmenced^a© i t eontinoed, that the
baafeB did not hai* eligible paper to mmt tlieir eiurlniclt^ de*
posits, brought abmit by thm general liqaidation of the bank
loans and hoarding! that than, of c(mm&9 in order to avoid
eloslng, they were forced to s e l l ouch bands a® the»r had upon
the narlost*

fh®@© bonds were NtfHdered, at oixe time, to be

secondary ra^@rv®s» because they n^re listed*

Thm& al«o

brou^it pressur© upon a l l loans wliioli oaae due during t^ie period,
and wers forced to refuaa new credit* feeling of course that
they ted to have as large oaali reserves ae possible and b$ a@
liquid as possible*

Tz&& ner© ultissately bringitig pressure

to collect loans that oaae due, aiid to ^ 1 1 tlm aeourltiea that
they had wli^rever thej emild do so f without talcing too large a
loss, until finally that attitude on the part of the banks




throughout %&e fi&tleu ~» the attitiui©
i t seeiiB to ae» to the leery great extfmt* the fact that
did aot fca*e e l i g i b l e paper 1B sufficient quantity to ceet t t e
desmnd — %2m ooald a<H get help at t^e ^oderal aM^rte
e&eapt

If tl># p&p«r eaa eligible*

strustiora.

o i t was found out tb^t,

fliml aiml^si« # i s ttm d#pr»a«ioti defl^tioo, tuoro « i
oxcapt t3»t liQuiditj t^l«h can te oraatad
car tts* eentrel bank throu^i i t s pom? of iesuo*
wa« finally rso^Qi«od tften g n » t daoaga had bo^i 4ono
thowsnudc of baoJte ted boon olouod, un-^caas&riXy» when
individuals aad tnstitutioti© itad booii fo^ood to
the v a i l throntfi tbo Xiae^ of avaiXabla eftidit* or t&roug£b proa»uro to pew oxietin- debU*.

BtllllcH^ of d«poBltorc lost

htin<!r«<s of allllona of dollars • m tbe result of tiioe^ cloei&gi*
o finally r«oogi,is«d Umt «o did ^ 4 havo to J«wi oliglble
#

«» did eot havt to back our ou&cm&& «it^ ^olcl# wa did

ovoo bavo to b&<^ i t «ith OoWMRM^Bt bonte*

e finally

rooogoisod tlsat* in ordsr to ^et the banks op©:-» t i » t «o oould
smind aaael Into Um iooor^s Bank and issue
bank not«i«

Tmn that liappened, robo^y

l^ r^r^ etoj^^a and llquidatiOG stoppod to a
axtant.

^ertalsily, tho pressure va© <roisr groatly

: owt I t 100— to E» tfeat i t i s imlir being a r e a l i s t to
reoo^isa iimt tHo ro«orr« bafO»» a»

a result of %im rules

«nd rogulatlons aado l^r ^ » toaorro Board, should have th& potter
to s»ot tlai ©oDrg»rici«ot eiiouid bara t^» power to taMi to c»®«
ber banks upon sound aooots # ratiaer than see ^ne toaka olo6e t or




15
r&ther them sew unnecessarily drastic liquidation forced upon
tke consnunity.
This provision does not mmn inflation*

Before the banks

today, &3 & whole f would lurce ar^r oeo&eion to ties the reserve
5?stem» th*sy would have to extend 'billions and b i l l i o n s and
b i l l i o n s of dollars of c r e d i t , because of the excess reserve
p e t i t i o n that they BOW occupy; but i f the provision ia t>jere,
i t w i l l mica the banks ^ « 1 altogether different about ©xta»d*
Ing credit today $ i t w i l l sake them recognize that they do not
have to ha^rs ninety-day or six»aai!th |^p9r # in order to wmkm
loans 9 when that typo of deiaand for credit does not oxiet to
aor© t?jsri a very limit ad extent*
This, t o s?y mind, i s one of the most important featuraa
of the l e g i s l a t i o n at the present t l a » | i t w i l l tend t o do s»re
towards inducing rscowery through credit expansion Umn ar^y
other fbatura of the b i l l *

The banking ays tea laaatbe mads*

i f i t la golsg t o j u s t i f y i t s e x i s t e n c e , to provide tiie taoney
ami credit required.

At the present t i n » t that la

provided by the GoYsrru^ent.

Tlie b&rJeirig nyete% the

e l a l banking system mmm
•"r. Oold©boroughi

: r.

*cclest

You say i t i s being provided by the

To a very l^rga extent«

r. ^oldaborou^ii

e were under the impreselon that the

Uoveroment borrowed the aoney that i t Is new providing from the
banksi i s that not correct?
T.

-cclosi

That is very true*

The banks are provid-

ing - - tiioy are w i l l i n g to extend credit on government bonds*
i$r* Goldsborought

«e provided the banks with thirteen

b i l l i o n d o l l a r s , about 9 have we not?




16

r* ^cciee*

e l l # I 4a not ^r,o^ tha &£&at account, but «••

Hr* ' wldiit-orougSis

A p t Mi ac s^proxiiaatioxu

Eut -whatcTer figure the ifovsmtsest bende tbat
hrr£s?: h?«T© ptixeha&ed • • i t i s r*ot thirteen "billion dollars,
but faNitaiiftg what tlie ^ d s r a l RNHTia ^.yst«» has t 1 think i t
i s arcra

Irteen b i l l ion dollari — 1» tba t o t a l investiaattt

Irs 'CJo^rriHe^ts, but tisa ^TrertiiaeBt i» aoing the land ing t o tho
^triot» GavernsBnt lending a fancies, the hone owners, th^ Stea
Credit ^dmiaiatratioiu tha Hacosaatrudtlon ^irKmoe aasrporation.
axo tlie t^r^e moat iimportant a^oncics aod 9 of course»
know t^qy i*aT# put (Hit

o i l l ions aa4 b i l l i o n s of dollar©»

acd the b&rJes J^fo lar^ol^r ta^^i Oo^ernaaent baiids and bonds
taed lajy tiie uorom£iantt aisd the oo^rnment, in substltu*
liM I t t m Mi| MM or i>ia indivic£uala wad, the oorporationa*
t!iat It ftfMI be^m a yroceet of the batiks li^uidatifig their
a l<mn^# eatd tl*e Cor©riiaer;t taking ttomm over* and the
pro7i<JJ.ng tils flHHta to tabs Oovermagnt borids or bonde
»'ta#d "Uy t «e Crjv&i*iaaat«

And« of coarse t i f eontiouea,

i t sdomo to 3» tlmt tb« baviks aro going to hanp3 ^tery great d i f fiaultj- |a jii.it I fyin£ tl*air oxlat^^OQ*
Y. Joldstooraugh:

Whei tbay can only l i / « lyr tlie Govoru-

sent furaiohing nasTly one blllldQ JitlifHW ^ year in i n t e r e s t ,
thoy do not e a r ^ i t aaflfa ta ;ae joiii ^i^ueiaent i s wortUy
ssrloas aa*^iid«raiiaiu
A^closi

2 raeo^niz# tii&t0 s^d X imre also told many

t/m barik^ tiffitt the provisioris of t h i s l e g i s l a t i o n with refer*
ta tiiia • l . l g i b i l l t y fiK^ture, ^.nd witii refereroa t o t i i s
estate loan feature* i s to give tiien aii opportunity to
t h e i r fuuxis in t:^o direct f i e l d of lending and get tbe
Q&*ev\vmt,-l out.

ui-^rwisc they w i l l find that the




17

will im^re taken over the banking business, not because tim
Government wanted t o , but because the banks forced I t to*
Purchase of United

tates guaranteed obligations*

I t Is

provided that obligations, guaranteed obligations, should be
put on the same basis as direct obligation©.
^

There seeae t o

to be tiu Justifioeiioa for this discrimination! tiiat they

should be eligible for puT&w.z& \>y the msarre Banks* without
regard to Uieiz* s«*turit^ t in the suns &e*iir»er £&&t direot
oi* tliss ^oi»ruES®at mro eligible foi» parelmse

for

Federal /ienerve notest

I t is

that the x'odsml iteaexre Aj&at ehail l*e eliminated in the
I&aerve, utidfch©chairmanship liml! uo ootfbitvati with that of
oovaraor.

Tiisi 2?e&erul

Boaerve *£etti t*efc» «ta trustee for the

af collateral lij&Iast wuioh ;*^dortil rueaorve note a are
Trm glM oortifioa-toa 9 the i*0quis?eiaent of «tiieh is 40
pax oe«it of

the not^a outakaiidiug, and t*ie balance is to be

i^ cured 1&& iiegotiajie papar# ;>r 3ovoru^8at bonds, or both, end
i t was thought, origioaUjr, that the amount of currency out*
3tandin^ a t a ^ tiis© wa& iaflu3:%ood 3r regulated b^
of eosoareial paper, which ifipresaata tiie aativitjr of
cf iMdi in bualnoaa*

it is ftttiod that there is -rery l i t t l e

ship to ths voluiaa of jfcd-sral iascrve aates to the &e~
of bu»lt>sia8 in trade and to bomnriag fro© t i ^ federal
Bs,aks#

Of e^ursaji that is dus to the fact that the

currency, aa such, pla^fs too a»%Xl a i>art it?, our ^ma«/ systemi
that the private bank iVtttt or deposit ourrernxy pla^/s a tsajer
role*

The amount of currency or federal :i& serve not as out-

standing will depend upon the G$CQ&C£ for currency b^
banka*

Tnaraember ^nl® discount or borrow from the




IB

in ord©r to imiataia their iw&rras* gBqpftMl reeerroe
Hi tit the .£©@i*rTe Banfou

Hgn&ar basics &r&^ currency t o tsvet

th& demn&s of their «ua tosaarc..

It le not f e l t that the c o l -

lateral pat up ©&ak &f the Hstani note^ to ^ny n&y reetriets
tfee UBu of curre&Gy*

i t Is not f@lt t&st collateral adds tqpi

thing t o tli#ir «e©uritj«

9Hp ^r@ r>cw gugjraotead by tii© United

states •3o^eriis®nt| thfty mr& a f i r s t lien ar (foliation of tli©
iiaiiloet and whaaewftr noies ajm issued tor the lleasrf©
#

tii^y la^a aasats to off set tha l i a b i l i t i e s of eme^ of
Banks t oons la ting of notes whioh th@^ isenet and the
of tliair aaaSber banks •
would seem to "b® no m&r® reaso» to seoii® notes
ffean t o seoun? deposits with that of their member
t&eir notea ar© r^qulrad to bo ••» the bar*ks ^re re-

quired t® hold goM equal to not l®m® tban 40 per cent of the
notes outstanding t net leee ttot?; 35 p©r eant of tit© deposit
l i a b i l i t y ftsad •««•
Ur# iolootti
r . socles t

Gold i s 50 p©r omnt*
w@lip of course, tiiQjf have M g@ld»

is is© pr&p®®&l to change that#

There

TJ^i assets of the IWJfelyM

irte other side # consist of gold eertifieates atid^or raenay that
thqy tms !iold# and their Investiastits in (*o^s©riiasnt bonds and
b i l l s or rediaoeunte*
Could

. rieoleei

* Hancock 1

Keolest
Mr* Imnoockx

^ou properly ©all those

i'hat is thatf

3ould you properly call those notas "asset

1 do not just understand i$iat you
1 do not want to begin quest iouiiig you t but




right on that point &mi mde t&e statesaeiit tii&t I t m s oet amen**
thai notae ham any particular

llr* Haneeoks

In that they constitute a liea against a l l

of tho assets of t&a banks*
Mr» Bodes*

That is r i g h t .

:..*r«. i&noooki

Bowt would you consider su<^i tiotes as

e l l , tJ^^ ar@ the unseoujred obllgatioti of
the l»ialE tJmt laetxes tli^a, itiieh i s euApa&teed by the
states Otoverruaant*

TM& ®&m not a©s@t ourr^*c^# In

backed ^peclfleaUjr lw that ^artieul&r asset or am^t@t ex*
to t«e extent triat th@r© Is a t laast 40 per cent of ^Dl&
csertificates held, and there would "be otfeea? ce-rtlfieetae bac^ of
tbeiof otherwise* thoy might not be Issued*

fhe l l i ^ i l i t l e ©

of the bank would be offset b j I t s assets*

M to ttia* extent

tJi^BT are aglets lo the fora of gold certificates, G&mrmmnt
beads, or Imms and disooiatits, beck of a l l the note© Issued* just
as toaj asm ba&k of a l l ©f the deposit© of the bsnk«
baek of tiae itederal

The value

Heeerve notes Is detsamined by the eeaete

©f the Haaerv* Banks| fttti t@ r e s t r i o t the issiie of these notes
mm thoor were re© t r i o ted, i t was found tii£*tt in 19S2, Aen gold
leaving tli© country very rapidly and wlian Urn banks held
Halted amounts of oasnaercial | ^ p s r t that t i » r@<^iirsme«ite
©f the ls>» .»iad to ba suspended in 1932f and Crovernment bonds
to "*m a c e ^ t e i as subetitution for eoiasereial p^?er as tlie
for issuing notvn* in urdmr to release tka axe#es
of gold that had to be held i*i tlia mbenn-^e of oaiaraerclal
i t i t was fourid that tli© restriction iapO3ocl at tim time,* and
the only ti^e whan the law, tha provlsior^ of the law were




20

tasted* at all** t£m$ had to be suspended*
Tho Jfaainaant

It mi git be well to reasaber definitely

the date of that action.
r.

cclee:

e l l , you probably reaes&er i t .

It was io

1952* ^ebrucry 27, 1938*
cserT© requirements $

tte etaergenqr banking &et provides

that, with the consent of tfca President, an en&rgoney Is de*
clarsd to e x i s t , and the federal l^eeerve Beard has power to
change the reserve requir&iseiit© of tlie a»ad»er banlcs.

It is

propeeed to recognise this emergency provision as a peroacent
prevision and give to the Board tbe power to change the reserve
roquii»aent8t without declaring that an emergonqy exists aod
without the approval of the Preeident.

this i s a function of

aenetaiy control almost equal in laportanee to the open inarlset
operations* aaad It i s f e l t to be aecessarjf that the Board have
this prnmT* in order to control particularly &n isflatioimry
condition, should one develop*
It i s conoeive.ble

that the reserves of the oentoer banlcs

aajr be greatly in excess of the amount of Government bonds and
paper held by the Beserve Banks*

The sale of those securities

in the market would not be sufficient to absorb tho excess re*
serves § and, therefore, the uam and tmed of this method of
Increasing the reserve requirements would come into use as inflationary control, that is* credit inflationary control*

It

would be expected to be used only secondary to that of the open
market operationsf i t would be a primary method of aeeting the
situation} that the reserve requirements, the change of the
reserve requirement© would be used in such time as the open
market operations failed to meet the situation*
x.

Jrosst

1 might suggest that I reasaber the condi-




o

21
tions that existed in the world* the speculation on the -took
do ysu think it would be vise to have a provision so
that you could designate certain particular banks, where they
had increased their reserve* rather tha& apply to a l l banks,
* at tu;y tine?
Mr.

cclecs

I do not believe so*

I think laoney is too

liis© water| i t seeks a place where i t can • • •
Fords
. Socles t

.-eeks

i t s own level?

Yes* i t seeks a level, and of course that

level is based upon the return it can get*
e have proposed here that the reserve requirements sight
be or could be applied to two classes of c i t i e s t

tfm central

reserve c i t i e s , or the reserve c i t i e s in ona class, atid the
counti$ baokiag areas in the other*

It is conceivable that

different veeorv® r^quir^&ieiit£. could be applied to the TQmrr&
cities* i f that is where the speculation was going on and where
the excess of reserves were, which i s ueual^ the cases and
there i s an element of tice ID money seeking i t s level*
what it is* X do not k&ow that anybody oan say*

Just

But the ex*

CMS reserves a&y be applied first to the x«eerve cities» arid
then later to tiie other areas, i f i t seems to be neeeas&rsr,
rather than apply the increased reserve rsquirerasnts universally.
I do not believe that you eould constdor i t beyoad that*

X

<to not believe i t would be practicable to apply i t to individual
banks*

The federal Be&&rm has the power now to regulate the

marginal requires*nte on collaterals and brokers* loans, which
is one of the seat effective instrusaento or speculation control
I think no* available* and X believe* had i t been available in
1928 ana 1929* It would have possibly been helpful in controlling
or restricting the speculation orgy tlmt we went through*




22

The <2balrjaan*

aoveraor Becles* the House has been In

ssion for a l i t t l e while, and there are matters that require
the attendance of aeaibors, and I am sure you w i l l be glad to
desist u n t i l tomorrow, anyway.

Therefore we will adjourn

u n t i l 10*30 o'clock tomorrow morning, and we expect to item the
pleasure of having you back again with u s .
( hereupon, the committee recessed u n t i l 10*30 o'clock
a* flu, tomorrowt «edne&day» March 6 t 1935*}