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Statement of Honorable Duncan U. Fletcher, Chairman of the Senate
Committee on Banking and Currency

Since the introduction of the proposed Banking Act of 1935,
(S. 1715 and H. R. 5557), a flood of letters and telegrams have been
sent to Senators and Congressmen in protest against one particular
section of the bill, namely, Title II. I myself have received several hundred letters which show evidences of having originated from
one central office. On the face of the facts, I would say that they
have been signed and mailed by parsons who have neither read tho provisions of the bill nor are conversant with the principles incorporated in it. For the enlightmant of probably thousands of ill-advised
correspondents, I am herewith reproducing one of the "form letters."
April 3, 1935.
Senate Committee on Banking and Currency,
Senate Office Building,
Washington, D # C,
Dear Senator


I hope that you will find it possiolo to U3a your influence against the Banking bill (H. R. 5357, S-1715). I believe that it
endangers the development of sound banking in this country, not only
because its banking principles are unsound, but permits
political control of the Federal Reserve Board and the Federal Reserve
Respectfully yours,
John Doe
On the other hand, a number of bankers, editors, pseudo economists and so-called financial exports have bandied the subject back
and forth in the Press and through the medium of "form letter" correspondence, for something like two months. Such tactics have resulted
in a wealth of misinformation. Much of this misinformation has been
deliberate and willful.

- 2 At this stage of the matter, 1 wish to warn the general public,
and particularly the correspondents to whom I have just referred, that
th^y must be on their guard lest they be abused as were thousands of
business men by the use of similar methods against the enactment of the
Securities Act of 1933 and the Securities Exchange Act of 1934. To this
date there are literally thousands of well intentioned but misinformed
business men who do not kno?/ the facts pertaining to the prospective
issuance of their own securities under theso Acts, This misunderstanding is not due to defects in either of the Acts or to the administration of them. It all goes back to the campaign of vicious propaganda
and misinformation.
Similar results are now evidenced with respect to the proposed
Banking Act of 1935. Do not be misled. This legislation will serve
a public purpose and its enactment is essential to the establishment
of the financial and economic security of this Nation's domestic enterprises.
As a result of having devoted nmch thought and study to the
numerous articles which have appeared in the Press and hundreds of
letters which have come to my desk, I think it best that this attempt
be made to explain more claarly to the public the issues which are in
controversy and discuss the principles involved in order that a much
clearer* understanding may be had of the necessity for the passage of
this piece of, legislation.
In iqy opinion, the proposed Banking Act of 1935 is, in all
probability, the most important piece of %anking and monotary policy
legislation with which this or any other Congress has dealt. This
statement is based upon the importance of Title II alone; and,curiously enough, Title II of the bill is bearing the brunt of almost all the
opposition made to the entire piece of legislation. Please be advised,
however, that all of those who are offering concerted opposition to the
bill on the basis of the incorporation of Title II are almost spontaneous in their clamor for the enactment of Titles I and III.

— 5—
Hence, I shall deal only briefly with the 1st and Illrd Titlesof the
Bill. The first Title provides: for tho merging of tempor«#ft#funds into
permanent funds} that $5,000 be designated as tho maximum insurable deposit|* assessments^ withdrawal from the fund; buying assets ot insured
closed b^nks, and a number of uthor important matters. Tho third Titlo
provides for: "accidental11 holding company affiliates; security affiliates in liquidation, security dealers accepting deposits, employees1
deposits, liquidation of assets of banks in voluntary liquidation, termination of double liability, examinations, i*nd a number of other important m&ttero.
Title II, on the other hand, deals almost wholly with the cj^aation of
machinery for the effective regulation of n definite monetary policy
in accordance v/ith the campaign promises of President Roosevolt based on
tho Democratic ^platform of 193H v/hich advocated "a sound currency to be
pres^rvod at all hczzards" and proposed to put an "the indefensible
expansion and contraction of credit for private profit at the expense of
the public".
Moreover, it is a definite attempt to accomplish the ends which the
President had in mind when, on July S, 1933, he stated to the American
delegation to the London Economic Conference and again reaffirmed on October ? £ in his address to the American people in v?hich he stated that:
"Khan wo have restored the pric^ levol, we shr:ll seok
to establish and maintain a dollar which will not
change its purchasing and debt paying po;;er during the
succeeding generation* I said that in my message to the
American delegation last July and I say it now once more."
This bill among other things provides that:
(1) "The offices of Governor and Chairman of the Board of
Directors of each Federal Reserve bank shall be combined." In their
places a Governor and Vice Governor "shall be appointed annually by the
Board of Directors, subject to the approval of the Federal Reserve Board".
"The Governor shall be the chief executive officer of the bank"*
Whereas, in the original Federal Reserve Act the executive head of the
bank was to have been known as Chairman of the Board of Directors and at

(Qnittod from buttou pago 5)

the same tiae act in the capacity of Federal resorvs agentj

tho activo head

in control of puroly banking operations was to function in tho capacity of a
b i x iaenagorj 'Bio Federal Kasorvo bunks s a a to tho bank nanagor tho highaic
sounding miido of "Governor."

- 4 Since that time, it has developed that tho "Governor" of each Federal
Reserve bank has nut only superseded the Ch&iruan end agent as tfao executive efficsr of the bank but lias also become tha virtual dictator of the
Federal Reserve buik tv, thj oxt ;nt of pmctic&lly controlling the election
of directors who are presumed to be independent in the exercise of their
power in the election of said "Governor". The results are obvious*
The above provision of the bill mjrely merges the two offices and
at the same tiuo provides f ~>r tn.j rotontion of all "Governors and f.fChiirmen" - if they are qualified, and if, subject to the approval of the Foderal Kesorve Board, the various boards \>f diroct-jrs el:sct them Governor and
Vice Governor • at tho s&uae tiua, tho language of tho bill makes it clear for
^nc3 that brinks cannut evade >JV override tho law through tho creation of
a high-sounding office and v/rjst control from tho Board by creating a dictatorshiptfitfainthe Fadoral Roaorvo System.
The bill furthor provides that:
(2) Prior to July 1, 1957, the Federal Reserve Board may v/^ive
the capital requirements for the adminssiju of nonmembor State bonks r,s
members of the Federal Reserve System.
It is intondod through such a provision to recognize tho fact tint
small banke,thct sntall Stat^ banks, arc not rnsro "piiwn shops". It is in
recognition jf the fact th^t smiillncss and bigness in a bank's capitalization, deposits, investments ^r loans is not an indelible ovidenco of oither
soundness or weakness. The suceoss or failure of a bank depends primarily
on its management, and not on its size.
It is a recognition of the fact that thore are thousands of snail State
banks in this country tfhich are 7/orthy of membership in the Federal Reserve
System. On the other hand, it absolutely does not provide a license for,
or inducement to, the inclusion of unsound banks, or of under-capitalized
banks, within the Federal Resorvo System. Assuming an unbiased and unprejudiced administration of tho Act in accordance vdLtfa the intentions of
Congress, there should result XIJ unfair treatment of, or impositions on,
either State bonks or National bunks, under tho provisions of this section.
Tho noxt provision t^ which I wish to cull your attention is: (S)

- 5 "In selecting the six appointive members of the Federal Reserve Board the
President shall choose persons woll qualified "by education or experience or both
to participate in the formulation of national economic end monetary policies."
Moreover, each director is to receive a salary oqual to that of a member of
the President's Cabinet, and shall be retired at the ago of seventy upon a retire
ment wage to bo paid out of funds derived from levies on Federal Reserve banks.
Such a provision i3 conceived in tho public interest. It provides for no
favoritism between bankers, lawyers, economists, manufacturers or man from aaay»
other profession. Tho administrative duties of a Board marabar are such as to
require a far broader experience and basis for the exercise of sound judgment
than that derived from the narrow confines of any ono profession. Please note
that the section roads:

"The President must choose persons well qualified by

education and experience or both to participate in the formulation of national
economic and monetary policies."
That is a mandate!
The next three points to which I wish to direct your attention are of tho
greatest vital importance. They have to do with the Federal Open'Market Committee, flexibility of reserve requirements, and discounts.
They are, in order of sequence, numbered (4), (5) and (6).
(4) Tho creation of a Federal Open Market Committee consisting of five
members, three of whom shall be members of the Federal Reserve Board, the other
two to be Governors of tho Federal reserve banks selected by all the Governors
of said banks. Their terms of office shall expire at the end of each calandar
year. Said Committee shall have supervisory control over the Open Market
Operations of the Federal Reserve banks.
(5) Tho Federal Reserve Board is empowered to change the reserve requirements of member banks as to any or all Federal reserve districts and/or any or
all classes of cities and as to time and/or demand doposits.

- 6 (6)

"Subject to such requirements as to maturities and othor matters

as tho Federal Reserve Board max proscribe, ^xi£ Federal Rosorvo bank may
discount enj commercial, agricultural or industrial papor and may ixukz advances to any such insiabjr bank on its promissory notes secured of tiny sound
assets of such member bank."
Significance) of Provisions fVur, Fivo ^.id Six
The first question vhicii crises in connection with these three provisions is as to whether they involve a radical change ixi the present powers and
functions of the Federal Reserve Board and the Federal Reserve System as it
is now constituted. The second question is as to whether there Jill be established a political dictatorship of banking.
The unequivocal answer to the first ~ aside from a technical splitting of
hairs - is HO. To the second, an unequivocal answer of MO must be given.
It is a fact that all of the powers which are by this bill centralized
in the Federal Reserve Board have since the onactmesnt of tha original Federal
Reserve Act existed within the Federal Reserve System. That is; all open
market powers dealt with in Title II of this Act exist in the present lav/, and
were so read into the original Act by the "Governors" of the Federal Reserve
banks, as I shall subsequently point out. But it also must be pgintsd out
that when ejiy or all the Reserve banks, the Reserve Board, or the Treasury
through its Stabilisation Fund, engage in Open Market operations, they depart
from and transcend the field of banking and become engaged in operations foreign to banking per se.
That is, whentounicsor the Board engage in open market operations, they
are buying and selling moneyj
volume of money;

they aro expanding and contracting the total

they ^re laying the foundation for inflation, deflation "

and economic chaos if intelligence, and prudence are not exercised in accordance with the sound principles of monetary science.
Such principles are not one and the same with even those of sound banking, where private profit is predominant. On tho other hand, the principles
of monetary science to which I refer are the principles of national monetary
policy operations v/hich absolutely must be made to conform with a public in

- 7 -


terest which oftentimes is diabolisalMr opposed to the private interest motives
of bankers if they are to be administered in tho interest of the general public.
For your information, I want to give you a brief historical sketch of the
development of open markot operations by Federal reserve banks under ths original Federal Reserve Act and the centralization of their power without any
specific authorization of law*
' My wish is first to narrat;* in tercts of what might be called f bankers1
technical language1j

then I wish to translate it into good * every day English1.

Prior to 1922 the Reserve bunks, having the power to invest money, made
considerable investments in the open market, buying bills and buying Government
securities. The holdings of United States Government securities by Federal
Reserve banks gradually increased in the early years of the System to about
$300,000,000 in 1920, and wore slightly smaller in 1921. Their purchase and
sale of bankers1 acceptances v/ere made largely in accordance vdth seasonal
changes in the supply of acceptances and in the demand for funds.
In 1922, Federal Reserve banks, facing a decline in earning assets because
of repayments of discounts by member banks, began to buy Government securities
for the purpose of increasing their earnings* It was observed that the operations of Federal Reserve banks, acting indepondently were affecting the market
for Government securities and that these operations conflicted with each other
and with those of the banks as fiscal agents of the Treasury.
In May 1922, at a meeting of the Governors of tho Federal Reserve banks,
a# committee was appointed to coordinate the buying and soiling of Government
securities so as to have a more orderly program under central control.
In October 1922, this Committee undertook to make recommendations to the
Federal Reserve banks regarding the purchase and sale of Government securities.
It was observed in this year that purchases of Government securities did not
cause an increase in the earning assets of the Federal Reserve banks, nor did
sales cause a decrease, but rather that they affected the volume of borrowings
at member banks. As a consequence, the Conference of Governors of tho Federal
Reserve banks voted that "investment policy should give minor consideration to

- 8 the question of earnings and constant consideration to the effects which openmarkat operations have upon the cjpflxtiun aid the couise, of tba money market
and the volume of credit«"
On -upril 7, 19£3, tie £oard advised the Governors of tfao Federal Reserve
bonks formally of u resolution adopted by tbe Federal Reserve Board on March
22, 19?S> respect to open-aarket cporutions by Fedoral Roserve banks,
pointing cut the necessity fur thj coordination of opj^rairket operations of
the Federal Reserve banks witL their aiaocravt operations and their £or.oral £re~
dit policy* It alsu announced tno organization of the "Open Market Investment
Comittoe" for the Fedoral Resorva 8ystamf

This conmitteo consisted of five

representatives of the Resorva banks and was to be under the general supervision
of the Federal Reserve Board. From this tlmo on, opon-iaarket operations could
not be engaged in by Federal Roserve tanks except with the approval of the Federal Resorvo Board.
In March 1930, .the "Open Market Policy Conference," consisting of representatives of all the Reserve banks, replaced the "Open Market Investment Committet.
Under the Banking Act of 19SS the "Federal Open Market Committee,11 consisting
of twelve Reserve banic Governors, was established.
What I huve said in the iumodlfitely preceding six paragraphs is, in technical bankers1 language, a correct statement of v/hat Federal Reserve bankers did
and are nor/ doing. But in tha language of the layman, this simply means that
the Federal Reserve Systora is already engaged in all of the operations and performing all of the functions which will be required under the proposed bill;
however, there is added ona factor of th^ greatest significance to the public.
toe shall, through this Act, definitely fix; the responsibility for and the power?
to en^agte in open market operations, in the Fodoral Reserve Board. In the futu:-.
when money becomes "easy" or money becomes "ti#ht" or v/hen we are led into a
period of inflation or a period of contraction and economic demoralization, we
shall be able to put our finger upon the Federal Open Market Committee and
May I re-emphasize the f^ct that when the Federal Reserve bonks back in
1921 and 1922 began their open market operations "for the purpose of increasing
their earnings" and later when they eppoiuted a Committee "to coordinate the
baying and selling of securities in the open market" they vere literally buying and selling dollars for profit. They (were buying and selling dollars in

- 9 just the same manner and for precisely the same ptirpos^ that hundreds of carloands of wheat were bought and sold, a hundred tim^g over, in the Chicago
wheat pit or in the street, despite the fact that the i$tfcat was in freight
cars and stood on the railroad sidingg for days, v/eeks, even months without •
once huving been moved, That is, the open market Committee was dealing in
pr3viously created credit obligrtions for profit and eventually awakening %o
the fact that they were shooting the price structure to pieces, upsetting
the financial plans of the Government, disrupting business, and confusing the
bankers* Through this Act we propose to introduce responsibility for such
activities, in fact - to command that the necessary operations must be engaged in at the direction of the Federal Open Market Committee with a mandate
laid down for the orderly conduct of such operations in the public ?Lnt'#est.
To what extent is this the introduction of a new principle into the law?
The answer is: "It is not new."
Sect on 8 of the Banking Act of 1933 provided for the insertion of a new
section in the Federal Reserve Act, to wit:
"There is hereby created a Federal Open Market Coiamittee . • . .", immediately followed by subsections (b), (c) and (d) which made all open market
operations subject to "regulations adopted by the Federal Reserve Board"*


upon the latter fact, I insist that the porposed Title II does not in any
way increase the political control ovor the operations of the Federal Reserve
Board, the Federal Reserve banks or of member banks• On the contrary, the law
remains as it has been for over twenty years * Under the above provisions of
subsection (d) any Federal Reserve Bank might be excused from participation
provided it "filed with the Chairman of the Committee within thirty days a
notice of its decision, • . • not to participate"• In this respect our proposal is to strike out the exception and leave the power to initiate action
v/ith the Board.
Now. What- uf the flexibility of Reserves provided for in the bi^l?
May I remind you that the same Congress which enacted the Banking Act of
1933 wrote a similar clause into Public #10 (in that part known as the Thomas
Amendment), a provision for the "increase or decrease from time to time, in itdiscretion the reserve balances required to be maintained against either deman

- 10 or time deposits".
On this point, the proposed Banking Act of 1935 gives recognition to the
f&ct that there is no safety to bo found in arbitrary judgment or arbitrary
figures with respect to the reserves of either Federal reserve banks or of
member banks. Several hundred years ago, the goldsmiths retained 100$ reserves«
Later they arbitrarily reduced their, reserves. England has no such arbitrary
reserve requirements established by law. This country has progressively
found it advisable to reduce tha legal reserve requirements fur even commercial
banks from an arbitrary figure of 50 to 40 to 85, until now they stand at 13,
10 and 7% on demand deposits of commercial banks, depending upon the size of
cities in which they arvi located.
The powers referred to in #6 as I am designating them, cannot find should .
not be constniau as the creation of a Federal Reserve Board dictatorship over
purely banking operations of the Federal reserve banks and their member banks.
In this respect the Board's directions to bonks are either permissive or prohibitive as to all purely banking operations. Within these two extremes all
actions v/ith respect to purely banking matters are loft to the discretion of
Federal Reserve bulks and their member banks. That is, bankers will dv^ci•io as i
whether they shall or shall not tnuko loans or investments which lie purely
v;ithin the field of tanking operations, such as whether loons shall or shall
not be nado to an individual or coporation; or a mortgage purchased; or tho
calling of a loan. And it is likewise left to the Federal Reserve bank as to
whether it shall or shall not rediscount any of the paper of a member bank, or
make a loan to said meiaber bank upon any of its souiii assets •
The next provision to v;hich I wish to rofor is?
(7) "Federal reserve not-ss are to be issued by the Federal Roserve bank
and retired under such rules and requirements as the Federal Reserve Board
may prescribe.
From the orthodox tanking i^oiut of view such a provision is sound. Banks
are/opposing this feature of the bill.
The next end last provision to which 1 wish to make a specific reference

(8) National banks vail be permitted to "make loans* secured by first
liens upon approved real estate, including improved farm lands and improved
business and residential properties."
This is a long established principle* Do you want it stricken out, or
do you havo some arbitrary liiait you think should bo fixed? This is definitely
up to the Congress. We must choose reasonable limits. What is your suggestion?
It is because of the above provisions incorporated in Title II that the
American Bankers Association, a number of the State bankers1 associations,
and numerous bankers and economists throughout tho country are making a concerted effort to divide tho bill and enact TitlesI end III, alleging that
said Title II effects radical chf;ng3S in the banking laws uf tho Nation.
May I point out that, with one exception, all of tho above requirements
iiava to do with the control over the monetary policy of the country. Monetary
policy operations cannot and should not be merged with purely banking operations.
The administration of a monetary policy has to do with tho contraction
and expansion of the credit and currency of the country zxA directly effects
the purchasing power of noney. This function transcends those of banking,
farming, manufacturing or that of any other business activity. It literally
controls the economic and social welfare of the whole Nation. Traditionally,
to be sure, this function has boon turned over to banks and bankers who have
operated it without direct responsibility to anyone. We propose, as I have
previously pointed out, to centralize tho powers and responsibilities in•the
Federal Ressrv® Board.
There era literally thousands of bankers in this country whose heads ere
bowed in humiliation and shame. . They are blamed for the vicious results, many
of which they are not able to rationalize. They have had their lines of credit
shut off or have experienced the withdrawal of huge sums of money upon demand.
In turn they have been forced to try to call in loans which they oftentimes
have made with the greatest of caution and deserved confidence, to be preemptorily thrown into the maelstrom of a financial panic, contraction or depression.

Among them, however, therj have been a few bankers "in the know" and also in a
dominant position for laying do\m the rules for making money "tight" or "easy" of literally determining the trend - yet the latter have not personally beon
singled out nor can they, under our present system, be called to account for the
disastrous results of their acts* It is ry oarnast desire that the fifteen or
twenty thousand bewildered bankers, whu have never known and never will know wha<
it is all about, demand that this great destabilizing and disturbing factor of
monetary policy shall be separated from banking per so and placed in the hands cs
men who must and who shall be held responsible and accountable for their acts.
Undoubtedly in this great Nation wo can find at laast five or eight mon, depending upon the finrxl provisions of the Act, who know what it is all about and can
bo trusted to administer our monetary policy intelligently and with the greatest
amount of integrity and respect for the people, and act for the public wolfare.
Bankers as a whole arc not qualified to determine nor competent to administer our monetary policy. They have not boan able to discern the difference
between purely banking functions and monetary policy operations. As a whole they
have known only that money was "easy" or monoy was "tight" Sri.thout knowing the
"whys" and "wherefores" and have boon wholly ineffectual if not irresponsible in
the administration of our monetary poliqy.
Wo have been sifting and winnowing the btisic facts for the past six long
years. We know the facts. We have weighed the evidence. We have made up our
minds as a result of the collapses of 1920, and 1929. None of the opposition
will dispute the facts. Thoy c&nnot deny them. If they have not made up their
minds after six yoars, we have little promise that they will have anything to
offer after another two yoara*
It is common knowledge, however, that there now lies within the hands of
bonkers the potential makings for ono of the most stupendous inflations this
or atiy other nation has evor experienced. And experience teaches us that banker
control of monetary policy will probably give us an equally devasting financial
whirlwind when that bubble is pricked.
This bill is conceived as our most essential safeguard.