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CONFIDENTIAL- Not yet released for publication. 1-514 TESTIMONY OF HONORABLE MARRINER S. ECCLES BEFORE THE COMMITTEE ON BANKING AND CURRENCY OF THE HOUSE OF REPRESENTATIVES ON H.J. RES. 377, AUTHORIZING THE DESTRUCTION OF FEDERAL RESERVE NOTES OF THE SERIES OF 1928 AND THEIR REPLACEMENT BY FEDERAL RESERVE NOT.S OF THE SERILS OF 1S34, OR A LATER SERIES, AT THE EXPENSE OF. THE UNITED STATES. July 14, 15 and 23, 1937. L—514 -1H. J. RES. 377 Authorizing the destruction of Federal Reserve Notes of the series of 1928, and their replacement by Federal Reserve Notes of the series of 1934, or a later series, at the expense of the United States* Wednesday, July 14, 1937 HOUSE OF REPRESENTATIVES, Committee on Banking and Currencyj Washington, D. C. The Committee met at 10:30 o* clock a.m», for the further consideration of House Joint Resolution 377, Honcrable Henry B. Steagall (Chairman) presiding. The Chairman. The Committee will be in order. Governor Eccles, the Committee would like to have you discuss House Joint Resolution 377, with which you are familiar, and whioh provides a method for reimbursing Federal Reserve Banks for money expended by them for Federal Reserve notes which they have not used. I do not know whether you have read the statements in the hearings that have been held prior to this time* If you have, you probably would know better just what line you should direct your statement to, but, in any event, we would like to have your views on this resolution. STATEMENT OF HON* MAilRINER S. ECCLES, Chairman of the Board of Governors of the federal Reserve System. Governor Eccles. Mr. 'Chairman, I do not know that I can add very much to what has already been said upon this subject. The statement which was prepared and presented here by the representative of the Treasury, giving the reasons for the proposed legislation, seemed to be quite complete. I read your own statement, which to me sums up the situation in about as short, direct and terse a manner as it can be summed up, and I will just quote from it: "The Government has sold notes to the banks which they have paid for, and as the banks now can not use them, does the Government want to take this money for the sale of something which has not been delivered and for which no benefit has been received by the banks, *r does it wish to substitute something that the banks can use?" L-514 As you know, the banks are provided with Federal Reserve notes which are supplied by the Treasury, and the notes in question, some of them completed and others in the process of completion, have be^n paid for by the various Reserve banks. They were asked to discontinue the circulation of the series of 1928 notes, for the reason that they were redeemable in gold or lawful money, and it was felt, in view of the Gold Reserve Act, that the statement should be changed to make them no longer redeemable in gold, which of course was a fiction or a lie on the face of the notes. They are not now redeemable in gold, and it was of course only proper that the circulation of them should be discontinued under the circumstances as soon as that could reasonably be done* The banks discontinued putting out these notes as rapidly as they wore provided with notes of the series of 1934, and of course they simply have an inventory or a stock of those notes which the Treasury said they would be willing to replace with notes of the series of 1934 if Cangress would authorize them to do so* using such portion of the gold profit that they had for that purpose# Now, it would seem that in view of the fact that these notes of the 1928 series were made unusable as the result of an act to discontinue the gold redanption provision, and because at the same time a large gold profit accrued to the Treasury, something over two billion eight hundred million, the banks should have those notes which were made ob solete as the result of this action replaced by the Treasury* Now, I know that some will say that the Reserve System should not receive a reimbursement, that they do not pay anything for thoir right to issue these notes, and that they aro privately owned institutions* It should be pointed out, however, that the stockholders of the Reserve Banks are limited to a fixed amount, to 6 per cent dividends, upon their stock in the Reserve Banks, and that any earnings accruing to the Reserve ^anks in excess of that amount at any time can be appropriated by Congress for such purpose as it sees fit. The surplus of the Reserve Banks has been greatly reduced, was cut practically in half as the result of on appropriation to the federal Deposit Insurance Corporation from that surplus. The surplus today is not excessive, based upon what would seem to be the reasonable conservative needs of the Reserve System, and if the Reserve System should earn funds in the future, those earnings would merely be added to the surplus, and the Congress, at any time that it say/ fit, could provide that such earnings as the Reserve System made above such amount as the Congress thought was a proper and an adequate surplus could be diverted to the Treasury of the United States* The Chairman. Governor Eccles, let me ask you a question right there. I reckon that it is a subject that might be discussed now with more freedom than would have been permissible at other times in our recent past. As a matter of fact, whatever might be the showing on paper, either of the member bank or of the Federal Reserve B an k itself, the condition of the member bank would necessarily be reflected in the actual condition of the Reserve Bank, and what I want to ask you is if it is not true that at one time our Federal Reserve Banks had inherent difficulties and problems as the result of the condition of their member banks, which the public would not necessarily get from a paper statement of the condition of the Federal Reserve Bank? In other v/ords, the Federal Reserve Bunks have not had all of the surplus all the time that they were supposed to have, as would have been shown if they had had to cash the chips and get out of the game, had they? / i f ) Governor Eccleo.* The Reserve lianks, of course, 211 a sense, are like any other institution. They have their assets and their liabilities,. The liabilities of course are the deposits of the member banks, and their notes in circulation, and their capital and surplus* Their assets represent gold certificates today very largely, and government bonds. The Chairman, But at one time they had large amounts in loans. Governor Eccles. That is right, Especially was that true in 1920 and 1921. The Chairman. And we all know that thousands of them were not in position to pay their loans to the federal Reserve. Governor Bccles. They can of course sustain losses like any other institution. The Reserve Banks j in times of depression, in my view, should be much more lenient in their credit extensions to member banks than they would be under times of more business activity. The Chairman. Let me call your attention to one thing. There was never anything much said about it at the time, and it should not have been discussed at that time, though some members of the House thought otherwise. When we were asked to pass the Reconstruction Finance Corporation Act, we were told in the conferences by some men from New York and elsewhere who were in a position to know, and I do not doubt that their statements were correct, that 800 banks in the Now York district, with capital and surplus of 600 millions of dollars, were obligated at that time in the amount of ^475,000,000. I have not the exact figures in mind. Of course, those banks had large loans with the Federal Reserve Bank in New York, and any man can draw the conclusion in a minute as to what that meant as to the actual condition of the Federal Reserve Bank of New York, and I am speaking of that because that was the particular case that was called to our attention. I do not mean that those conditions did not exist elsewhere, "but that is what we were told about the New York Federal Reserve district, S 0 that I have never been very much disturbed on account of any fear that the Federal Reserve Banks were permitted to accumulate any larger surplus than good common sense would suggest. But excuse me for intruding upon your discussion. Mr. Gifford. I want to clear up the gold certificate matter. How did you acquire the gold certificates? Governor Eccles. Do you mean the Reserve Bonks? Mr. Gifford. *es. Governor Eccles. They acquired them, in exchange for the actual gold the Reserve System turned over to the Treasury. Mr. Gifford. So the gold certificates mean that you have a call on the gold? Governor ECcles. It means what? Mr. Gifford* Does it mean that you have a call on the gold that we have on hand, if and when gold may be freed? -4- L—514 Governor ECCIGS. Well, I do not suppose, of course, that they would have a right to turn the gold certificates over to the Treasury and ask for gold. Under the law, the Treasury, of course, has the right to issue licenses to release gold* The Reserve Systam has no right to release gold for any purpose* Mr. Gifford. The point that I want to make, that I want to clear up, is this: Would it be a proper thing to use that gold to pay the public debt? You must hear that discussed and argued. Governor Eccles* You say, would it be a proper thing? Mr. Gifford. Is that gold idle? The gold certificate is not idle, but does the gold certificate represent the gold itself, and should it be held there to meet those gold certificates, or could it be used to pay the public debt? Governor Socles* I think that it should be held there to redeem the gold certificates, just as silver is held in lieu of silver certificates. Of course, there is the gold held in the stabilization fund, which is a gold profit, and there is also the gold in the sterilization fund, which is gold in addition to the gold necessary to redeem the gold certificates held by the Reserve Banks. Mr. Gifford, Then you would say that that gold, perhaps seven billions, should not be used to retire a part of the public debt? Governor Eccles. No, sir, it should not. It should be held just where it is, back of the gold certificates which have been issued to the Reserve Banks and of credits to the Reserve banks payable in gold certificates. Mr, Gifford. Mr. Chairman, I wanted to bring that out. Mr. Patman. V/hat about the idle gold? Why should it not be used to reduce the public debt? Governor Kccles. To use that to reduce the public debt, of course, would Immediately bring it back as excess reserves, and if you do that, that would be merely desterilization. If you used the gold in the stabilization and sterilization funds, it would increase the excess reserves of the banks by something over three billion dollars, and the Reserve System would have no power with which to control credit inflation, without getting further power to increase reserves. Mr. Gifford. How much idle gold is there? Governor &ccles. Just what do you mean by idle gold? Mr. Gifford. These certificates represent gold, I suppose. Governor kccles. Yes, but do you mean gold outside of #lat the gold certificates cover? Mr. Gifford. Y0s. We hoar so much about this idle gold. -5- L—514 Governor Eccles. I do not know. It seems to me that you would have to get those figures from the Treasury. Mr. Gifford* How much in gold certificates has the Federal Reserve? Governor Eccles. What is the question? Mr. Gifford. How many gold certificates have you? Governor Eccles. Has the Reserve System? Mr. Ford. Donft you mean the sterilized gold, Mr. Gifford? Mr. Gifford. I think Father Coughlin waxed rather angrily when he found that the gold certificates were issued to the Federal &eservo, and ho said that that was a call on that particular gold. I think that it is a good thing at this moment to find out if we do have idle gold. Mr. Patman* Didn't the Governor answer that when he said that the only gold certificates outstanding were the gold certificates in the hands of the Federal Reserve Banks, aggregating seven billion? We have about twelve Million four hundred millions in gold, but there is only about seven billion outstanding in certificates held by Federal Reserve Banks. Governor Eccles. About eight billions eight hundred million in gold certificates and credits payable in gold certificates. Mr. Patman. There must be two or three billion dollars of idle gold at least, and the treasury statement every morning shows that there is over a billion dollars in active gold. Mr* Gifford. I want that answered very much, how much idle gold there isj but you agree that those gold certificates are a call on that amount of gold? Mr. through. all over gold for Patman. It is a rather fictitious proceeding that they aye going Of course, the Treasury has been turning these gold certificates to the Federal Reserve ^anks, to get credit. You cannot get those certificates. Mr. Gifford. When gold is freed, those certificates would be honored. Mr. Patman. I beg your pardon? Mr. Gifford. If and when that gold is freed, those gold certificates would have a call on it. Mr. Patman. Because of the way they obtained those certificates, I do not know that they have any moral right to demand the gold, because the Federal Government favored the Federal Reserve Banks in that over every one clse^ The Chairman. Have not the Federal Reserve Banks turned over the actual gold when the legislation was passed, and I want to ask in that connection how much gold the federal Reserve Banks have surrendered as compared to the amount of gold certificates outstanding. L-514 Governor JSccles. Well, as I understand it, the federal Reserve Banks have gold certificates, or a call on gold ccrtificetes, of approximately eight billion eight hundred million. They turned that much gold over* The Chairman. How is that? Mr* Patman. You are bound to be mistaken about that. Governor Eccles. About what? Mr* Patman. Do you mean to say that you actually delivered that much gold, eight billions eight hundred million? Governor Eccles. Yes. That is the amount of gold certificates the Federal Reserve Bonks report as "On hand and due from United States Treasury." Mr. Patman. How much have you evo-r had in your possession, in the vaults of the Federal Reserve Banks? Governor Eccles* Well, I would have to gofcackto answer that. I do not know what amount of gold was had at the time the Gold Reserve Act was passed, but whatever it was it was turned over to the Treasury, and they got gold certificates. Since that timeMr. Patman. Is it not a fact—• Governor ficcles. Since that time the gold that has come into the country, of course, has gone to the Treasury. All gold that has gone out of circulation has gone to the Treasury. Mr. Patman. If the law compels turning in the gold, and I turn it in, does the Federal Reserve Bank claim any credit to that gold? Governor Eccles. The Federal Reserve Bank turns that gold *ver to the Treasury immediately. If you go to a bank and deposit gold, or it comes from any source and it goes through a bank, you will get credit at the "bank for that deposit, but that "bank immediately turns it over to the Reserve System, and the Reserve System turns it over to the Treasury* Mr. Patman. But suppose that it is a gold certificate; what do you do with that? Governor ^ccles. One of the old gold certificates? Mr. Patman. Y e s ? Governer Eccles. That would be turned into the Treasury. Mr* Patman. You mean that you would turn it in to the Treasury? Governor Eccles. Mr. Patman. That is right* And the Treasury turns it right back to you for credit L-514 oftentimes, and isn't that the way that you acquired most of the certificates? Governor ^ccles. That is right. Mr* Patman. certificates. So that you did not get the gold, but the gold Governor Eccles* I do not know the exact figures, but whatever gold the Reserve System had, they delivered to the Treasury* Mr* Patman* Those figures are would be rather interesting to this much gold the Federal Reserve Banks Will you furnish the committee with available, and I think that it committee to know just exactly how had in their physical possession* that information? Governor Eccles* That information, I am sure, could be easily gotten# The gold was turned over at $20*5? an ounce, the same as gold held by anybody else* Anybody holding gold turned it over at the old price of gold, and the difference between that and the increased price of gold* of course, becomes a gold profit to the Treasury* Gold turned over to the Treasury by the Federal Reserve "banks on January 30, 1934* in accordance with the provisions of the Gold Reserve of 1934 was as follows: Gold coin Gold bullion Gold on deposit with Treasurer of the United States for account of Federal Reserve banks and agents Total $ 707,067,000 99,235,000 1,761,469,000 12,567,771,000 Gold certificates held by the Federal Reserve banks on January 30, 1934, approximately ^1,000,000,000, were all turned over to the Treasury on various dates in exchange for credits on the books of the Treasury payable in the new form gold certificates. Since January 30, 1934, gold coin withdrawn from circulation, domestically produced gold, and imported gold has all gone to the United States Treasury. On the basis of these gold holdings the Treasury between January 31, 1934, and July 14, 1937, g^ve the Federal Reserve banks credits payable in gold certificates in the amount of about $5,300,000,000 in exchange for deposit credits on the books of the Federal Reserve banks, which credits have been used by the Treasury to meet its current obligations. The procedure differs in no essential respect, so far as the Reserve banks are concerned, from that followed in connection with the silver purchase program* in which silver is purchased by the Treasury and silver certificates turned over to the Reserve banks for deposit credit. In the case of silver certificates, however, unlike gold certificates the Reserve banks can and do pay out the certificates into circulation, whereas they must themselves continue to hold the gald certificates* L-514 Mr. Patman. You stated awhile ago that these gold certificates were turned over to the Treasury. They are turned in there for the purpose of obtaining different kinds of certificates. Supposing that you had ^100,000 worth; would you turn that in and get one gold certificate for $100,000? Governor Eccles. As a matter of fact, forttiebiggest part of that gold, gold certificates have not even "been issued. It is merely an account. Over six billions of gold certificates have not been issued. Mr* Patman. I am anxious for you to describe one of these new kinds of gold certificates that they have gotten up for the purpose of being used by the Federal Reserve Banks. What does it look like? Governor Eccles. I have a form here of the gold certificate. Mr. Patman. The new form? Governor Eccles. Yes, tho form of 1934. Mr. Patman. Describe it, please. Governor Eccles (Reading). "This is to certify that there is on deposit in tho Treasury of the United States of ^erica, (blank) dollars in gold, payable to the bearer on demand as authorized by law. This certificate is a legal tender in the amount thereof in payment of all debts and dues, public and private. "(Signed) Treasurer of the United States. and Secretary of the Treasury." Mr. Patman. I thought it was supposed to be restricted in use so that only the Federal Reserve Banks could use it. Is that right? Governor Eccles. The Federal Reserve Banks do not use them. They merely hold them as they would a receipt in lieu of the gold that they have. Mr. Patman. That is what I thought, but that indicates that anyone getting possession of it would have a right to take it to the Treasury and get gold on it. Governor -Eccles. It says, "On demand, as authorized by law." Mr. Patman. Suppose that he wanted the gold for export; he would have to get permission to export it. Governor Eccles. If they wanted gold for any purpose, the law has given to the Secretary of the Treasurer the discretion on that* Mr. Patman. But that certificate, so far as being a claim on gold is concerned, is restricted to the provisions of the law, and domestically you cannot demand gold, and you cannot get gold on that certificate* ]>514 Governor Ecclf^| That is right Mr* Patman* For domestic purposes. far as it relates to domestic business. So it is merely a fiction so Mr* Gifford* The other question is, Suppose that the gold certificate is presented for money by you, and you receive United States bills or paper, and you accept that; can you after that demand gold? If you can, then I claim that the gold is not idle, that it is working through the.gold certificate* Governor Eccles* question? I do not get the point* Just what is your Mr* Gifford* If I have a receipt, it means that I can demand gold that is freed, and I give up that receipt and take money that is "being issued now* That gold receipt is a certificate for gold in the hands of the Treasury, but you have been paid the money and accepted it* Governor Eccles* Whom are you speaking of, the Reserve System? Mr* Gifford* Yes, and I want to a,sk if you do not jeopardize your privilege of a demand for gold when you accept paper money? Governor Eccles. I still do not get your point. The law, of course* as you all know, required the Reserve System and everybody *lse holding gold or gold certificates to turn them in to the Treasury, at $20.67 an ounce. That was done* The Reserve Systemj in lieu of the gold, was given these gold certificates* The law requires that the Federal Reserve notes must be covered by not less than 40 per cent of gold--and in this case it would be gold certificates*—so the gold certificate serves the same use under the law that the gold did serve, and the balance is to be covered by either United States Government "bonds or paper, commercial paper, eligible paper which the Reserve System has taken from the member banks* Mr* Gifford* I do not think my question should be so difficult. I think I see the moral side of it. If you bring in that gold certi-* ficate, and you take money, bills, you lose the right to demand gold, don't you? The Treasury accepts gold certificates for the money handed over the counter, and haven't you lost it then so far as its being a demand for actual gold is concerned, or is it simply a bookkeeping arrangement? Governor Eccles. The Federal Reserve Banks do not turn gold certificates over to the Treasury in exchange for other kinds of currency. Mr. Gifford. Don't you have to give up the gold certificates? Governor Eccles. They have to turn all of the old series gold certificates over to the Treasury but not the new series certificates which are issued only to the federal Reserve Banks. Mr* Gifford. You don't give them up? Governor Eccles* Not the new ones* Mr* Patman. I want to ask a question on this bill* -10- L—514 The Chairman. Let mo see if I understand what ne is talking about. You have eight billion eight hundred million of Federal Reserve notes now outstanding—is that right? Governor Eccles. How many did you say? The Chairman. Eight billion eight hundred million. Governor Eccles. That is in gold certificates. You have less than that of Federal Reserve notes outstandings The Federal Reserve notes in circulation amount to four billion two hundred fifty-two million. The Chairman. gold certificates? -And you have eight billion eight hundred million of Governor Eccles* certificates* Gold certificates and credits payable in gold The Chairman. Where are the gold certificates? Governor Eccles. Where are they, did you say? The Chairman. Yes. Governor Eccles. They are in the various Reserve Banks* The Chairman. They have than now? Governor Eccles. Yes or a call on them. The Chairman* No matter how they have them, they are under their control? Governor Eccles. That is right. Here is where they are— The Chairman. That does not matter; I understand that part of it. Mr. Hancock. You have not actually got two billion dollars in gold certificates, have you, in the System? Governor Eccles. Yvhat was the question? Mr. Hancock* You have not actually got two billion dollars in gold certificates in the System? Governor Eccles. They have eight billion eight hundred and thirtyfive million, but there has only been two billion eight hundred million actually delivered to the banks. The banks could get the balance at any time they wanted it. The Chairman. I want to ask you this, Governor: They have four billion, plus any Federal Reserve notes. What is the cover for those notes now? Governor Eccles. It varies. Gold certificates on hand and due from the Treasury, #4,563,632,000; eligible paper, |12,844,000; and United States Government bonds, $20,000,000; or a total of $4,596,476,000, is what -11is held by the F'ede^UL Reserve agents covering the v/hich they have issued or are outstanding. L—514 f O ral Reserve n^tes The Chairman* Of course, those notes are protected by all the assets of the federal Reserve Banks, and they have only <#112,000,000 in commercial paper? Governor EocJ.es. And the rest in gold certificates and govemnen* bonds. The Chairman. The rest is in gold certificates, which are theoretically redeemable in gold? Governor Eccles. That is right. The Chairman, idle gold? hid then they have in additien to that how much Governor Eccles. They have a total of eight billion eight hundred thirty-five million, so that they would have the difference between four billion five hundred and sixty-three million and eight billion eight hundred thirty-five million not pledged against Federal Reserve notes* The Chairman. Over four billions more of gold to their credit which, so far as the Federal Reserve System is concerned, is now idle? Governor -Eccles* It is not idle, because that is to be used to cover deposits. The law provides that they must hold a 40 per cent coverage on Federal Reserve notes and 35 per ceit on deposits, so it is not idle, and it is not wholly free. Mr. Goldsborough. Isn't-this the situation, that the idle gold being discussed here is represented by two billion dollars in the stabilization fund and the so-called frozen gold which has been recently purchased by the Treasury? Isn*t that the total amount that constitutes the idle gold, so-called? It amounts to about three billion dollars? Governor &ccles. I would say so, as far as— The Chairman. I have undertaken to show the amount of gold that the Federal Reserve Banks now hold and the amount of notes that they have outstanding and in circulation, and the notes that they have outstanding and in circulation are covered by nearly 100 per cent gold* Then they have in excess of the gold required to be covered by deposit about one or two billion more. Governor &ccles. I think about one billion seven hundred million dollars more. The Chairman* the highest requirement we ever had as a gold protection against Federal Reserve notes was 40 per cent, wasnft it? Governor Eccles. 40 per cent, of course, is the legal requirement* The Chairman* I say, the highest that we ever had? Governor Eccles. The difference has to be made up by Government bonds* -12- L—514 Tho Chairman. I am not talking about that. I mean that the only requirement, and the highest requirement, was 40 per cent. Governor ^ccles. That is right. The Chairman. That being the case, we have how many millions of dollars of gold that could be used as a base for Federal Reserve notes, if wo only used the amount actually required? Governor Ecoles. You would have the excess, which is about one billion seven hundred million dollars, plus the difference between the present gold coverage and the required coverage. In other words— The Chairman* would it not? It would be something like five billion of dollars, Governor ^ccles. It would be close to that. About four billion nine hundred million. The Chairman. Above what it would take to cover your notes with 40 per cent of gold? Governor ^ccles. In other words, if you covered your notes with 40 per cent and your deposits with 35 per cent> you y/ould have about four billion nine hundred million of gold in excoss of that minimum coverage. The Chairman. That is what the Federal Reserve now has? Governor Eccles. That is right. The Chairman. And which they could use with a 40 per cent coverage fir additional Federal Reserve notes' Governor Eccles» That is right. Mr. Hancock. That would serve as a credit base for something like fifty billion dollars, would it not? Governor ^ccles. If issued by the Reserve banks and redeposited "by member banks, it could serve as a basis of multiple expansion by member banks, but the Reserve banks could issue it only if they purchased that amount of securities in the open market, which it would be impossible to dO« The Chairman. How much of a further currency base would it serve, assuming that you made up the other coverage by bonds or commercial paper? Governor E0cles. Assuming that 60 per cent was made up of bunds and commercial paper, and the gold was only used to the extent cf 40 per cent coverage on notes and 35 per cent on deposits, that would leave about four billion nine hundred million of gold in excess of that minimum requirement. The Chairman. Then how much additional issue $f Federal Reserve notes would that cover on the basis of 40 per cent, assuming 60 per cent -13- L—514 is made up of bonds and commercial paper? What I am trying to get at is this: How many notes could the Federal Reserve Banks put out and still protect then by the 40 per cent provision? Governor Eccles; Twelve billion two hundred fifty million* The Chairman* And still we have lots of people lying awake at night for fear we are going to expand our currency too much and have inflation* That is what I wanted to bring out. Now, how much credit would your twelve billions make possible? Governor Eccles* The thing that determines the possible credit expansion of the banking system is the amount of excess reserves of the member banks* Now, those reserves are increased or decreased through two methods: through open market operations or through the actual increase or the decrease of reserve requirements* Prior to the action of the B0ard in increasing the reserve requirements last summer and this spring, and assuming there had been no increase in reserve requirements last summer and this spring, there would be approximately three billion dollars more excess reserves held by the member banks than are held today* Today there is about 900 million in excess reserves* The member banks would hold very close to four billion dollars of excess reserves had Congress not given the Board power to increase the reserve requirements, and had the Board not used that power* You add to excess reserves to the extent that you buy securities in the market* As securities may be sold in the market or are permitted to run off, it diminishes the amount of the excess reserve* That is the mechanism available in the Reserve Systen the control of the expansion or the contraction of credit, and the amount of gold held by the Reserve System influences it only to the extent that it is not sufficient to cover the 40 per cent and the 35 per cent. If the gold reserve was getting olose to the limit, then, as was the case in 1932* it maybe impossible for the Reserve System to carry out an open market operation in attempting to ease the money situation, but with the large amount of gold available, it is not a factor today in either the expansion or the restriction of credit by the banks* Mr. Wolcott* Following that thought further, you have expressed an opinion based upon the Chairman's question, to this effect, that it appears that you can, upon the gold basis, issue upon your gold excesses about twelve billion five hundred million of currency. Now, is it your contention that if the Federal Koserve issued twelve billion five hundred million in new currency, under the quantitative theory of currency, that would not create inflation? Governor Eccles. "What would the Kesorve System do with the currency if it issued it? Mr, Wolcott. Would it not find its way back into the excess reserves -14- L-514 of the banks, and t^^fore be used as a basis for ci(%t inflation? Governor Eccles* In the first place, there is no way that that currency could be gotten out* Mr* Wolcott* As I understand it, the theory behind the issuance of money is to meet current demands for currency, and you do not issue any more currency than is needed. Governor Eccles* The Reserve System does not determine the mount of currency issued; the depositors determine that* Mr* Wolcott. And that is influenced by the needs of business for currency? Governor Eccles. In fact, the greatest amount of currency we had in circulation was at the time of the bank holiday, when business was at the lowest ebb, so that we cannot say that the volume of currency is determined solely by the expansion and the contraction of business* Mr* Wolcott* What determines, therefore, the amount of currency which is outstanding? Governor Eccles. I would say normally that business expansion and contraction—and the price level, which is a factor of course in determining the volume of money needed to do a certain amount of businesswould determine the volume of currency outstanding. If currency is hoarded, as it was at one period, it is a factor in determining the amount of currency outstanding, but under a normal condition, where people do not withdraw currency and hoard it then the amount of business activity largely determines the amount of currency in circulation* Mr. Wolcott* It is contended by a great many members of Congress that where there is a contraction of credit facilities, either due to the tightening up by the banks or the failure of borrowers to demand credit, it is desirable to issue currency to balance up the withdrawals of credit* What would normally happen to that increase in currency, if that was done under those conditions? Governor Eccles* It would come right back into the Reserve Banks and would be added to the excels reserves of member banks* Mr. Wolcott. -And the banks would be required to invest those excess reserves in federal bonds? Governor Eccles. Well, the manber banks would have thu excess reserves, and I suppose that they could invest them wherever there was a demand* Mr. Wolcott* And when the excess reserves got up to a point where you thought it was dangerous and might cause inflation, then you again would have to raise the reserve requirement to offset it? Governor Eccles* The Board has no further authority under the law to increase reserve requirements* Mr. Hancock. Is it not a fact that under our monetary system, the more prosperous and stable business is, the less currency we use? Governor Eccles* xaont I should say that,that is not an accuaa -15L-514 Governor Eccles. I should say that that is not an accurate statement* It is true, however, that business may be prosperous and stable, and we would use less currency than we would in a time of crisis, when people hoarded currency. Mr. Hancock. As long as people have confidence in banks* they do not use currency, do they? Governor Eccles. The greater the business activity, tho greater the amount of cash needed to transact it, and that increases the amount of currency in circulation. The amount of currency in circulation now is substantially more than it was a year ago. There was more a year ago than two years ago. The amount of currency in circulation has increased substantially, due to two factors, first the large increase in the physical volume of business and secondly some increase in the price level. Mr. Hancock* Governor, there was more currency outstanding in February, 1933, than at any other time in the history of this nation. Governor Eccles. That is right. That was duo to the fact that currency was carried in lieu of bank deposits, and it was carried idle; it is what we call hoarded money. Mr. Wolcott. And there was less in circulation during the peak year of 1929 than before that* Governor Eccles* That is correct* Mr.. Fish. I think that it would serve a useful purpose to put into the record the amount of currency he refers to as being outstanding in 1933, and the date, because I am under tho impression that we have today almost as much outstanding as at any other time in our history. I may be in error there, but isnft a fact that we have more outstanding now than we have had for a groat many years? Governor Eccles. We had more in 1933* Mr. Fish* How much more in 1933 than at the present time? Governor Eccles* The maximum amount of money in circulation was soven billion tr:d >.un:li\.d ninety-four million on lfnroh 13, 1933. Mr. Hancock* For about two weeks it ran pretty close to seven and a half billion dollars* Mr. Gifford. Mr. Patman* The French people arc hoarding our currency. I would like to ask a few questions about the bill* Fish, ^e had bettor answer my question first* Governor Eccles. At the present time (July 7) there is a total amount in circulation of six billion five hundred twenty-four million* That includes all kinds of circulation. Of that amount, about four -16- L—514 billion two hundred and fifty million is in Federal notes. Then there are the silver certificates, and the eld United ^tates notes. Mr. Fish. Isn't that the largest amount, except for that one exception in 1933 when we had seven and a half billion outstanding? Governor Eccles* ^es* Mr. Fish. One other question. Will you state to the oocnaittoo whether you are in favor of the sterilization of gold? Governor Eccles. You are asking me that question? Mr. Fish* Yes. Governor $ccles. "Whether I am in favor of it? Mr* Fish. Yes* Governor Eccles* Yes* 558 Mr. Fish. And whether* in view of the fact that wo took over 250 million dollars last month in geld and sterilized it, and placed it in the inactive account, you are in favor of continuing that policy indefinitely, of holding those huge sums of money? Governor Eccles* You have one of two alternatives* You can either sterilize gold in that way, or find some other way to do it, or permit it to become excess reserves in the banking system, in which case the credit control which now can be exercised by the Reserve Bonks could no longer be exercised. Mr* Fish. I want to hear from you whether you consider it possible for this ^ovornraont—not this administration, but the Treasury Departmentto continue this policy to which I have referred indefinitely in connection with any attempt to balance the budget, because I understand that you want to balance the budget* Governor Eccles. Of course, you get into a very large and involved subject when you discuss the gold question, and it is one that I do not feel at liberty to discuss. I feel that inasmuch as Congress has given to the Treasury the responsibility for dealing with this subject, that I would prefer not to discuss it, or to express personal opinions with reference to it* The Chairman* Gent lemon, the Members are aware of the state of mind of the Members of the House today on account of the shocking death of Senator Robinson, and I on sure that all the Members here would like to be on the floor when the House meets. For that reason I am going to suggest that the committee recess until 10:30 tomorrow morning. -17- L—514 You con be back with us tomorrow morning, can you not? Governor ^ccles* Yes* The Chairman* tomorrow morning* I hope that we may be able to finish with you Without objection, the committee will meet tomorrow morning at 10:30* (Thereupon, at 11:50 o'clock a*m*, the committee recessed until Thursday morning, July 15, 1937, at 10:30 o*clock a*m.) -18- L—514 H. R. RES. 377 Authorizing the destruction of Federal Reserve notes of the series of 1928, and their replacement by Federal Reserve notes of the series of 1934, or a later series, at the expense of the United States* Thursday, July 15, 1937 HOUSE OF REPRESENTATIVES, Committee on Banking and Currency, Washington, D. C. The Committee met at 10:30 o*clock a. m., for the further consideration of House Joint Resolution 377, Honorable Henry B# Steagall (Chairman) presiding. The Chairman. Gentlemen, we have Governor Eccles with us again this morning. He will resume his statement on House Joint Resolution 377• Mr. Ford* Mr. Chairman, might I make the comment there that I hope that the discussion will be confined to the bill this morning. (Thereupon there was a brief informal discussion, off of the record.) The Chairman. You may proceed, Governor Eccles. FURTHER STATEMENT OF HON. MARRINER S. ECCLES, Chairman of the Board of Governors of the Federal Reserve System. Mr. Patman. The Chairman. I would like to ask the Governor some questions. Certainly. Mr. Patman. The 1928 certificates are the ones involved hero, are they not? Governor Eccles. Yes, that is right. Mp. Patman. They are the ones that stato on their face that they are payable in gold at the United States Treasury, or in gold or lawful, monoy at any of the Fedoral Reserve Benks? Govornor Ecclcs. That is correct. L—514 -19- Mr. Patman. I believe that you stated yesterday that the new form of gold certificate that is used between the Federal Reserve Banks only uses the phrase "as authorized by law." In other words, the statement is on the certificate that they arc redeemable in gold, but the additional phrase is used, "as authorized by law." That is the only difference, is it? Governor Eccles. Yfell, to be sure that there was any greator difference, I would have to examine them, but, as I recall it, that is the difference. Mr* Patman. That being true, why couldn't you just add that same phrase to these bills, "as authorized by law," and make them just the same as the other bills now being used? Governor Eccles. Of course, the bills now being used are not in circulation, I mean the bills that the Treasury now gives to the Reserve System for the gold which they took from the System, Mr. Patman. I did not got that. Governor Eccles. I say, the gold certificates which the Treasury has given to the Reserve Banks in payment of gold which the Reserve System has turned over to the Treasury, as I understand it, are different certificates than these Federal Reserve notes payable in gold. Mr. Patman. Yos, sir, they are different certificates, used for different purposes. Governor Eccles. But they aro not in circulation. Mr. Patman. I think that you misunderstood mo. I am not talking about those at all. Whon you stopped paying out on the so 1928 notes, you had about thrco billion dollars worth of thorn on hand, did'you not? I moon the aggregate amount in notes in tho cagcs over there at tho Bureau of Printing and Engraving. Governor Eccles. Tho totol amount involved would bo loss than throe billion at tho Bureau. Tho Federal Reserve agents also hold about a billion and a half. Mr. Patman. But you had in circulation notes just like that, amounting to about two or throe billions dollars, or more? Governor Eccles. Well, there were notes in circulation at that time, but there was no way, of courso, of recalling those notes readily, bocause—• Mr. Patman. lion dollars? How much did they aggregate? Two or thrco bil- -20- L—514 Governor Ecclos* What did they aggregate, Mr. Smcad? Mr. Smead. Probably a little more than that. Mr. Patman. About four billion dollars. Now, they remained in circulation, except those that have boon replaced because they wore injured or damaged? Governor Eccles. They are being replaced constantly, of courso, as mutilated currency is. Mr. Patman. Therefore tho System is rocognizing tho policy of paying those out and continuing thorn in circulation, although thoy do oxpross a lie, as you stated yestorday, on their face? Governor Eccles. I think that that is possibly corroct. Mr. Patman. You lot them be paid out every day, didnft you, those that wore paid out? Governor Eccles. Prior to tho timo when we wore askod to discontinue their circulation by tho Treasury. Mr. Patman. You could withdraw them or capture them as thoy come over the counter, as you always capture tho gold certificates? Governor Ecclos. could bo done. Mr. Patman. It would be with great difficulty that that But it could bo done? Governor Eccles. I suppose that it could bo by a lot of extra oxponse and work, but you would have to examine every Federal Reserve noto carefully. Mr. Patman. The point that I was endeavoring to make is this, that there cannot be so very much harm dono in paying these out and using them, bocauso wo have billions of notes out every day and being paid out by Federal Reserve Banks. Governor Ecclos. That of course is a question for tho Treasury to decide. The Re servo System did not discontinue— Mr. Patman. The Treasury discontinued them? Governor Ecclos. Yes, tho Treasury wore tho ones that askod— Mr. Patman. Whon was that request made? Governor Ecclos. When was it, Mr. Smcad? L—514 -21- Mr. Smoad. December, 1935. Governor Eccles. And it was taken up with the bank presidents, at a conferenco— Mr. Patman. I wonder why the question was not submitted to Congross at that time. Do you know? Governor Ecclcs. The Treasury agreed at the time thai; they would submit it to Congress, but they did not do it at onco. Mr. Patman. yoars? It just has not boon dono? And it has boon two Governor Ecclos. No, the t was in the fall of 1935, and this is the second sossion. They wore going to do it, but just did not got to it, and the matt or ccmo up to mo from thoso various banks. You soo, the bonks have funds invested in this account. Mr. Patman. I understand that« Governor Ecclos. And it is shown as an investment in curroncy, a currency inventory. What wo wore trying to do was to get tho thing cloarod out. Mr. Patman. How many of the govoramont bonds have on their faco, "payablo in gold"? Governor Ecclos. I could not toll you. Mr. Patman.. A groat porcontago of than, I presume? Governor Ecclos. Well, I suppose that all of those that wero $ut prior to tho Gold Reserve Act. Mr. Patman. do thoy not? Thoy have tho samo kind of a lio on their faco, Governor Ecclos. I think that is true. Tho Chairman. Lot mo interrupt you ono minute, just so tho record should show the fact about that.. Tho fact is, Governor Ecclos, that in the legislation of 1934, wo providod for the exchange of all bonds with tho gold clause for bonds simply payable in lawful money of tho United States, the exchange to bo ma do without expense to the bondholder, did wo not? Governor Ecclos. Banks— Mr. Patman. I could not toll you. I want to ask you— Of course, tho Reserve -22- L—514 Governor Eccles. — or a holder of the present notes redeemable in gold could exchange those for the 1934 series* that is* tho holders of the scrios of 1928 could oxchango -their notos for tho series of 1934* Mr. Patman. Without expense to thefti? Governor Ecclos. Yes. Mr# Patman. Do you mean notos or bonds? Governor Ecclos. Notos. Mr. Patman. That is when they arc dofe.eed in some way? Governor Eccles* No. What I moan is that if a person owns some Federal Resorvo notos rodoemablo in gold or lawful money, they can naturally oxchango those notes for a note not redeemable in gold, in tho some manner that — Mr. Patman* I want to ask you about this $139,000,000 taken from tho reserve funds of tho Federal Reserve Bank* It is my understanding that when the FDIC Bill was passed, the Government appropriated $150,000,000 from the Treasury to mako up tho initial fund, and $139,000,000 from tho Federal Reserve Banks1 surplus fund, and tho remainder was made up by assessments on tho banks, and after that there was a law passed to turn that $139,000,000 over to the Federal Reserve Banks* Is that right or not, and I wont to know what kind of a string was tied to that #139,000,000? Governor Eccles. I would havo to chock on tho dotail of that. The money has not boon returned to tho Fodoral Reserve Bonks, and there is no way in which tho prosont Federal Reserve Banks can get that* ' Mr. Patman* I thought that for Industrial loans thoy could. Governor Eccles. No. Tho Treasury put up one-half of tho rmount for industrial loans, and the Resorvo Systom put up onehalf, and tho total amount roceivod from the Treasury by tho Fodoral Resorvo Banks under section 13-b is $27,421,000. Th^t is tho total amount that wo got and Upon that we hr.ve to pay interest at 2 per cent* Mr* Patman. To whom? Governor Eccles. To the Treasury if it is earned* Mr. Patman. Do you mean to say that you will havo to pay back tho money to the Treasury? Governor Ecclos. Wo do not pry it back, but wo pay interest on it. -23- L—514 Mr. Pivtman. It is my understanding that there is no string at all attached to that money, that tho law was so worded that the Treasury cojinot force tho Federal Reserve Banks to pay it back to tho Treasury. Govornor Ecclos. cent. I think that is correct, but wo pay 2 per Mr. Patman. Which law requires you to pay 2 per cent if you ore not required to pay back the principal? Governor Eccles# It was an orrangomont with the Socrotary of the Treasury by Govornor Black prior to my time, and I do not know the circumstances under v/hich tho arrangomont was mado, but I cannot imagino that the Rosorvo System would assume an interest obligation if it had not boon required to do so* Mrt Patman. That is what I cannot understand, that if thoy are not required to pay the money back, why they havo to pay interest on it. Governor Ecclcs. Tho law requires that wo pay the 2 por cent. Mr. Patman. how long? Tho law requires that you pay the 2 por cont for Governor Eccles. As long as wo havo tho money. Mr. Patman. As long as you have tho industrial loans? Is that right? Whon the industrial loans arc collected, you kcop tho money and cease to pay intorost? Govornor Ecclos. Air. Smoad says that thoro is no such limitation. It has no relation to whothor tho industrial loan is paid. Mr. Patman. But you vrill continue to keep the money and to pay interest? Governor Eccles. Mr. Smoad. I cannot say that. If earned. Governor Eccles. In other words, thoro is no opportunity of earning any money on that kind of a loan. It is in tho nature of a loan at 2 por cont. Thoro is a very groat difforonco between that money and tho money which was in the surplus of the Reserve System which thoy turned over to tho FDIC. Mr. Patman. In regard to this— Governor Ecclcs. The Rosorvo System cannot nalco 2 por cont on tho avorago over a poriod of time. Tho average yield on thoir present holdings of government bonds is around 1-1/2 per cont, and the highest discount rate is 2 por cont today, and tho lowest is -24- L—514 X-l/2 per cent, so that tho gross return on any Federal Reserve loan or investment would necessarily bo loss than tho 2 per cont which wo are required to pay, cxcept 011 industrial loans, where the rate received is from 4 to 6 per cent. Most of tho loans, I would say, would possibly average 5 per cent. However, there is not much profit on tho so loans, bocauso of tho typo of lorn, They require a groat deal of investigation end a groat deal of tine and attention in managing and looking after them. Mr. Patman. I am not claiming that you make any profit on thorn. That is really a different point. Governor Ecclos. I thought you wore making tho point that wo got our surplus of $139,000,000 back. Mr. Patman.. I am making tho point, and I still believe that I cm'right about it, although I am not positive, that that §139,000,000 is gono from tho Treasury without any strings on it at all, and that tho Treasury cannot make you pay that monoy back to tho Treasury. Governor Ecclos. In the first plaoo— Mr. Patman. I hope that I am wrong about it, and I hope that you are right, but I am still not convinced. Mr. Williams. Lot mo a.sic a quostion right in that comioction. This is my under standing of it, that tho original invostmont was 1139,000,000 in FDIC stock. Governor Ecclos. That is right. Mr. Williams. That was taken from tho Federal Reserve surplus. Governor Ecclos. That is right. Mr. Williams. When tho peruanont FDIC law was passe \ that vlo9,000,000 was turned back to the Treasury, was it not? Governor Ecclos. No. Mr. Williams. And tho :voiiey which represented it is not carried as a surplus now by tho Federal Roservo? Governor Eccles. It is ontiroly out of the Federal Reserve; it is nonexistent as far as thoy are con corned. Mr. Williams. Well, tho money to that oxtont is in tho Treasury. -25- L—514 Governor Ecoles. The money is in the Federal Deposit insurance Corpor at ion. Mr. Hancock. Is it not a fact that tho records of tho FDIC show that tho Federal Reserve System, still owns $139,000,000 of stock? Governor Ecclos. I could not say what their records show. Mr* Williams. Isn't this further the situation—and I would like to have this understood myself—"that as those industrial loans aro mado by tho Federal Reserve Banks, tho money with which thoy aro mado comos from tho Treasury? Governor Ecclcs. Ono-half of it. Mr. Williams. And to that extent thoy appropriated to tho Federal Rosorvo B-nks approximately #27,000,000? Governor Ecclos. That is right, and that has practically reached its peak, too. Mr. Williams. As a matter of fact, tho Federal Rosorvo Banks have not any of this surplus, except tho amount that thoy have invested in industrial loans? Governor Eccles:. Except tho $27,000,000 which was turned over to thorn for tho purpose of making industrial loans, and upon which thoy arc required to pay 2 per cont, if earned* Mr. Williams. That is the only amount of that surplus that tho Federal Rosorvo Banks have now, and thoy have to pay 2 per cent on that amount? Governor Ecclos. Mr. Williams. If earned. If earned? Governor Ecclos. That is right. Mr. Williams. Tho point that I am trying to make is that you do not have this #139,000,000. That was" taken away originally under tho FDIC. Governor Ecclos. No. Wo havo had #27,000,000 returned from tho Treasury in the form of on interest-bearing obligation. Mr. Williams. And that is for the purpose of making industrial loans, and upon those you pay 2 per cont interest? Governor Ecclcs. That is right, and thoro is no way of getting more than that, bocausc the industrial locals arc declining -26- L—514 rather than increasing. Tho aggregate industrial loans aro not increasing. Wo havo reached tho peak* Mr. Williams. That $27,000,000 is carriod as pert of tho surplus of tho Federal Resorvo Banks on their books? Governor Eccles. Yos, it is carriod under a separate surplus. The capital fe $132,000,000. Then you havo a surplus of $145,000,000,* and the surplus under soction 13-b of §27,000,000. Mr. Williams. provis ion? It is carriod as a surplus under a separate Governor Eccles. That is right. Mr. Williams. Making your total surplus now §175,000,000? Governor Ecclos. That is right, $172,000,000. Mr. Williams. That is tho situation now? Governor Ecclos. That is correct. Mr. Patman. It is my understanding from an investigation that I mado some time ago — I have not gone into it recently— that this $139,000,000 was authorized for industrial loan purposes, and as tho Federal Reserve Banks usod it for that purpose -aid the loans were collected, thcro is no way that the Treasury c m c .uso th;..t monov to bo paid back into tho Treasury. Governor Eccles* That is correct, but tho Treasury maintained a string on it that required tho Resorvo Banks to pay interest. Mr. Patman. Havo you actually paid interest? Governor Ecclos. I do notjlcnaw how much interost has boon paid. Mr. Smoad- A number of Federal Rosorve Banks havo$ v/honover it has boon earned. Governor Ecclos. Wo havo sot up a formula that was agreed upon with the Treasury, that thoy folt complied with tho law, and whenever it shows an earning 011 these loansMr. Patman• and so forth? Charging all exponses of supervision to tho loans, Governor Ecclos. Thoy do not charge all that oxponso against the Treasury, because the Treasury supplied only half of tho money. In other vrords, part of the money loaned is their ovjn fund, and part tho Treasury's, and expenses aro char god in tho L—514 -27scmo proportions. Patman. Chapter 16 of tho Federal Reserve Act says that when Federal Rosorvo notos are issued to a Federal Reserve Bank, tho Federal Rosorvo Boord, under the original law, should cause that Federal Reserve- Bank to pay tho interest rato that was fixed by tho Fodoral Reserve Bo rd, end I understand that at that time tho Board mot and said, "Well, all tho oxcoss earnings go into tho Troasury, anyway, and wo will just fix tho zero rato of interest.!t Thon in 1917 tho law was rmondod, on Juno 21, 1917, so as to provido that tho Fodoral Rosorvo Banks would only pay interest on tho notos representing tho difference bctwoon tho gold certificates that were used as collateral security or gold and tho amount of the notes issued, and I have chockod that up sinco 1917, and. my investigation discloses, from information that was obtained from your office that over since that tirno some of tho so banks hrvo obtained notes in violation of that law. If that is true, I would like to know why tho Board has not carried out that provision which requires an intorost charge to bo loviod. Governor Ecclcs. Well, as a matter of fact, it would seem that you ore of tho opinion, Mr. Patman, that private ownership of those reserve banks i:s a deterrent, that some one gets a particular advantage— Mr* Patman. That is not the question at all. I am just asking about that specific point. Governor Ecclos. I could not answer that. Tho question lias not como up sinco I havo boon connoctod with tho Board. It is a question that has never boon raised, and the Reserve System has boen operating for the last thrco years with practically no profit whatever* Mr. Patman. Woll, of courso, thoir income has boon principally from Government bonds. Governor Ecclcs. Entirely so, and it could not bo from any othor sourco. Mr. Patman. Don't you believe that that lea? should havo bo on compliod with, Govornor, and that those banks owo that money, that thoy still owe it, end should pay it now? Governor Ecclcs. I do not know what rate you would fix upon tho use of that currency, and/if you fixod a rato on it, the Gov* or run ant would turn around raid appropriate funds to tho Rosorvo System to keep that going. Mr. Patman* But there is a difference. If tho Government -28 L-514 appropriates tho funds, thoy will havo some c .:itrol of tho way those earnings are expended. Nov/ they have no control. Governor Eccles. Thoy have all tho control that Congress wants to enact. Mr. Patman. Affirmatively, yes, but we do not have tho question coming up where wo can take action, but if we had to appropriate money for tho continuance of tho Federal Resorvo System, wo would havo an opportunity to say how it should bo cxpondod. •To would probably stop thc«*$30,000 and $50,000 salaries. Governor Ecclos. You moon all tho earnings should go to the Government and in turn all appropriations should bo made? Mr. Potman. That is right. Governor Eccles. That is up to Congress * Mr. Patman. Yestorday, in reply to Mr. Hancock, you stated that you had botween four and five billion dollars in gold upon which currency could bo issued, that is, Federal Reserve notes, equal to 2-1/2 to 1, or about 12 billion 500 hundred million. Governor Ecclos. Approximately. said Mr. Patman. And there was something/about tho mount of expansion that could be made of the currency. Is it not a fact that under tho present Rosorvo requirements, that you could have an expansion equal to about 75 billion dollars of that money? Governor Eccles. Tho 5 billion approximately of gold or gold certificates now hold by tho Rosorve System in excess of tho gold rosorvo requirement to be hold against deposits and note liabilities would be sufficient to furnish 14 billion dollars approximately on o. 35 por cont rosorvo ratio of crcdit to tho member banks. In other words, if the membor banks were loaned 14 billion by the Rosorvo Bank, that would moan that thoir deposits would incroaso with the Reserve with tho Reserve Banks. Mr. Patman. In excess reserves? Governor Eccles. Yes, by 14 billion, and that 14 billions would roquiro nearly 5 billions of gold to be hold against it, but tho banks undor those circumstances would have 14 billions of additional oxcoss reserve upon which thoy could expand with the prosont rosorvo requirements, which is* between 5 and 6 for 1; they could expand between five and six times tho amount of credit that that would givo them, or between 70 and 84 billion dollars. Mr. Patman. Governor, in view of your statement, a mombor bank could sell to tho Federal Rosorve Bank a $100,000 bond, and havo to its crcdit in the Federal Reserve Bank $100,000 in oxcoss -29- L—514 reserve, orid then if it wanted to buy §600,000 in government bonds, it would bo privileged to do so upon that rosorvo, would it not? In fact, more than that? Governor Eccles* No, Tho individual bank, of courso, would only bo able to buy bonds to tho extent of its excess reserves but the banking system as a whole could do this: Tho fact is, that this bank with $100,000 of excess rosorvo would only have $100,000 availablo with which to expand credit or make investments. However, whon tho bank made tho loancr made the investment, tho institution or tho individual getting the proceeds of that loan would deposit that loan in another bankMr. Patman* I know, but we are presuming that you will not do that, and that tho rural Carriers, tho postmasters, and all of tho Fodoral employees in that particular town would collcct that much money. Governor Eccles. Tho amount of expansion would dopond upon whether it was a central reserve city bank— Mr. Patman. But I am talking about tho average. Governor Ecclos. Tho average would bo between fivo and six to ono. Mr. Patman. Governor, the Federal Intermediate Credit Bank is to agriculture about tho same as the Rosorvo System is to industry generally, is it not? Governor Eccles. No, there is a very groat differonoo. Mr. Patman- I understand that it is a go-botween. Governor Eccles. There is no relation to it at all, bocauso tho Intermediate Cx*odit Bank of course is not a bank of issuo« Mr. Patman. It sells bonds to tho public* Governor Ecclos. That is right; it sells debentures. It sells its three, six and nino months debentures* Mr. Patman. But tho point that I want to ask you about is this: When an Intermediate Credit Bank has accumulatod a surplus equal to its subscribed capital stock, one-half of the remainder shall go into the Treasury of tho United States as a franchise tax, and that is tho law today, and of course the law has boen changed as to the Federal Rosorvo fo as to provide that none of the profits aro required to go into tho Treasury as a franchise tax, and since tho law has boon changed and all of this money has accumulated, some two or three hundred million dollars as a surplus fund—I do not recall the exact amount— -30- L—514 Governor Eccles. Whore? With tho Federal Resorvo? Mr. Patman. Yes. Governor Ecclos. $145,000,000 is tho only item outside of this $27,000,000 that thoy have to pay interest on. Mr. Patman. Since as a matter of right that money belongs to tho Government, because tho Federal Reserve Board failed to carry out tho law in making an interest char go—and tho law is plainly writ tenGovernor Eccles. I would not cxgroo at all to that. Mr# Patman. And since the Board has failed and refused to comply with tho law, and which if it had boon complied with that money would h^yo gone to tho Treasury, it just occurred to me that we should not pay out any $3,000,000 to tho Fodoral Reserve Banks on currency. Governor Eocles. As a matter of fact, the $132,000,000 is the capital, and if tho Reserve System had no surplus whatever, of course it would not bo in a position to operate very satisfactorily. It is true that it could call upon its member banks for tho payment of all of.the stock which thoy subscribed. Thoy never called for more than one-half of tho payment. Now thoy could havo called for all of it, and if tho Treasury took the surplus that they had, then thoy might have to call upon the banks for 1132,000,000 upon which thoy would have to pay 6 por cent. Thoy havo called upon the banks for only one-half of tho subscription to Federal Reserve bank stock, and only on that amount which has boon called for and paid in, do thoy pay any return. Tho total bonofits to tho ncmbor banks by way of an incomo out of Fodoral Rosorvc earnings, i.e., tho total amount that they got, is 6 por cent on $132,000,000, which is about $8,000,000« So if the ownership of tho Resorvo Banks wore elsewhere, if it was in the Government, and the average rate of intorest which tho Government pays upon its long-term obligation, which you would have to figure in this case, is between 2-3/4 and 3 por cent, tho total saving in tho picture would amount to about $4,000,000; so that the total amount that would bo sa.vod to tho Government if they owned tho Reserve System as tho banks now own tho Reserve Systom, would bo about $4,000,000. Mr. Patman. That is in dollars and cents, Governor, but I think that thore is another view that should bo considered thoro, tho main view from my standpoint and that is divorcing private banks from the Federal Resorvo/oX^iiP^ly, so that they will not in any way havo any stock or interest in the Fodoral Rosorvc Systom, the bonk of issue, and I believe that that is of greater importance than the question of tho saving of $4,000,000. -31- L—514 Governor Eccles. I think the question of the $4,000,000 is a small factor in the picture. The banks could continue to own the stock without having the voice that they have in the individual reserve banks. That voice, however, is not very important, because the monetary powers are largely in the Board. The Open Market Committee used to be composed of the twelve bank governors or presidents. These people, before tho Banking Act of 1935, were selected entirely by tho directors of the Reserve Banks, and two-thirds of the directors of the Reserve Banks were selected by the banks. Therefore it did indirectly give to the banks cortain powers over monetary control through that means. But oven thon all their decisions had to be approved by tho Fodcral Reserve Board boforo action could be takon. Today tho power to incroase or decrease reserve requirements is solely in tho Board. The mombors of tho Board, as you know, are all appointed by the President, with the consent of tho Senate. Tho power to incroaso margins on collateral loans made by both banks and brokers is entirely in tho Board. Tho power to fix discount rates is ultimately in the Board and interest rates on timq funds aro regulated by tho Board. Tho Open Market Committee is a divided power. I did all that I could to got that power exclusively in tho Board, but, as you all knowMi'. Goldsborough. I think that you will agree that the Houso conforoes tried to do tho same thing• Governor Eccles. As far as the House was concerned on that issuo, I havo no complaint. Mr. Patman. You havo statedGovernor Eccles. So that when you get to this picture, bank ownership today is not an important factor v/hon it comes to the question of the oxorciso of monetary control. Tho Govornmont, through its powor to appropriate tho earnings of tho Federal Rosorve System from time to time, is in a position to got tho benefits that may bo derived from the operation of the Rosorve System should earnings bo in excess of tho amount that may bo roquirod for an adequate surplus. It seems to mo that tho bill that provided that when the surplus was built up to a certain amount, any earnings thereafter woro to revert to the Govornmont automatically, was not an undesirable situation* Personally, I would soo no objection to that sort of provision, bccauso thero is nothing to bo gained by piling up an amount in oxcoss of tho need of tho Syctom# Tho Rosorvo System is entirely a different institution than any private financial or banking institution, in that it docs not oporato for profit* The policy that it pursues should not bo in any way motivated by whether or not this or that operation will bring to it a profit -32- L—514 or a loss. Whon it carries out an open market operation, as it has dono in times past for tho purpose of giving reserves to tho banking system, it might well toko a loss when it roverses that policy, but— Mr* Patman. You have statedGovernor Eccles. But when it carries out tho policy, the only factor to bo considered is, what is in the public interest, and whether or not an easy money policy is advisable at tho time® Whon discount rates are raised, and you reverse your policy and extinguish tho excess reserves, what that may cost tho Rosorvo System or what the System might make out of such a policy is, 1 am sure, never a factor. Mr. Hancock. May I ask him a question right there? Mr. Patman. Will you let me ask two or three questions, and I v/ill be through? Mr. Hancock. I was going to interrupt here just to got this information. Mr. Patman. I just have two or throe more questions, but go ahead. Mr. Hancock. Where is the open market? Governor Eccles. What is that? Mr. Hancock. Where is there an open market in tho United States, or whore is the opon market? Governor Ecclos. On tho question of buying government securities, I suppose anywhere except buying thom directly from the Treasury. Mr. Hancock. Do we havo any open market other than tho Now York market, in actual practice? Governor Ecclos. In actual practice, not on a largo scalo. Mr. Hancock. I was -wondering if in tho State of North Carolina wo could not have an open market established, so that wo would not have to send to Nov/ York to got our bonds. Governor Ecclos. Tho difficulty is with tho banks. They would liko to buy low and soil high, and thoy would like tho Rosorvo System under those circumstances to oporato as an accommodation for tho banks. Wo can hardly operate by going into a state and buying government bonds when the banks do not want to soli them. Mr. Hancock. Is that tho real reason for tho sentiment in Now York that is either very pessimistic or very optimistic, and you have never a medium, in between? Governor Eccles. Well, I do not know. I think that thoro may be a lot of reasons for that* I do not think that tho Government bond market is tho solo roason. -33- L—514 Mr. Patman. I just wont to ask you ono or two more questions, and I am through* Of course, you gave tho reasons usually given why tho Government should not own tho Fodoral Rosorvo Bank System* Governor Eccles. I did not say that thoy should not own it* Donft got mo wrong* Mr. Patman. Would you find it objectionable if tho Govorbment woro to provide for government ownership? Would that bo objectionable to you? Govornor Eccles. There is no nood, thoro is no necessity of thoro being any stock, as a matter of fact* Mr. Patman* I agree with you. Governor Ecclcs. Thoro doos not necossarily nood to bo any stock in tho Reserve System* Mr* Patman* Whatever stock is owned, I think that tho Government should own it* Do you think that that would be objectionable, or not? Govornor Ecclos* I do not think that it would bo important ono way or tho other* Tho importance is, what are the powers that tho Reserve Systom has? Mr. Patman. That is it* Governor Ecclos* It is not so much the ownership* The Government could well own tho stock, and tho Government could well permit a member bank, without the ownership of stock, if it chose to, to elect some of tho directors* In other words, tho member banks would not necossarily havo to hold stock to occupy exactly tho samo position that thoy do* Mr* Patman* Don't you think, in viow of tho power of tho banks now on tho Opon Market Coimriittoo and tho Federal Advisory Committee, which evidently must havo some hiddon powers somewhere, if not othor powors, because I think certainly thoy havo oxortod some influence, that in spito of every argument that wo can logically make, tho disposition of tho banks is to say, "Now that wo own tho stock in this system, we fool that you should do like wo want-you to"? I just havo a fooling that wo would bo bettor off from tho public standpoint if tho Government owned that stock outright and tho banks did not have any interest in it at all, and wo had no Federal Advisory Council, and would you oppose a bill ponding in Congress that provides that tho Government should own that stock? -34- L—514 Governor Ecclos. It v/ould dopcnd upon what tho othor conditions were. Mr. Patman. I am talking about tho conditions that I just enumerated* Governor Ecclos. If it involved not more than just a mere question of ownership, I do not know that it would make very much difference ono way or tho other. Mr® Patman. You would not oppose it, then? You would not fight it, in othor words? Governor Ecclos. You moan, just that ono provision? Mr. Patman. Yos, sir. Governor Ecclos. In othor words, if tho Government proposed that thoy would furnish tho capital? Mr. Patman. That is right, and divorce it from tho bonk control. Governor Ecclos. When you talk about control, do you moan if it was a question of making tho Fodoral Rosorvo so that it did net have a cortain amount of independence? If it did not have that independence, I would be opposed to it. Mr. Patman® It is all right to bo independent. I do not want a President to appoint all tho members of tho Board; I would like to have it staggered so that no one president wculd appoint then all. Governor Ecclos. And tho Board itself should not bo, nor tho staff, subject to what wo nay term a political influence. It should bo an independent, continuing public body. Mr. Patman. And you wculd not objoct to that, if tho stock wore cwnod by the Government? Governor Ecclos. I would prefer to eliminate tho stock, under those circumstancos to havo no stock, and have merely— Mr. Patman. Now— Governor Ecclos. It is a question that I havo not given very much thought to. I havo never boon askod to testify on that subject in connection with any bill, and it might bo that circumstancos would exist with relation to tho legislation whoroby I might find it nocossary to oppose a change in the ownership, so that I would net want to bo understood as saying at this time that I am in favor of tho Government owning tho stock cf tho Federal Rosorvo Banks without reservations. Mr. Patman. Or against it? -35- o 1 L-514 Govornor Ecclos. Yes, or against it; that is right. Mr. Patman* After Mr. Goldsborough finishes with his bill, thoy aro going to havo a hearing on a bill sponsored by 160 members of this House proposing government ownership of Federal Reserve Banks, and I am going to ask tho chairman of tho committee to invite you to testify on that bill. Govornor Ecclos. All right, sir. Mr. Patman. Ono other question, and I will bo through* This Federal Advisory Council, I fool, has influenced the Board to some extent. I do not know that thoy have, but I havo that feeling, especially with regard to commodity prices, and I havo a fooling now that the Board should havo adopted a policy that would have caused commodity prices to have increased, and it occurs to me that the actions of tho Board havo boon deflationary, unduly deflationary, and that thoy unduly hindered tho advance in commodity prices. Donft you think that commodity prices should increase more, raw material prices, Govornor? Mr* Ford* Enumerate them* Mr. Patman. Cotton, corn, wheat, and other things* Mr. Ford. Cotton? Mr* Patman. Yes* Govornor Eccles. You say that the Board has adoptod a restrictive policy. I say that that is not tho case at all* Mr* Patman* I did not say restrictive* adoptod occurred to mo to bo deflationary* I said that tho policy Governor Eccles. All right, then, deflationary* What policy do you rofor to? At what time in the past? Mr. Patman. All right; tho time when you increased tho reserve requirement 50 per cent I considorod it was wholly unnecessary, bocause there was no evidence in the world of inflation; and also when it was increased 50 per cent more—I rofor particularly to cotton. I think cotton is entirely too low. Governor Ecclos. That is right, but tho excess reserves of the banking systom would havo mado no difference whatovor, on tho price of either wheat or cotton. Had tho Board not in any way increased reserves or done absolutely nothing, in opinion you would havo soon no different price level than you see today, for this reason— Mr* Patman* Now-- -36- L—514 Governor Eccles. If tho Board's action had brought about such a restriction in a lending policy of the member banks as to force liquidation, or as to make it impossible to got credit for purposes of production and also for marketing purposes, then you could say that tho action of tho Board was deflationary. As a matter of fact, tho interest rates today are as low as thoy havo ovor boon. Just last week on Monday tho Government oponod bids for $100,000,000 of government bills, $50,000,000 duo in nine months and $50,000,000 duo in December. Tho rate on those bills, on those nine months bills, was #514, which is slightly ovor one-half of one por cent. The debentures of tho Intermediate Credit Bank, which finance the cotton and tho wheat farmors, are soiling on tho market at loss than ono per cent, so that you cannot say that tho action of tho Reserve System has in any way rostrictod credit, and therefore if thcro is a slump in certain commodities, it is not duo to a credit shortage or a restriction of credit. The Resorvo Systom did not reverse policy when they increased reserves. Thoy woro moroly adjusting the resorvo requirements in the Systom to tho new gold position of the country, caused by a not inflow of foreign capital. The foreign capital camo in hero, and the way it is transferred is, of course, through tho shipment of gold. This gave to tho Resorvo System the huge supply of gold that we have boon discussing, and it gave excess reserves to member banks, and it was felt that the rosorvo requirements of tho member banks should bo adjusted to absorb some of tho excess reserves created by tho gold inflow. In other words, a part of that gold import was loeked up, because it was not necessary to use it as a basis of credit, but had it boon used it would of courso havo creatod a very sorious inflationary condition. Now, the time to lock it up is when tho banking systom has excess reserves, generally spoaking. There was just a fraction of them that did not havo .sufficient excoss reserves to meet the requirements. Evon after putting into offoot tho incroasod reserve requirements, there is still approximately $900,000,000 of excess reserves in tho banking systom today. If wo had waited until any substantial amount of oxcoss reserves had boon utilized by may bo only a few banks, it would havo boon that much more difficult to make this adjustment. This was not a reversal of tho monetary policy, but it was merely an adjustmont of tho banking systom on a now basis of roserves, and as wo announcod at the time, we will use a more flexible instrument, tho open markot operation, which doos not have an overall of feet such as an increase in the reserve requirements does. So that when.the reserves wore incroasod in March and May, there was a billion and a half of tho oxcess reserves locked up. The Reserve -37- L—514 System, in order to facilitato tho adjustment of tho banking system to that increased requirement, carried out an open market oporation of approximately $100,000,000. This loft tho not amount of tho incroaso a billion four hundred million. Wo anticipated at the time that wo ordered the increase in rosorvo requirements that we might havo to carry out an open market oporation, and wo stated that wo had tho instrument with which to doal with tho situation in the public interest. Tho opon market operation that tho Systom carried out along in April was in no way a reversal of the policy of increasing tho rosorvo accounts* Mr. Goldsborough* Govornor Eccles— Mr. Patman. Just this ono observation, and I guarantee that I am through* I appreciate tho pationco of the committee, but you have noticod that Governor Ecclos has taken up most of tho timo, and I am gldd that ho has, bocauso what he has presented has boon very interesting f Of courso, the purchases of government socuritios made by tha Federal Rosorvo Banks wore considorod inflationary, bocauso they put more nonoy in circulation* but to mo it was deflationary and unnocossary to raakc the incroaso in rosorvo requirements which was made. As to whether I an right, you have your opinion and I havo mine, and I have boon hopeful that tho Board would adopt a policy that would not provent commodity priccs from going to tho level that I think thoy should bo increased to* Mr* Lucc. Is thoro any opportunity for this side to ask questions? Mr* Goldsborough (temporarily presiding). By all moans. Govornor Ecclos, thore soon to bo in tho country two opinions regarding tho inflationary offoct of tho policy of the Fodoral Reserve Board. Ono is that thoro is no evidence of inflation in so far as tho business of tho country is ccnccrnod, but that there was ovidonco of inflation in stock prices, and that therefore the policy of tho Board should havo been to mere a s o tho nargina 1 requirements rather than to incroaso the reserve ro quiremonts * Another opinion seems to be that tho policy of the Board in increasing the rosorvo requirements under indicated circumstances, and the policy of tho Treasury in freezing gold, have created a doubt in the business world as to what tho permanent policy will be, and that that has seriously interfered with recovery* Now, I think that these opinions havo boon broadcast, and that it would bo interesting to tho coinmittoo and to the country for you to give us your views about that* -38- L—514 Governor Eccles* Answering tho first one, and expressing rny views about it, namely, that if thoro was inflection, it was in tho stock market, ond the Reserve System should havo dealt with that problom not by increasing tho reserve requirements but by increasing the marginal requirements, the Reserve System, contrary to tho views of some people, did not increase the reservo requirements in order to have a deflationary effect or tornakofor tight money* I personally gave a statement along in March to try to clarify at least my point of view on that subject* Wo did not do it as a reversal of policy, as I have explained* Now, so far as the increase of margin requirements is concerned, tho stock market was not expanding as tho result of credit* Thore was practically no increase in crodit going into the stock market* Therefore an increase in margin requirements would not necessarily have been effective to any appreciable extent, in my opinion, because tho stock market was very largely a cash operation* The total amount of bank credit on brokers1 loans, loans by banks to brokers, was only slightly over ono billion dollars, as against an eight and a half billion dallar credit in 1929* Thoreforo tho situation did not call for an increase in the margin requirements to deal with a speculative inflation in stock* Somo people thought that that was what to do* I say that that was duo to cash purchases, and in no small measure to foreign capital coming over here and buying for cash* Now, with reference to those people who say that thoro was no inflationary development— Mr* Goldsborough* I said* In so far as general business was concerned, Govornor Ecclos* That is true* Wo had a groat army of unemployed , and we had somo idle facilities, but on tho other hand we did have some very definite evidences of an inflationary trend outside of the stock market* The building costs and rents wore advancing very rapidly, so far that thoy had tended to retard the home construction activity* The wages, particularly in industrial and building fields, had advanced very, very rapidly, rapidly throwing out of balon.ee our economy* We know what happened to steel prices* They are substantially higher today than in 1929* Tho total production figures are very close to those of 1929 at tho present timo, yet in tho building industry, lumber production and cement, brick, tile, plumbing oquipmont and all tho items that enter into the construction field are still at a depression level* Last year in this country we built something liko, as I recall, 300,000 housing units* In 1925 wo built over 900,000 housing units, with, of course, a population very much loss than tho present population* It is estimated that the normal annual requirement for home construction today is noarly 600,000 housing units, to take care of -39- L—514 demolitions, destruction by fire, flood and cyclone, and to take care of tho increasing population. Wo have boon getting behind every year since 1934. Wo had an exccss in 1929 of something closc to onehalf million housing units. Construction fell off very rapidly, and we had practically caught up with tho oxcoss that we had by 1934. Since that time wo havo built far loss than wo required, until today wo possibly havo a deficiency of around 500,000 or 600,000 housing units. So, in order to make up for tho backlog or tho deficiency, and to take care of the normal requirements, wo should not build loss than 800,000 housing units for tho next four or five years, on an avorage, and yet last year we had about 300,000, as I recall, and this year it is too oarly, of course, to say, but at the present time there is a falling off in hcroe construction, due in very large measure to increased cost of building materials and labor. Mr. Goldsborough. Now— Governor Ecclos. Now, that is tho inflationary element in that field, and that is tho bottleneck, in my opinion, in your recovery. Mr. Goldsborough. I understood you to state a few moments ago, in answer to one of Mr. Patmanfs questions, that tho incroaso in reserve requirements still loft over $900,000,000 in oxcoss reserves, and that therefore legitimate borrowing was not interfered with by that process. })Ncw, if that is truo, hew would that process tend to lower tho price of tho raw product and increase tho ability of tho builder to construct homos? Governor Ecclos. That is a good question, did not do it* Mr. Goldsborough. I understood you to say that it did do it. Governor Ecclos. I say that it had no effect on it. In other words, I suppose that the si&e of tho wheat crop in relation to tho world supply may havo something to do with tho price of wheat, and I think also that thattmay be truo with tho cotton crop. Mr. Goldsborough. My question is a practical one, I hope, and it is for tho purposo of trying to got to tho country the view of the head of tho Federal Reserve System, because so far as I know the country is confused about it. Now, if the increase in reserves could have no effect, why was tho regulation for an incroaso in reserves promulgated? Governor Ecclos. Bocauso wo were getting an increasing supply of gold that was gcinp; into tho banking system. Wo knew that at no time, so far as wo could soo, in tho future, would there by any use for such oxcoss reserves as woro being accumulated, and tho time was -40- L—514 hero to lock up thoso rosorvos. Bofcro the Reserve Board could move into position to oxerciso control, it had to got thoirosorves down to a point whore its action would have influence, and we felt it was time to at least novo into position so that through an open market operation wo could oxorciso an influence ovor the money market. I an sure that increasing rosorvos of tho banks throughout tho system, to the extont that wo have in the last year, at a time whon thoro was a very groat ovidonco of an inflation and there was a huge credit expansion under way would have caused such repercussions as to practically paralyze tho country. I do not think any Rosorvo Board could possibly havo facod a situation of that sort. Mr. Goldsborough. Is this your answer, that it was done partly so that tho psychological offoct would be tc increase interest rates to a sufficient oxtont to prevent a disastrous inflation? Doos that express anything at all to you? Governor Ecclos. Yos$ I say that interest rates duo to tho huge excess reserves had gotton down to such a low rato that thoy could not bo oxpoctod to be sustained there for any oxtendod period of time, that thoy had roachod a point whore your insurance companies, your mutual savings banks, your trustees and others were unwilling to buy your long-term securities from tho Government down to a 2.2 average—that is tho low point that thoy got to—and that was after wo had increased reserves last summer by a billion and a half, and other long-torn securities wore soiling on a 3 por cent or slightly ovor 3, basis. The danger of investing funds in long-term securities at oxcossivoly low rates is that if rates go up through a restrictive policy, thoro would bo torrific losses and depreciation on thoso soouritios. The Rosorvo System has sono responsibility, and I think that when you take into account tho public interest, you havo to.look at tho mutual savings bank depositors and tho holders of insurance policies, as woll as your fiduciary institutions generally. It is true that debtors would like to soo interest ratos vanish to a point where you would havo no interost. Mr. Goldsborough. Do you mean to say that you felt it was the responsibility of tho Federal Reserve Board to hold up the price of securities, for tho benefit of tho creditors? Governor Ecclos. No, I do not moan to say that. As I understand tho responsibility of the Board, we are concerncd primarily with credit needs of commerce, agriculture, and industry. No?/, of courso, you can expand under that provision to take into account, it would soon to no, tho public interest generally. Mien you have the needs of commerce, agriculture and industry as an objoctivo, as prices continue to advanceMr. Goldsborough. May I interrupt you there to say that I havo personally boon opposed to having these words in tho law. I always thought that it should bo tho public intorost, rathor than to havo any specific designation. L—514 -41- Governor Ecclos. But I an saying that that is the law. Mr. • Goldsborough* Yes, that is the law* Govornor Ecclos. Wo rocognizo that, and it seems to me to tako that literally would mean that when an inflation starts, you would continue to pour out credit continually, because commerce, agriculture and industry would need more credit the further expansion went* Therefore it would seem we may be required to help the process of inflation through an interpretation that some may give to that requirement, and as credit contacted and deflation started, and as commerce, agriculture and industry would not need credit, we should adopt a contracting policy. As a matter of fact, wo roally otight to do the rovorse, if you are going to get stability and balance. As expansion goes beyond a certain point, and as it falls below, there has to be an effort, on the part of the Reserve System, if we are going to keep tho balance, to reverse tho policy. Mr. McKeough* May I ask tho Governor a question in connection with tho hearing on this House Joint Resolution? Mr. Goldsborough* Suroly* Just a moment* Mr* Luco asked a question, and I am not sure that I understood him, but I think ho wanted to know whon he might ask questions* Mr. Luce. Yes. I was asking if this side would havo an opportunity. Mr* Goldsborough. Certainly* Mr* McKeough* I will be glad to yiold* wore dividing the time between tho sides* I did not know that you Mr* Goldsborough* Lot mo mako this statement, because I was in tho chair at the time* 1 did not rocognizo one man any moro than tho other* Tho first follow that started questioning was recognized* The Chairman. Wo certainly want Mr* Luco to bo givon tho privilege of asking whatever questions ho has, but tho time is about up now* I had hoped that we would finish this morning, and that wo would devote tomorrow ncrning entirely to an oxocutive sossion* But it is evident that we cannot do it, and if it meets with tho approval of the committee, I would suggest that we adjourn now and ask Govornor Eccles to como back tomorrow, so that everybody may havo an opportunity to question him* -42' Mr* Ford* L-514 May we havo tho discussion tomorrow on the bill? Tho Chairman* The committee will stand adjourned until 10:30 o'clock tomorrow morning* (Thereupon, at 12:05 o'clock p* m*, tho Committee adjourned until Friday morning, July 16, 1937, at 10:30 o'clock a* 114) L—514 -43- H. J. RES. 3?7 Authorizing the destruction of Federal Reserve notes of the Series of 1928, and their replacement by Federal Reserve notes of the Series of 1934, or a later series, at the expense of the United States. Friday, July 23, 1937, HOTTSE OF REPRESENTATIVES, Committee on Banking and Currency, Washington, D. C. The Committee resumed hearings on House Joint Resolution 377 at 10:30 o'clock a. m., Honorable Henry B. Steagall (Chairman) presiding. The Chairman. The Committee will be in order. We have Governor Eccles with us again this morning, and, Governor, you may proceed. I havo forgotten now where we were at the time of the last hearing. Mr. Luce. I was about to ask some questions. The Chairman. You may proceed. STATEMENT OF HON. MARRIWER S. ECCLES (Resumed) Chairman of the Board of Governors, Federal Reserve System. Mr. Luce. Govornor Eecle§, will you be good enough to toll us who will be advantaged by the passage of this bill? Governor Eccles. The Reserve Banks. Mr. Luce. Tho Federal Reserve Banks? Governor Eccles. Yos, sir. Mr. Luce. And, should thoy receive up to $3,000,000, will that bo added to their surplus? Governor Eccles. It won't amount to $3,000,000. It will be less than |2,000,000. They will merely have replaced notes, which due to no fault of theirs, have been made obsolete, end it -44- L—514 has been desired that those notes bo not used. Mr. Luce. Would this amount bo added to their surplus? Governor Eccles, It would indirectly be added to their surplus or reduce their deficit, depending upon their operations for the year. To the extent that they would not be required to pay out as current expenses these funds for notes, it would reduce their expenses—that is what it would do, rather than to add directly to their surplus. Mr. Luce. After the war, this Committee learned that the earnings of the Federal Reserve Banks were falling off— Govornor Ecclcs. Wore what? Mr. Luce. The earnings of the Federal Reserve System were falling off by reason of the lessening of demand for the rediscounting of commercial paper, as times grew better. What- is the condition of the System at the moment? Is there danger that they cannot make enough money to pay their expenses? Govornor Eccles. The Reserve System for several years has had practically no paper discounted with them, or no acceptances sold to them. That is always the condition of a central bank when thoy have substantial excess reserves carried with them by the member banks. In other words, if member brinks have excess reserves, naturally there is no occasion for those bsnks to use the credit facilities of the Reserve System. Excess reserves tend to create an easy credit condition, which is a desirable condition to have for the purpose of helping to finance, on a low interest basis, business activity and recovery. With the excess reserves which prevail at the present time, and have prevailed, in varying amounts, ever since shortly after the banking holiday, the earnings of the Reserve System have been derived entirely from their holdings of government securities. Those securities, which now amount to $2,526,000,000, were largely acquired by the Reserve System prior to the banking holiday as an open market oporation. Thoy were purchased by the Reserve System 5n order to help member banks get out of debt and to pl^ce them in an easy reserve position; in other words, it was an open-market operation for the purpose of making easier money conditions. About 700 million of tho 2 billion 526 million was purchased after the banking holiday, and all but 96 million of these 700 millions was purchased within six months after the banking holiday. Now, those securities hold by the Reserve Banks, purchased for the purpose at that time of creating an easy money condition, or relieving the money situation that. existed, were the source of the revenue of the Reserve Banks. The purchase of those securities was not designed for the purpose of providing income to the Reserve Banks, however, any more than the decision to soli them -45- L—514 would be determined by income requirements. The Reserve System must operate, as I said the other day, not with regard to its profit. There are times when it will make money, but there are rightly other times -when it will lose money; the earnings that it mck.es at times above expenses place it in a position to lore money under other conditions. Its monetary policy is never determined by its desire or its need for earnings. The Chairman. May I ask a question right there? Mr. Luce. Certainly. The Chairman. As a matter of fact, Governor Eccles, it was never contemplated by the framers of the Federal Reserve Act, and it was never any part of the philosophy of that legislation, that the Federal Reserve Banks should be money-making institutions, or that thoy should be operated for tho purposes of profit. Isn't that right? Governor Eccles. Well, I do not know what the view of the designers of the Act may have boen in that regard. I only know that no central bank c^n serve the public interest that has profits as an objective. The Chairman. That is absolutely true, and, as a matter of fact, it has never been a money-making system, in practical results, for those who owned the stock, has it? G wernor Eccles. That is correct. The amount of its dividends, of course, has been limited to the 6 per cent that is paid upon its stock, and that stock might just as well be a preferred stock so far as that limitation is concerned. Tho Chairman. As a matter of fact, a great many member banks owning this stock have held the view that the ownership of the stock was really a burden, and that the membership wes a burden to the banks, rather than a profit. Governor Eccles. Well, I think that that fret has been true in the case of some of the banks, possibly of smaller banks. The Chairman. Isn't it also true that thousands of state banks which have never joined the Federal Reserve System, and which here remained out voluntarily, have been free to act as their own interests and the matter of profit m:i ght be involved, and that thvy have regarded it to their best interests not to join? Governor Ecclos. A large proportion of them. Mr. Luce. Mr. Chairman, I understand that matter precisely as you do. I would like to state that, if my recollection serves me -46' L-514 right, ton ^r twelve years ago the quesbion whether the banks should be paid their running expenses began to loom on the horizon, and there was discussion as to whether or not it might become necessary for the Government to appropriate the money to keep the System going. Fortunately that did not come up, but it brought out rather sharply tho fact that the Federal Reserve System is perhaps the one institution in the country that suffers when times are gpod, and it gains when times are bad. Now, let me give you, Governor Eccles, a homely illustration of what I am driving at. We will suppose that Smith finds that Jones owes him some money, and Jones goes around to Smith and says: "See here, Smith; you think that I owe you some money. Perhaps I do, and perhaps I don't, but, -anyhow, I am a little hard up just now. Do you need that money?" What I want to find out is whether the Federal Reserve System needs two million dollars of money at a time when we are supposed to be trying, though not greatly succeeding, in cutting down expenses to balance the budget. Governor Ecclos. This does not come out of the revenues of the Government. All that is being asked in the case of this bill is to permit the use of a very small portion of the gold profit, which in no way would affect the budget situation. Mr, Luce. Why, my dear sir, when a man pays two million dollars to another, he is two million dollars shy. Governor Eccles, But the $2,000,000 came into being as the result of the revaluation, Mr. Luce. That does not affect the fact. Mr. Goldsborough. Society either owes tH s money to the Federal Reserve Banks or it does not owe it. If it does owe it, it ought to be paid. If it does not owe it, it should not be paid. If it pays it, it has to come out of the Treasury, either directly or indirectly.. It seems to me that the question of whether or not this will come out of the revenues of the Government is not the primary question. The primary question is, does society owe this money to the Federal Reserve Banks. Governor Eccles. That is the primary question, and there is no question but what the Treasury, at least, seems to think that it is so obligated, for it has recognized the obligation; otherwise they would not have asked for tho authority of'..Congress to replace these notes. They recognize the obligation, and they have asked for the authority from Congress to replace these notes which they have, through their action, kept from being put in circulation^ -47- L—514 Mr. Goidsborough. Tou did riot undertake to say to Mr. Luce that it makes any difference whether it comes out of one pocket or another? The United States has that money to pay, one way or another. Governor Eccles. It is not a question, however, of collecting that much more monoy out of taxes, or borrowing that much money with which to pay, It would be a question of taking these funds out of son© of the gold.prof it that is lying unused. New, it makes possibly a small difference, from purely an accounting standpoint, what— Mr. Hancock. May I ask a question right there, Mr. Chairman? Governor Eccles. As a matter of good business procedure, the Treasury recognizes that they should replace those notos to tho Reserve Banks, and thus not make it necessary for tho Resorvo Banks to duplicate tho oxpens o of buying from the Treasury tho currency they need. In other words, the expense of the Reserve Banks by reason of this action has boon increased—tho expense'of providing currency. Thoy provide the curroncy at thoir expense, thoy distrib* ute' it to tho member banlcs, and from the mombor banks it goes to the public. New, this action has greatly incroasod the expense of the Reservo Banks, or will incroaso tho expense by this amount, beyond what it otherwise would be, and it seems to mo that it is an expense that should bo borne by the Treasury. Tho Treasury recognizes it, and they aro willing to boar tho expense. If the Reserve System should make earnings, which is another matter aside from this, and should not be taken into account, it seems to mo, Congress at any time can make such disposition of the earnings of the Resorvo Systom as thoy think is in the public interest. If Congress does not soo fit to authorize tho Troasury to do what thoy are perfectly willing and want to do, then tho matter will have to be disposed of by thdjkbsorxytion of this expense by the Rosorvo Systom, or by the circulation' of those notos. TUhat I am particularly anxious about is to get the matter settled ono way or the other. It has been pending for two years, and certainly wo would either like to get the notes replaced, get tho item off the books and absorb tho expense, or put in circulation the notos which we havo hold out of circulation. We havo to do one of throe things, and it is up to you gentlemen, it seems to me, to determine which one of thoso three things we should do. My purposo, of courso, is to do the'business thing, and that is to havo the notes roplacod by notes which we can use. It seems to me to be a perfectly proper and legitimate business transaction between tho Treasury and the Resorvo System. -48- L—514 Mr* Luce. Frankly, Mr* Eccles, you do not convince me that anybody would save any money by burning up soveral'tons of paper. That, however, is not what I was driving at at all. I want to find out, if I can, why thoro is instant benofit to anybody from this bookkeeping transaction which will add two million dollars to tho oxponso of the Government of tho Unitod States. Lot us go back to my original question and tho illustration that I gcivo about Smith and Jones, where Jones says to- Smith, "Perhaps I owo this money, and perhaps I do not, but I am. hard up; con you wait a while?" It is up to Smith to give some valid and serious reason why that transaction ought to bo immediately closed up, and it struck mo from tho first, as you havo said, that it is largely a bookkeeping (jiostion, excopt for the fact of that $2,000,000 of outgo from tho United Statos Treasury. Mr* Go Idsborough* Whon it does involve an outgo of nearly $2,000,000 to tho Unitod Statos Treasury, doos not that immediately take it cut of a bookkeoping transaction and make it a transaction whore the Troaasury of tho Unitod States bocomos a debtor? Mr* Luco* I guess that I wont too far in that concession. Mr* Goldsborough* I do not understand what is meant' by a bookkeoping transaction* "When tho Government advances $2,000,000 it costs $2,000,000. Mr* Luce* It is duo to tho fact that it will ultimately como back again from the surplus* Governor Ecclos* Tho Treasury doos not take tho §2,000,000 and turn it cvor to tho Reserve Batiks at all* What tho Treasury doos is to pay for tho notos that thoy print for tho Rosorvo System. That will spread over a period of a year, so that it roally, in fact, is not a question of a transfer of $2,000,000 to tho Rosorvo System* It is merely turning over to the Rosorvo Syston, notes as thoy are needed in tho current business of the Rosorvo Systom* without the Re servo System being required to again charge up to oxponse tho cost of those notos which they havo already paid for. That is what it really amounts to* Mr* Goldsborough. Irrespective of tho terminology, it is a fact that if this bill is not passed, the Treasury would be nearly $2,000,000 bettor off, would it not? Govorttor Ecclos* Thoy will havo $2,000,000 moro of tho sterilized or unused gold profit thali thoy otherwise would have* Mr* Luco. But, Mr* Eccles, tho last paragraph of this bill says: "There is hereby authorized to bo appropriated cut of tho miscellaneous receipts covered into tho Treasury"— and so forth — -49- L—514 "not exceeding |3,000,000*" When wo get tc the floor of the House, our job is to tell the House "why wo went the Treasury to be up to $3,000,000 shy* Governor Ecclos* It is loss than $2,000,000. Certainly the appropriation would only bo whatever tho oxact amount is, which is loss than $2,000,000. This is merely an authorisation* Mr. Luce* Why was tho bill written for $3,000,000? Governor Eccles* Troasury. I do not know* You would have to ask the Thoy can oxaly uso whatever the cost may be to replace the notes, and unless the cost has increased very, vory much, the cost would bo under the f2,000,000. Mr* Luce* Now, Mr* Ecclos, one of the argvtments presented in favor of this transaction is that there are in existence certain completed or partially completed piocos of paper, which represent that they will bo payable in gold* Governor Eccles. That is right* Mr* Luco* And it is said that that is a deception, arid that the Government ought to got away from any such deception* Nov/, the present certificate says: "This is to cortify that there is on deposit in the Troasury of the United States of America, (blank), dollars in gold, payable to the bearer on demand as authorized by law*" That is just as much of a deception and a fraud for the average man as you havo urged tho present certificates to bo* There is not one man in a thousand in this country who would not "take that to bo a statement that ho can got gold with tho certificate, because only the elite, so to speak, understand what "authorized by law" means* Would it not be well, if wo are going to got rid of one fraud, to got rid of another fraud? Governor Ecclos* That is a quostion of opinion as to whether the other is a fraud* That may be your opinion* Mr#.Lueo* It certainly is mine« Governor Ecclos* Tho gold is hold in'the Treasury back of that certificate, in accord with that statement* Mr* Smcad tells me that the certificate that you are reading is tho cortificato which the Treasury has given to tho Rosorve System and -50- L—514 is merely a certificate held only by the Rosorvo Bonks, end does not in any way got to tho public, and it is ontirely out of circulation. Therefore, of course, the only holders of that certificate would bo tho Resort B^nks, who understand very thoroughly tho clause which you havo just road, and for that reason would not havo cause to expect that upon demand they could get tho actual gold, unless the Secretary of the Treasury doomed it in tho public interest to let them have it for expert purposes. Mr. Luce. Then I have been misled, sir, because I copied this out of your t estimony when, unfortunately, I was unable to be here, for I was out of town. So I took the pains to read your testimony, and I copied this out of it, and I got ffrom irk the impression that this was the real wording of the present gold certificate. Governor Eccles. That is tfyo wording of tho gold certificate, of the gold certificate, however, not in circulation. The Reserve banks are prohibited from paying out gold certificates.» Tho present gold certificate, and the only gold certificate now issued, was issued for the gold held by tho Rosorvo Banks. The public is not permitted to hold gold certificate^, and private holders.were required to turn in their old gold certificates. Therefore, that testimony was' correct, and the goJbd certificates referred to aro hold only by the Reserve Banks. I do not believe that in my testimony I stated that thoy wore in general circulation. Mr. Luce. No, I do not believe that you did. I am merely pointing to the fact that if a deception existed in one, it exists in the other. Whether we may assume that a misleading statement will do no harm because it finds its way only into tho hands of financial" organizations, or men acquainted with those things, is another problem. I should think, though, that a happier wording might have been used. Governor Ecclos. I do not know who is responsible for that clause. Mr. Hancock. Mr. Chairman, may I ask a question? Tho Chairman. * Yes. Mr* Hancock. Have you given any special concern to the precedent that this legislation might establish? Governor Ecclos. The procedent? Mr. Hancock. In other words, if you used a part of tho gold profit to pay the Federal Reserve debt, could we not by the same token use it for any other governmental debt? Governor Ecclos. Woll, there is a very closo relationship here to -51- L—514 tbe gold profit of this particular transaction, and "that is by roason of tho fact that tho Fodoral Rosorvo noto which the Reserve System has been requested riot to circulate has the clause "Redeemable in gold" upon it. Mr. Hancock. I am not referring to tho desirability of making thoso notes speak the truth. My question is directed toward the precedent that might be croated. Governor Ecclos. I understand that, but there is a very close relationship, it seems to me, hero. Mr. Hancock. How much of the unused gold profit remains in the Treasury now, that is not particularly designated or allocated? Govornor Ecclos. Well, of course, the stabilization fufrd is designated or allocated. Tho gold profit outside of that is, I thirik, one hundred forty one millions. Some of the gold profit, as I understand it, is not being used, but I am advised that there is very little of it that has not boon allocated, and that the unused part largely represents gold that will be used to retire tho nati6nal bank notes which were called, as you will remember, some time ago, but which aro only taken up, of course, as tho notes com© through for destruction. Mr. Hancock. Do you know whether any portion of this fund has been used to pay the interest on the certificates that are issued against tho new gold purchasos, tho sterilized gold? Governor Eccles. I do not think so. I do not believe any of that fund is used for that at all. Mr. Hancock. Whore does the Treasury get its money for that purpose? Governor Eccles. Out of tho general fund. Mr. Hancock. Is that authorized by law? Governor Eccles. I suppose it is, or they would not be doing it. Mr. Hancock. You do not happen to know vfiiat particular section authorizes the issuance of those certificates? Governor Eccles. Well, those certificates are not earmarked. The Treasury borrows such money as it needs from time to time, I suppose under its gonoral authority, and the'funds that arc used to sterilize gold imports are, as I understand it, just taken out of a general fund, and tho gold is shown in the Treasury statement, so at all times it is known how much of the funds are used for that purpose. Mr. Hancock. In tho facc of your present problem, financial problem, I assume you consider it highly desirable not to lot any of -52- L—514 this money got into circulation? In othor words$ you would not think that it would be wise for us to authorize the use of any of this unused profit in the payment of regular debts of the Government, or the salaries of Government employees, at this particular time, would you? Governor Eccles* Not unless there was some means given to the Reserve System for dealing with the effeots of the increase in reserves that such action would create* A very small amount, of course, would not be a very important factor, but a large amount of funds, such a s the amount of gold that has been sterilized, added to the excess reserves, or the gold in the stabilization fund added to the excess reserves, would of course create an uncontrollable credit situation, and certainly the Reserve- System would be unable to exercise the responsibility for any credit control under those conditions, unless Congress saw fit to give them some additional powers to deal with that situation. Mr* Crawford* May I ask a question? The Chairman* Proceed* Mr* Crawford* Governor Eccles, I think that the record will show that the inactive gold account was created around December 1st last, and tho Secretary announced at that time that that fund with which the gold was to be purchased for the inactive account would be obtained through the issuance of government bonds or Troasury certificates, and sold to the public* Governor Eccles* That is right* Mr* Crawford* That was made very clear to the people* So that they would be forewarned as to how the money would be raised* Governor Eccles* That is correct* Mr* Spence* Governor, the question that seems to disturb me is that tho loss sustained by tho Federal Reserve System in this matter resulted from the enactment of a public law that was allegedly in the interest of all the people* Frequently we enact laws that cause losses to various industries and to various activities* The railroads may sustain a loss by reason of legislation* Insurance companies may sustain such a loss, and distilleries and brewories frequently have to change their methods of advertising, and their labels* Certainly it would bo a dangerous precedent to say that the private individual can recover for damages by reason of a change in public law, and donft you think that it would be a dangerous precedent to say that the Federal Rosorve could recover tho losses that it sustained by reason of a law enactod in behalf of all of the poopZo? Governor Eccles* Of course, you could say that the Federal Reserve System sustained a loss representing the difference between the old price -53- L—514 of tho gold and the revalued prico of tho gold. The action in changing the price of gold resulted, of course, in a profit to the Government of two billion eight'hundred and some-odd million dollars.. Individuals, many of them, who complained about having to surrender their gold and thoir gold certificates may claim that thoy sustained a loss as a result of it. Of course they would havo no claim upon the Govornmont any more than the Reserve Systom should as the result of tho action of the Govornmont in revaluing the dollar. But this situation is a little different, it soems to me. A government might pass legislation that would interfere with or would reduce profit during an operation of an institution. It might tend to put thorn out of business through some legislative action. But here is a case where the Treasury furnishes tho notos in the first instance that tho Reserve Systom uses, and *thoy require that the Reserve System pay them for those notes as thoy aro delivered. Here is a situation where tho Reserve Systom owns these notos now on hondf and they should either know that the loss has got to bo taken, and bo prepared to tako it, for we have twelve Reserve Banks, or these banks would like to havo some instruction as to what disposition to make of this item. Until we know whether or not it is a loss that the banks must take in proportion to the notes printed for their benefit, it is impossible to make a disposition of the matter, and, as I say, I think that it is only right and fair that the notes should bo replaced by tho Treasury. However, tho item involved, in relation to the size of the operation, is not what may be termed a very' important item in total amount, but it is desirable, it seems to me, that the matter bo disposed of. . Even if thoso notes wore permitted to bo used, there would not bo very much difference in putting out the now notes that had been printed until they wore out, and in keeping out notes that were already out. I felt at tho time that inasmuch as we had gone on for a year using those'notes, and thatwo had a substantial amount of notes still outstanding, that there was no particular reason to not continue to use tho inventory of notes that wo had on hand. Howover, that is not up to mo to decide that matter, but if those notos aro net going to be used, then we should charge them off and forgot them", provided the Treasury is not to bo authorized to replace them. Mr. Spence. Would there be any difference botweon a case wherein we had ordered tho distillers to change their labels in a certain fashion and this situation? The distillers had a great amount of lab®ls on hand, probably hundreds of thousands of dollars worth, thp.-h thoy had to chango to conform to tho national requirements, and do you think that they could come back and say, "Ylo sustained a loss by reason of this law which you should compensate us for?" Your institution is privately owned. Governor Eccles. Not privately owned in the sense that they havo any benefit whatever from profits beyond a fixed amount. In -54- L—514 othor vrords, whether the Reserve System mokes a large or small profit, or no profit, is net a matter of much concern to member banks. Mr. Spence. This would net affect your stockholders at all? Governor Socles. Not at all. Mr. Sponco. Your original stock was oft the basis of 6 per cent of tho surplus and capital of the bank, was it not? Governor Eccles. Fifty per cent of the full amount. Mr. Spence. I mean that the earnings were 6 per cent. Gcvornor Eccles. Yes, of paid in capital. Mr. Spence. Have you ever defaulted in the payment of interest? Governor Eccles. Dividends were not paid immediately after the organization of tho Reserve Bonks, but the dividends are cumulative and all back dividends were paid by the end of Jiine, 1918. Mr. Spence. That is 6 per cent cumulative interest? Governor Eccles. It is a dividend on the stock. Mr. Spence. And the stockholders would nevor know whether this has been paid or not? Governor Eccles. I think that that m y be truo. During and following the war period, when there was a tremendous demand for credit, and when the discounts of tho Reserve System wore very, very largo, the Reservo System mado very largo profits and paid a large franchise tax to the Government. Very shortly after the time when the Reserve System was organized, we got the inflationaxy effect of a World War, and it required a great deal of credit for the purpose of doing business on the increasod basis of pricos, and particularly was that truo after the war was over. So that while it might have taken a great many years to build up a surplus in tho Reserve System, tho surplus was built up very, very rapidly as the result of the unexpected condition which developed. The Chairman. Aro there any more members that have questions? Mr. Transue. Mr. Chairman, I have a question, which is veiy short. Mr. McKeough. I have a question. Tho Chairman. Could you come back another day, Governor? Governor Eccles. Yes, I could. -55- L—514 The Chairman. If wo report on sono other bills that we have boforo us, wo will not havo time to hear you further, and what I had in mind was that we would rosumo this some other time, and go into oxocutive session to consider thoso other matters* But if we oan finish with the Governor shortly, I would bo glad to do it® Eow many members here want to ask questions? Lxr« McKeough* My question will not take me long* Mr* Crawford. May I ask tho Governor a question? The Chairman* Go right ahead* Mr. Crawford* Governor, immediately following the depression, commercial banks began to liquidate all of the discount paper with the Reserve Banks, and tho Reserve Bank earnings began to fall off, did they not? Governor Eccles* That is correct* Mr* Crawford* And wo havo been going through that period now for yoars, where the earnings have almost vanished? Govornor Ecclos* Except from the source of government bonds* Mr* Crawford* is concernod? The .-earnings have vanished, so far as discount paper Governor Eccles* That is right* Mr* White* As I understand the previous statements of tho representatives of your department, the passage of this bill will not in any way affect the volume of credit? Governor Eccles* Not at all* It has no relation to it* Mr* White* Now, then, how much money did tho Government receive as gold profit from tho Federal Reserve Banks? Governor Ecclos* Two billion eight huMred and some-odd millions; I do not remember the exact amount* Mr* White* In a way, that is what we might- Mr* Patman (interposing)* That statement should not go in that way* That is evidently a mistake, Governor* The Government 1ms made a gold profit of that amount, but I do not think that the Federal Reserve System is entitled to say that by reason of the gold that it has turned in to the Government, tho Federal Reserve System caused the profit of two billion eight hundred million* If I understand it correctly, tho Fodoral Rosorvo had loss than three billion in gold and gold certificates, only claimed that much* -56- L—514 Governor Ecolos* Most of tho gold, of course, was hold by tho Rosorve Banks, out si do of tho gold certificates* I thinfc that Congressman Patman is right* I did not understand your question, Mr* White* Tho Reserve Banks hold #3,557,000,000 of gold and gold certificates on January 31, 1934* Mr* White* What I had in mind was this: As a result of that novo, how much gold did tho Government receive from the Fodoral Reserve that was previously to tho credit of tho Federal Rosorve Banks? Governor Ecclos* Of course, tho profit on the gold held by tho Federal Reserve Banks at the time of devaluation could be definitely determined* A largo part of the gold was held by the Rosorvo Banks, but it is truo that some of it was in circulation or in hoarding at t ho time, that is some of it was gold hold outside of tho System at tho time of devaluation* Mr* White* You moan th&t there was an amount of two billions eight hundrod millionsGovernor Eccles* That was the total gold profit* Mr* Whito* That was in the exchequer of the Federal Re servo, which was turned over to tho exchequer of tho Federal Govornmont? Governor Ecclos. No* Tho total gold steclf was four billions, out of which tho Federal Reserve had over throe and a half billions, so that you can figure that over 30 per cent of tho gold profit was profit on the gold held by tho Rosorvo Systom, approximately. Mr* White. Can you toll mo, in figures, how mtoch money in the Federal Rosorve was turaod ovor to. the Treasury as a rosult of that move ? Govornor Ecclos. Something around throe and a half billion dollars* Two billion eight hundred million was tho profit on the total gold takon by the Troasury, from all sources* Mr* Whito* Now-, that was sort of a dividend, in a way, was it not, from tho Governments oporation of tho Fodoral Rosorve Banks? Governor Ecclos. Ho, I would not figure that. Mr. Whito. And its gold policy? Govornor Eccles* Its gold policy made possible the profit* Mr* White* Eere is the thing that I an getting ats The Governrieiit rocoivcd three billion dollars benefit thore from tho Federal Rosorvo System* If it was a dividend, or a splitting up of moneys that accrued to tho Federal Reserve Banks, and then turned ovor to tho Government, and this bill does not pass, is it not cxactly tho same thing? In other words, do you not give tho Government tho benefit of $2,000,000 on cxactly tho some basis? -57- L—514 Governor Ecclcs. Tho Federal Government would, of course, have $2,000,000 nore for scno ether purposo than it would have if tho bill did not pass. Mr. White* That is what I mean. Tho Federal Government received thoso funds from the Federal Reserve. If this bill does not pass, in effect the Government has received $2,000,000 moro, end if tho Federal Government had the right and it was proper for it to receive tho original funds, why is it not proper also for it to receive the benefit of this $2,000,000? That is tho point that I am making. This would simply require the necessity of tho Federal Reserve assuming tho burden of the expense, and charging it off and getting rid of it, but, nevertheless, on purpose letting the thing stand to tho Federal Treasury. It is the same thing, is it not? Mr. Ford. Mr. Chairman, I will have to leave, and if we are going to go into executive session-Mr. Ytfhito. Just ono othor question. If this thing does go through, in view of the fact that you say that the Federal Government is buying gold at tho present time out of its regular funds, would it not moan that the Treasury would therefore havo $2,000,000 loss to carry out its policy in that respect, and would that net bo a good thing? Governor Ecclos. No, this would have nothing to do with that, because tho gold profit is not being used in any way for the purpose of buying gold. Tho gold that is coming into this country, that the Government is sterilizing, is being purchased out of the general fund, and tho goneral fund is being replenished out of borrowed money or taxes or whatever source of rovonue the Government has. Mr. White. Mr. Chairman, I know that you aro anxious to got away, so I won't ask any moro questions. I will just say that if the Federal Treasury had tho right to take the money in the first place, they also havo the right and should ask the Federal Reserve Banks to bear the expense of this $2,000,000. Tho Chairman. Gentlemen, it is evident that we are not going to be able to finish with Govornor Eccles, and on some day next woolc, satisfactory to the committee, wo will resume with Governor Eccles and try to finish. We cannot do it today. I will have to leave in a few minutes, and so will Mr. Ford. Wo will havo to go into executive session for a few minutes, to see what wo will do about those othor bills. Wo will ask you to come back another fiay, Governor Eccles. (Thereupon, at 11:50 o'clock a. m., tho Committee went into executive session.)
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