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Testimony 11/22/49

"Why should there be Federal supervision over banking?
What reason is there for applying nation-wide reserve requirements in
the field of monetary control to all commercial banks*
Bank reserves are now said to be largely for the purpose of influencing
the supply, cost and availability of credit*

f

Weren t they originally

set up to assure the solvency of individual banks?
"What kind of reserves do nonmember banks hold?

?

How do they differ from

those held by member banks?
What, if anything, needs to be done to increase the coordination of
Federal Reserve and Treasury policies in the field of money and debt
management?
How does the Federal Reserve System provide liquidity for the banking
systems?

Does any other banking agency share in this liquidity function?

How can selective credit controls supplement general monetary controls?
What are the disadvantages of limiting closely Federal Reserve discretion
in applying monetary controls?
You have said that the various bank supervisory agencies look upon bank
examination from somewhat different points of view*

Would you care to be

explicit as among supervisory agencies and appraise the effect of such
differences?




What are the legal deterrents to membership in the Federal Reserve
System other than higher reserve requirements?

Would it be advisable

to remove or modify them?
What purpose would be served by a return of this country to the gold
coin standard?




November 16,

Briefly summarized, the principal reasons given for
opposing the proposed action are:




1. The FDIC is:
(a) Primarily concerned with the insurance risk
and not with monetary and credit policies.
Sjiphasis on protection of fund might run
counter to monetary and credit policies;
also, the public interest.
(b) Not sympathetic with actions of the System
and would not be diligent in enforcing regulations imposed by the System. Examples are
attitude vith respect to enforcement of Regulations Q, U and W .
(c) Inexperienced. The banks which it has supervised for a relatively short time are themselves
a relatively unimportant segment.
(d) Not entitled to examining power solely as an
insuring agency. Other types of insurance are
administered without such power.




The Federal Reserve System is:
(a) Required by lair to keep itself informed of
the general character and amount of the loans
and investments of member banks and the condition of such banks«
(b) In the final analysis, the real guarantor of
bank deposits. During a period of crises, the
commercial banks and the FDIC would have to look
to the System for the conversion of their assets
to meet deposit liabilities*
(c) Concerned with devising and maintaining bank
supervisory policies of a type seeking the
objectives of supervision without exerting
influence in opposition to national monetary
and credit policies.
(d) Equipped through trained staffs, powers and
contacts other than those related directly
to examination and supervision to exercise
supervisory influence, directly or indirectly,
upon both State and national member banks
holding a large proportion of all commercial bank
assets.
(e) Decentralized. It has adequate office facilities
well placed and general contacts with banks. A
reasonable amount of supervisory authority rests
with regional or district officers familiar with
sectional and local problems.
The Federal Reserve System would:
(a) Lose prestige and influence. It is felt that
the System should have an active rather than
passive or consultative part in the formation
of examining policy.
(b) Lose contacts. Through examiners in the field
the Reserve Banks keep in touch with local conditions and trends. Some other means would
need be devised if examining function "were
removed.

- 3 -

(c) Lose members, or, at least, such action -would
not be conducive to increased membership.
(d) Suffer djapairment of its ability to discharge
its duties effectively and in bank relations.
li. Member banks:
(a) Are believed to regard Federal Reserve examination and supervision as comprehensive,
constructive and sympathetic.
(b) Would look with disfavor upon such a transfer.
5>. The proposed action would:




(a) Centralize• In fact, with the Comptroller a
member of the FDIC board, it may tend to become, in effect, one agency. A considerable
degree of decentralization considered desirable
and beneficial.
(b) Neither promote efficiency nor accomplish
economy*

MONETARY, CEEDIT, AND FISCAL POLICIES
TUESDAY, NOVEMBEB 22, 1949
CONGRESS OF T H E U N I T E D STATES,
SUBCOMMITTEE OF M O N E T A R Y , CREDIT,
AND F I S C A L POLICIES,
J O I N T C O M M I T T E E ON T H E E C O N O M I C R E P O R T ,

Washington, D. C.
The subcommittee met, pursuant to adjournment, at 10:00 a. m. in
the caucus room, Senate Office Building, Senator Paul H. Douglas
(chairman of the subcommittee) presiding.
Present: Senator Douglas (chairman of the subcommittee) and
Representative Wolcott.
Also present: Dr. Grover W . Ensley, acting staff director, and Dr.
Lester V. Chandler, economist to the subcommittee.
Senator DOUGLAS. Mr. Eccles, we are very happy indeed to have
you with us this morning. We were glad to get the expanded statement of Chairman McCabe^ which I suppose represented official Federal Reserve policy on the matters which we raised in our questionnaire, and I assume that may have been one of reasons why you as
an individual did not submit a reply to our questionnaire. But we are
happy to welcome you here this morning, and t understand that you
have a statement which you would like to give first. I think perhaps
I should say for the record that you are here on our invitation and not
on your solicitation.
STATEMENT

OF M A R R I N E R

GOVERNORS, F E D E R A L

S. E C C L E S , B O A R D
RESERVE

OF

SYSTEM

Mr. E C C L E S . I would like to comment on your observation. The
reason I did not reply to the questionnaire is that I understood, as did
the rest of the Board members, that it was submitted to Chairman
McCabe as a personal matter, and I did not see the questionnaire, nor
have I seen the replies. The replies to the questionnaire, as Chairman
McCabe indicated, were his views and not necessarily those of the
Board. I would not say, however, that there may not be a lot of
agreement on the Chairman's replies, but at the same time there may be
some different points of view and some disagreement. I appreciate
this opportunity, Chairman Douglas, to appear before your committee.
Mr. Chairman, I am here, as you know, in response to the invitation
in your letter of October 31, 1949, to discuss issues that have been
raised during the study initiated by your subcommittee in the field
of monetary, credit, and fiscal policies. I shall be glad to try to
answer such questions as may be uppermost in your mind, but I
should like first to present for your consideration a short statement




213

214

MONETARY, CREDIT, AND FISCAL POLICIES

which I hope may anticipate and answer some of your questions. My
views are the cumulative results of 15 years of participation in developing and carrying out policies of the Federal Reserve System, preceded by long experience in private banking under State as well as
National authority and membership in the Federal Reserve System.
I therefore could not fail to be aware of the vigorous opposition that
has so often been voiced against new proposals with respect to Federal
authority over banking. In recent years it has seemed that nearly
every recommendation emanating from the Federal Reserve Board
has been assailed as a threat to destroy the dual banking system. As
one who has spent his business life in that system, I have been unable
to see the justification for such agitation.
Our commercial banking system is composed of banks that receive
deposits subject to withdrawal upon demand, make loans, and perform
other services. About half of the total dollar amount of bank deposits
are insured up to $5,000 for each depositor by a Federal agency, the
Federal Deposit Insurance Corporation. Banks holding 85 percent
of the resources of the banking system are in the Federal Reserve System, another Federal agency. Approximately 5,000 of these banks
operate under Federal charters, issued by the Comptroller of the Currency, and about 9,100 operate under charters from the 48 States. This
is the dual-banking system.
Senator DOUGLAS. May I interrupt a minute? And, of the 9 , 1 0 0
State banks, about 2,000 are in the Federal Reserve System?
Mr. ECCLES. That is correct.
Senator DOUGLAS. About 7 , 1 0 0 outside?
Mr. ECCLES* I do not know the exact figure, but I think it is less than
7,000 that are outside, between 6,000 and 7,000.
While I am sure that those who are its most vociferous supporters
would not seriously contend for the abolition of the Federal Reserve
System, with the consequent restoration of the intolerable conditions
that prevailed before its establishment, they nevertheless constantly
oppose measures that would enable the Reserve System to be far more
effective in carrying out its intended functions—functions that help
to protect not only all banking but the entire economy.
Two proposals, more than any others, stir up this agitation. One is
the proposal for the equal application of a fair and adequate system
of reserve requirements to all insured commercial banks. The other
proposal is that the Federal Government apply the principles and objectives of the Hoover Commission to the Federal agencies concerned
with banking, monetary, and credit policy. Bankers believe in the
objectives of the Hoover Commission, at least as applied to all other
activities of the Government—why not the banking activities?
The red herring of the dual banking system is always brought up
to obscure the real merits of the fundamental questions involved in
the proper administration of fiscal monetary, and credit policy, which
concerns commerce, agriculture, industry, and the public as a whole;
it is by no means the sole concern of bankers.
The major responsibility of the Federal Reserve System is that of
formulating and administering national monetary policy. It does
this chiefly through the exercise of such influence as it may bring to
bear upon the volume, availability, and cost of commercial bank reserves. It must operate through the commercial banks of the country,




215 M O N E T A R Y ,

CREDIT, A N D FISCAL

POLICIES

because they, together with the Federal Reserve banks, are the institutions through which the money supply is increased or decreased. It
is of paramount importance to the entire country that someone have
the means as well as the ability to discharge this responsibility. It
cannot be left to the voluntary choice of some 14,000 individual and
competing banking institutions. It cannot be split up among the
various agencies of the Federal and State Governments. The framers
of the Federal Reserve Act undoubtedly intended that it should be in
the Federal Reserve Board under the direct control of Congress.
Others have pointed out that existing bank reserve requirements
are inequitable, unfair, and ineffective at the very time when they
are most urgently needed to restrain excessive expansion of bank
credit. They should not depend as they do now on whether a bank
is located in a central Reserve city 01* in a Reserve city or whether it
is outside of one of these cities or away from its downtown area, nor
should they depend 011 whether a bank is a member or a nonmember.
There is no good reason for such distinctions from the standpoint of
effectuating monetary policy.
Senator D O U G L A S . May I interrupt a minute? Are you suggesting,
therefore, that you should have one set of reserve requirements and
abolish the present distinction between central Reserve cities and
countiy banks ?
Mr. ECCLES. That is right.
Senator D O U G L A S . That is one set across the board ?
Mr. ECCLES. That is right.
Senator D O U G L A S . For banks wherever located ?
Mr. E C C L E S . The next paragraph will cover that, I think.
In addition to other handicaps of membership, members of the Federal Reserve System are subject to much more onerous reserve requirements than nonmember banks. Member banks are required to carry
certain percentages of their demand and time deposits in non-interestbearing cash balances with the Federal Reserve banks. Apart from
these required reserve balances, member banks necessarily carry some
vault cash to meet deposit withdrawals, and in addition they carry
balances with correspondent banks, none of which can be counted
toward statutory reserve requirements. On the other hand, nonmember bank reserve requirements not only are generally lower in amount
but may also consist entirely of vault cash and balances carried with
city correspondents. In some instances reserves of nonmember banks
may be invested in United States Government and other specified securities. Thus to a considerable extent nonmember banks may receive
direct or indirect compensation for a substantial part of their reserves.
These discrepancies are most obvious and difficult to explain when two
banks, one a member and the other not, are doing the same kind of
business as competitors on opposite corners of the same town. Member banks therefore bear an undue and unfair share of the responsibility for the execution of national credit policy.
There should be a plan under which the responsibility for holdingreserves to promote monetary and general economic stability would
be as fairly distributed as possible. This would require a fundamental
revision of the existing basis for bank reserve requirements. They
should be based on the nature of depoits rather than mere location;
they should be somewhat higher upon interbank deposits than upon




216

MONETARY, CREDIT, AND FISCAL POLICIES

other demand deposits. Vault cash should be given consideration
because it has much the same effect as deposits at reserve banks.
In any such revision of reserve requirements, it is of primary
importance to take into account the fact that they are a means of
contracting or expanding the liquidity position of the banking system
and of making other credit instruments more effective. Reserve funds
of banks may expand through large gold inflows or silver purchases,
or return of currency from circulation, or borrowing from Reserve
banks, or Federal Reserve purchases of Government securities through
necessary open-market operations. There should be sufficient authority over reserve requirements to permit taking such developments into
consideration when necessary.
There is widespread misunderstanding even among bankers of the
function of reserve requirements as a means of expanding or contracting the supply of bank credit. In sharp contrast with State
reserve requirements, those applied to member banks under the Federal Reserve Act are primarily designed to affect the availability of
credit; that is to say, the money supply. The Federal requirements
are not primarily applied for the purpose of providing a cushion to
protect the individual bank. They are not basically 'reserves in that
sense at all, and incidentally the Reserve banks do not and cannot
use them to buy Government securities, as most of the bankers seem
to think.
The Federal Reserve System is a creature of the Congress. You
can make it weak or you can make it strong. We have recited to the
Congress over and over again the dilemma that we face. It is perfectly simple. So long as the Reserve System is expected to support
the Government bond market and to the extent that such support
requires the System to purchase marketable issues, whether sold by
banks or others, this means that the System is deprived of its only
really effective instrument for curbing overexpansion of credit. It
means that the initiative in the creation of reserves which form a basis
on which credit can be pyramided rests with banks or others and not
with those responsible for carrying out national monetary policy.
To the extent that banks or others can at will obtain reserves, they are
thus able to monetize the public debt. In view of this situation, if the
Congress intends to have the Reserve System perform its functions,
then you should by all means arm it with alternative means of applying restraints. The only effective way to do that is through revision
and modernization of the mechanism of reserve requirements. The
Congress will not have done the job at all if it fails to include all
insured banks. Reserve requirements that are limited only to member
banks of the Federal Reserve System impose upon them a wholly
unfair and inequitable burden which becomes the more intolerable
as the need arises to increase reserve requirements as a means of curbing overexpansion of bank credit. Of course, organized banking and
its spokesmen, chiefly large city banks, do not want any change. They
never do.
Throughout the long history of banking reform in this country—
and it is still very far from complete—the same bankers or their prototypes have been for the status quo. Beginning with the National
Banking Act, they have fought every progressive step, including the
Federal Reserve Act and creation of the Federal Deposit Insurance
Corporation. I f you abide by their counsels or wait for their- leader


217

MONETARY, CREDIT, AND FISCAL POLICIES

ship, you will never do anything in time to safeguard and protect private banking and meet the changing needs of the economy in such a
way as to avoid still further intrusion of the Government into the field
of private credit, to which I am really very much opposed—an intrusion which the public has demanded in the past because private banking leadership failed.
I may add that whenever Congress sees fit to enact into legislation
the principle of equitable reserve requirements applied uniformly
without regard to membership in the Federal Reserve System, there
might well be changes in other relations of the Federal Reserve System which would be of benefit to all commercial banking, as, for
example, to offer the credit facilities of the Reserve banks on equal
terms to all banks which maintain their reserves with the Reserve
banks, together with further improvements in the check-collection
system. These and other beneficial changes could well be brought
about with great advantage to banks and to the public in general.
The role of the Reserve System in relation to Government lending
to business also should be clarified. This is particularly important to
the functions exercised in that field by the Reconstruction Finance
Corporation and with respect to the authority of the Reserve banks to
extend credit to industrial enterprises under section 13b of the Federal Reserve Act. The latter should be modified as proposed in S. 408,
the bill favorably reported by the Senate Banking and Currency Committee in 1947, and the enactment of which was again recommended
by the Board in 1948.
There is unquestionably a need for such an agency as the Reconstruction Finance Corporation in emergency periods for direct Government lending for projects outside the field of private credit, but I
have always taken the position that the Government should not compete with or invade the domain of private banking and credit institutions. When aid is necessary to facilitate the functioning of private
credit, then such aid should take the form of guaranteeing in part the
loans made by private institutions, just as was done in the V-loan
program of the Federal Reserve for financing war production. That
is what S. 408 proposes. The profound difference m the principle at
stake here ought to be obvious.
In relation-to the second question, that of organization, which I
mentioned at the outset, I feel that students of government, and particularly those who endorsed the objectives of the Hoover Commission, ought to be more interested than they appear to have been in
the problems of organization of the agencies of Federal Government
concerned with bank supervision. Some, however, may have been
misled into thinking that there is no problem in this field because
the expenses of these agencies are not paid from governmental
appropriations.
The establishment of a system of insurance of deposits by the Federal Government was one of the great accomplishments of the Congress in the direction of fostering public confidence in the banking
system. I favored Federal deposit-insurance legislation at a time
when most of my fellow bankers were denouncing it. But I never
expected, and I am certain Congress never intended, that this protection for depositors would be used either to hamper effective national monetary policy or to give any class of banks special advantages
over others. I regret to say that the Federal Deposit Insurance Cor


218

MONETARY,

CREDIT, AND FISCAL

POLICIES

poration has been used to discourage membership in the Federal Reserve System and to weaken effective monetary policy.
There is 110 logic whatever in the present provisions of law. which
say, in effect, to a bank, "You can't .joint the Federal Reserve System
unless you also join the Federal Deposit Insurance Corporation, but
you can join the Federal Deposit Insurance Corporation without joining the Federal Reserve System." The law compels a national bank
to join both, but a State bank lias the option of joining one or the
other or neither. I should like most earnestly to urge upon you the
importance of making this a two-way street by providing that a bank
can be a member of the Federal Reserve System without joining
the Federal Deposit Insurance Corporation, in the same way that a
State bank is IIOAV privileged to be a member of the Federal Deposit
Insurance Corporation without being obliged to join the Federal
Reserve System.
Senator D O U G L A S . Mr. Eccles, may I ask a question there? Is this
a counterattack which you are proposing that the Federal Reserve
System make
Mr. ECCLES. It is a logical answer to some of the comments.
Senator DOUGLAS. Are you serious about this?
Mr. ECCLES. I have proposed a uniform system of reserves. Certainly, if there is not to be a uniform system of reserves, the Federal
Reserve System is weakened, and its position can only be maintained
by having a two-way street as proposed. In other words, it seems to
.me that, unless you have uniform reserve requirements, then certainly this proposal here is an alternative that should be taken into
account, not as a counterattack for the purpose of any destructive
effects, but merely, as it seems to me, a necessary piece of legislation
so that the Federal Reserve is in a position at least to protect itself
or to defend itself.
Senator DOUGLAS. This might be a very effective means of bringing
the Federal Deposit Insurance Corporation and some of its supporters
into line with your proposal for uniform reserve requirements.
Mr. E C C L E S . I would hope that would be the result.
Senator D O U G L A S . But if it were not the case, do you think this proposal of yours would strengthen the banking system as a whole?
Mr. ECCLES. I do not think it would hurt it.
Mr. W O L C O T T . Would it strengthen it?
Mr. E C C L E S . N O ; I do not know that it would strengthen it. I think
there may be some member banks that wTould decide they would not
need Federal deposit insurance just as there are many State banks
now that have decided they do not need the Federal Reserve as long as
they have Federal deposit insurance.
I think some of the bigger banks may well say that as members of
the Federal Reserve they clo not need FDIC.
Senator D O U G L A S . D O you think that Federal deposit insurance has
lowered the value of a bank belonging to the Federal Reserve System ?
Mr. ECCLES. N O ; I clo not think so. I favored F D I C . Neither do
I think that membership in the Federal Reserve System would lower
the standards of a bank which is a member of the F D I C .
The Federal Deposit Insurance Corporation was designed in the
public interest, and it should be maintained for that purpose; but
this is not to say that the continued existence of three Federal agencies
performing similar or allied functions in the field of bank supervision,



219 MONETARY, CREDIT, AND FISCAL POLICIES

regulation, statistical, and other services is justifiable. There is unnecessary duplication and triplication of offices, personnel, effort, time,
and expense. While the maintenance of separate and often conflicting
viewpoints may serve selfish interests, on the old principle of "divide
and conquer," it seems to me that this should not prevent improvements wherever possible in the organization of a Government already
overburdened with complexity and bureaucracy.
In this connection various suggestions as to where responsibility
should be lodged for the examination of banks subject to Federal
supervision have been offered, ranging from the setting up of a new
agency with no other responsibility to maintaining the status quo.
The Reserve System must have currently accurate information, procured through examination, bank condition reports, special investigations, constant correspondence, and contacts with the banks. The
System must have examiners and other personnel responsible to it,
specially trained and directed for the purpose of procuring such
information. The Reserve System is in position to determine policies
to be pursued by examiners, to coordinate them with credit policies,
and at the same time decentralizes the actual administration by utilizing the facilities of the 12 Reserve Banks and their 24 branches. They
examine all State member banks, receive copies of examination of all
national banks, are in close touch in this and in other ways with all
member banks, as well as the State and National supervisory
authorities.
Through their daily activities of furnishing currency, collecting
checks, seeing that member banks maintain their reserves, and extending credit to them, the Reserve banks obtain current information
about banks which is invaluable for purposes of bank supervision.
The Federal Reserve is and must be at least as vitally concerned with
the soundness of the individual bank as anyone in the organization
of the Comptroller or the Federal Deposit Insurance Corporation.
The Federal Reserve Act places in the Federal Reserve a specific responsibility for effective supervision over banking in the United States.
Soundness of the individual bank and soundness of the economy must
go hand in hand. Therefore, Federal Reserve concern with the maintenance of stable economic conditions should be and is in the interest
of sound banking as well as the public welfare. It has not destroyed
the effectiveness of Federal Reserve supervision over State member
banks, and it is absurd to think, as I understand has been suggested to
you, that it would destroy the effectiveness of supervision or examination of other banks. Moreover, is it reasonable to believe that the
intelligence of the officials of the Federal Reserve banks, combined
with the judgment of a seven-man board appointed by the President,
confirmed by the Senate, responsible to the Congress, should be regarded as less independent than a bureau in the Treasury under one
official whose deputies are appointed by the Secretary of the Treasury? No single individual in the Federal Reserve System determines
its policies.
Since examination supplies information essential to the right conduct of the business of the Reserve System and since the Reserve
authorities must review reports of examination of all member banks,
it is illogical to argue that they should be deprived of all examination authority. Examination procedure is a tool of bank supervision
and regulation which should be integrated with and responsive to




220

MONETARY, CREDIT, AND FISCAL POLICIES

monetary and credit policy.
1
1
1 ' ~''
'J1

If directed as though it were not connullify what otherwise could be effecIn fact, too often in the past, bank
ter when conditions grew worse, thus
o
intensifying deflation, and conversely examination policy has gone
along with inflationary forces when caution was needed.
Only one of the three Federal supervisory agencies, the Federal
Reserve System, is charged by Congress with responsibility over the
supply and cost of credit, Which is directly affected by reserve requirements, discount policy, and open-market operations. The Reserve System views the economic scene principally from the standpoint of national credit conditions as effected by monetary, fiscal, and
related governmental policy. Other agencies do not have these responsibilities. Their differences of interest often lead to prolonged
discussions which delay or prevent agreements.
Let me turn now to the question of the composition and responsibilities of the Board of Governors and the Open Market Committee, which
committee is composed of the seven members of the Board plus five
Reserve bank presidents. The New York bank has one of those five,
and the position is continuous. The other banks rotate in their membership on the committee.
I do not suggest that the present system has not worked. It was a
compromise and your committee is interested, and properly so, in the
question whether the present structure could be improved. I feel that
I should point out its defects and how they could be remedied. '
While the Board of Governors has final responsibility and authority
for determining, within statutory limitations, the amount of reserves
that shall be carried by member banks at the Federal Reserve banks,
for discount rates charged by the Federal Reserve bank for advances
to member banks, and for general regulation and supervision of the
lending operations of the Reserve banks, the responsibility and
authority under existing law for policy with respect to the Government security market, known as open-market operations, is vested
in the Open Market Committee. These operations have become an
increasingly vital part of Federal Reserve policy. In practice they
are the principal means through which debt-management policies of
the Government are effectuated. They are the means by which an
orderly market for Government securities is maintained. With the
rapid growth of the public debt, chiefly as a result of wartime financing, with the continuance of a budget of extraordinary size, with
major refunding operations in view and the prospect of deficit financing, there can be no doubt of the responsibility that will continue to
rest with the Federal Reserve System for open-market policy .
Suggestions have been made and I believe will appear in answers
to your questionnaire, with a certain degree of logic in their support,
that the interrelations between the considerations of policy governing
open-market operations and those governing reserve requirements,
discount rates, and perhaps other functions, are such as to justify
transferring these major instruments of policy to the Federal Open
Market Committee, leaving to the Federal Reserve Board as such only
matters of secondary importance. This would not justify the continued existence of a seven-man Board of Governors. To the extent,
however, that such suggestions recognize the principle that responsibility for over-all credit and monetary policy should be fixed in one




11

221

MONETARY, CREDIT, AND FISCAL POLICIES

place, I would agree. On the other hand, they accentuate the major
inconsistency in the present set-up.
It should be noted in this connection that the president of a Federal
Reserve bank is not a director of that bank but is its chief executive
officer. He is elected for a 5-year term by a local board of nine directors, three of whom are appointed by the Board of Governors and
the other six by the member banks of the district. In addition to
making the appointment, the directors fix his salary. Both of these
decisions are subject to approval by the Board of Governors. Neither
he nor the directors of the bank have any direct responsibility to the
Congress, or the administration, for that matter.
<
When a Reserve bank president sits as a member of the Federal
Open Market Committee, however, he participates in vital policy decisions with full-time members of the Board of Governors, who are
appointed by the President of the United States and confirmed by
the Senate and whose salaries are fixed by Congress. Those decisions,
which must be obeyed by his bank as well as by the other Federal
Reserve banks, affect all banking. So far as I know, there is no other
major governmental power entrusted to a Federal agency composed
in part of representatives of the organizations which are the subject
of regulation by that agency. President Woodrow Wilson expressed
himself very vigorously on this subject when the original Federal
Reserve Act was under consideration. I f this principle is not to be
discarded, it follows that further inroads should not be made into the
functions of the Federal Reserve Board and on the other hand that
responsibility for open-market policy should be concentrated in the
Board. I am convinced in this connection that there is no need for
more than five members, instead of seven as at present, and that the
Congress should recognize by more appropriate salaries the great
importance of the public responsibilities entrusted to the Federal
Reserve System, of which the Federal Reserve Board is the governing
body. Such recognition would be more likely to attract to the membership of the Board men fully qualified for the position.
I f , however, it is believed preferable for national credit and monetary policy to be determined in part by some of the presidents of the
Reserve banks, then the presidents of all 12 Reserve banks should
be constituted the monetary and credit authority, and they should
take over the functions of the Board of Governors, which body should
be abolished. The governmental responsibility of such a body should
be recognized by requiring their appointment by the President of the
United States and their confirmation by the Senate; their salaries
should be fixed by Congress, to whom they should report. May I point
out that if the presidents of the Reserve banks can, in addition to performing their manifold duties as chief executive officers of these very
important institutions, take on in addition the principal functions
of the Federal Reserve Board, it must be that these functions do not
justify a full-time seven-man Board, and this would be another reason
for abolishing it, and substituting a part-time Board composed of the
12 presidents.
You would have to add, of course, an administrator and a proper
staff in Washington, and you would possibly have to add committees
made up from the 12.
99076—50

15




222

MONETARY, CREDIT, AND FISCAL POLICIES

I am offering this seriously. This is not a counter-proposal. This
is a serious proposal based upon the experience that I have had in
Washington over a long period of time.
Senator DOUGLAS. Is this your first choice or is your first choice
the abolition of the Open Market Committee and the lodging of
powers of the Open Market Committee in the Federal Eeserve Board?
Mr. ECCLES. Well, I would be pretty neutral on that. I think either
would work. I think it is largely a question of placing responsibility
in a governmental body, whether it be the President's or whether it
be another board. I think either would work. I would be neutral.
Senator DOUGLAS. But you would prefer either to the present
set-up ?
Mr. ECCLES. I would.
The views I have expressed have developed out of a long experience
in and out of Government and they have not been altered by the fact
that I have ceased to be Chairman of the Board after serving in that
capacity for more than 12 years or by the fact that I expect sometime
to return to the field of private banking.
In the foregoing I have not attempted to include some other important matters which may be of interest to the committee in its
deliberations and might well be considered by a national monetary
commission, such as that proposed in S. 1559 which I strongly support.
Accordingly, I would appreciate it if you would permit me to file a
supplemental memorandum for the record in the even that it appears
to be desirable to do so in order to complete my statement.
Senator DOUGLAS. Thank you very much, Mr. Eccles. Of course
we Avill be glad to have you file a supplementary statement. I want
to thank you for your very interesting testimony.
(The following supplementary statement was later furnished by
Mr. Eccles:)
BOARD OF GOVERNORS OF T H E FEDERAL RESERVE SYSTEM,

December lt 1949.

H o n . PAUL H . DOUGLAS,

United States Senate, Washington, Dt C.
DEAR SENATOR DOUGLAS : In connection with my testimony presented on November 22 before your committee, I indicated tliat I had not attempted to include in
my statement some important matters which may be helpful to the committee.
You granted me the privilege of filing a supplementary statement should that
appear desirable.
In the course of my testimony you asked if it would serve a useful purpose if
Congress were to instruct the Treasury further as to the policies to be followed
in debt management where they are dependent upon the monetary policies of the
Federal Reserve System. You also stated that you would appreciate it if you
could get some suggested standards of an instruction that might be given to the
Treasury by Congress with reference to Treasury relations with the Federal
Reserve.
Since presenting my testimony I have given a great deal of thought to this
subject In reading over the record of my remarks, it was apparent to me that
I had not responded as fully as I could have to some of your questions. Therefore, I should like to take advantage of the privilege of making a supplementary
statement.
A very fundamental dilemma confronts the Federal Reserve System in the
discharge of the responsibilities placed on it by Congress. The System has by
statute the task of influencing the supply, availability, and cost of money and
credit. In peacetime, the objective is to do this in such a way that monetary
and credit policy will make the maximum possible contribution to sustained progress toward goals of high employment and rising standards of living. Federal
Reserve System powers for carrying out this responsibility are at present basically




223 MONETARY, CREDIT, AND FISCAL POLICIES
adequate. But the System has not, in fact, been free to use its powers under
circumstances when a restrictive monetary policy was highly essential in the
public interest. It has been precluded from doing so in the earlier postwar period
in part because of the large volume of Government securities held by banks,
insurance companies, and others who did not view them as permanent investments. Reasons for supporting the market under these conditions I have already
presented before your committee.
This policy of rigid support of Government securities should not be continued
indefinitely. The circumstances that made it necessary are no longer compelling.
But the Federal Reserve would not be able to change these policies as long as it
felt bound to support debt-management decisions made by the Treasury, unless
these were in conformity with the same objectives that guide the Federal Reserve. The Treasury, however, is not responsible to Congress for monetary and
credit policy and has had for a long time general easy-money bias under almost
any and all circumstances. As long as the Federal Reserve policy must be based
upon this criterion, it could not pursue a restrictive money policy to combat
inflationary pressures.
Decisions regarding management of the public debt set the framework within
which monetary and cx*edit action can be taken. As the size of the debt grew
through the period of deficit finance in the thirties and particularly over the war
period, Treasury needs came to overshadow and finally to dominate completely
Federal Reserve monetary and credit policy. When the Treasury announces the
issue of securities at a very low rate pattern during a period of credit expansion,
as it did last Wednesday, the Federal Reserve is forced to defend these terms
unless the System is prepared to let the financing fail, which it could not very
well do. To maintain a very low rate pattern when there is a strong demand
for credit, the System cannot avoid supplying Federal Reserve credit at the will
of the market.
Under these conditions it can hardly be said that the Federal Reserve System
retains any effective influence in its own right over the supply of money in the
country or over the availability and cost of credit, although these are the major
duties for which the System has statutory responsibility. Nor can it be said
that the discount rate and open-market operations of the System are determined by Federal Reserve authorities, except in form. They are predetermined
by debt-management decisions made by the Treasury. This will be true as long
as the System is not in a position to pursue an independent policy but must support in the market any program of financing adopted by the Treasury even though
the program may be inconsistent with the monetary and credit policies the System
considers appropriate in the public interest.
The Federal Reserve System was established by Congress primarily for the
purpose of determining and carrying out credit and monetary policy in the interest of economic stability and is responsible to Congress for that task. There is
a seven-man Board of Governors, appointed for 14-year terms with approval of
the Senate. The Board is assisted by an experienced and highly qualified staff of
experts. There are 12 presidents of the Federal Reserve banks, each with a
staff of specialists, and each Federal Reserve bank has a board of directors composed of leading citizens in its district drawn from professional, business, farming,
banking, and other activities. There is also the Federal Advisory Council, composed of a leading banker from each of the 12 districts, established by Congress
to advise the Board. All of these supply information and advice and many participate in formulation of monetary policies appropriate to the needs of the
economy.
Under present circumstances the talents and efforts of these men are largely
wasted. Views of the Federal Reserve Board and Open Market Committee regarding debt-management polices are seldom sought by the Treasury before
decisions are reached. The System, however, has made suggestions on its own
initiative to the Treasury in connection with each financing, but very often these
have not been accepted. Decisions are apparently made by the Treasury largely
on the basis of its general desire to get money as cheaply as possible.
In a war period or a depression, there is reason for financing a deficit through
commercial bank credit—that is, by creating new money. The Federal Reserve
System has supported such financing at very low rates by purchasing Government
securities in the market at such, rates, thus pumping the needed reserves into
the banking system. In the early postwar period some support was desirable,
especially for the 2 Ms-percent long-term bonds, but it should not have been as
inflexible as it was for short-term rates.




224

MONETARY, CREDIT, AND FISCAL POLICIES

Tlie outlook at the present time is for an expanding economic activity with
high employment. We also now anticipate a Government cash deficit of over
$0,000,000,000 in the calendar year 1950. It would be inexcusable to finance this
deficit at very low rates of interest by creating new money should inflationary
pressures resurge. But if the Treasury, under these conditions, insists on continuation of the present very low rates, the Federal Reserve will have to pump
new money out into the economy even though it may be in the interest of economic
stability to take the opposite action. In making a cheap money market for the
Treasury, we cannot avoid making it for everybody. All monetary and credit
restraints are gone under such conditions; the Federal Reserve becomes simply
an engine of inflation.
With respect to the problem of how future monetary and credit policies are
to be established, it seems to me Congress must choose from the following three
general alternatives if the present dilemma confronting the Federal Reserve
System is to be resolved:
(1) Congress can permit the present arrangement to continue. The Treasury
would control in effect the open market and other credit policy as it does now
by establishing such rates and terms on its securities as it pleases, with the reouirement that the Federal Reserve support them. It should be recognized that
under this course, limitations over the volume of bank credit available both to
private and public borrowers, and accordingly limitation over the total volume
of money in the country, would be largely given up. Such credit and monetary
restraint as might be required from time to time to promote economic
stability would be entirely dependent upon the willingness of the Treasury to
finance at higher interest rates, and in the past the Treasury has been resistant to
doing this. If this alternative is followed, which is the present arangement, Congress should recognize that the responsibilities for monetary and credit policies
are with the Treasury and not with the Federal Reserve System and that the
principal purpose of the Federal Reserve System is then to supply additional
bank reserves on the demand of any holder of Government securities at rates
of interest in effect established by the Treasury.
(2) The Congress could provide the Federal Reserve System with a partial
substitute for the open market and discount powers which debt-management
decisions of the Treasury have rendered and can continue to render largely useless for purposes of credit restraint. Some measure of control over the availability of credit under inflationary circumstances could be regained if the System
were given substantial additional authority over basic reserve requirements of
the entire commercial banking system. With such authority, the System could,
if necessary, immobilize new bank reserves arising from a return of currency
from circulation, gold inflows, and System purchases of securities from nonbank
investors and thereby prevent the multiple expansion of the money supply. In
addition, the System would need authority to require banks to hold a special
reserve in Government bills and certificates. This would be necessary in case
banks entered upon an inflationary credit expansion through the sale of Government securities to the Federal Reserve or in the event it was necessary to assist
the Government to finance large deficits without creating additional bank reserves
which serve as a basis for multiple credit expansion.
(3) Congress, if it wishes credit and monetary policy to be made by the Federal Reserve System in accordance with the objectives of the Federal Reserve
Act and the Employment Act of 1940, could direct the Treasury to consult with
the System in the formulation of its debt-management decisions in order that
these decisions may be compatible with" the general framework of credit and monetary policy being followed by the System in the interest of general economic
stability. It is obvious, of course, that Government financing needs must be
met and the responsibility of the Federal Reserve to insure successful Treasury
financing must continue to be fully recognized. But Treasury financing can be
•carried out successfully within the framework of a restrictive credit policy, provided the terms of the securities offered are in accordance with that policy.
To sum up briefly my views, I believe that Congress should fix clearly the
responsibility for national monetary and credit policy. Although the Federal
Reserve System was established as an agency of Congress for determination of
monetary and credit policy, as it must function now it is responsible both to
Congress and to the Treasury for that policy. These two responsibilities are
often conflcting, and both cannot be satisfactorily discharged. The responsibilities and authority of the System need clarification and for that purpose one of
three alternative actions might be taken by Congress:




225

MONETARY, CREDIT, AND FISCAL POLICIES

(1) Recognize in the statute that responsibility for monetary and credit policy
is with the Treasury and recognize the Federal Reserve for what it is today—
an agent for advising the Treasury and carrying out monetary and credit policy
determined by the Treasury.
(2) Give the Federal Reserve System such additional authority over bank
reserve requirements as would adequately serve as a partial substitute for discount and open-market powers.
(3) Give the System a mandate to determine monetary and credit policies
on the basis of guide posts stated in terms of the language of the Full Employment
Act of 1946, with the Treasury required to advise and consult with the Federal
Reserve and take into account the mandate of Congress in connection with its
debt-management decisions.
I recognize that monetary or credit policy by itself cannot assure economic
stability. It should be accompanied by a fiscal policy, as well as a bank supervisory policy, in harmony with it.
I appreciate very much having the opportunity to express my views on this
matter.
Sincerely yours,
M.

S.

ECCLES

Senator DOUGLAS. N O W . Mr. Eccles, I take it that the three main
methods by which the Federal Reserve System attempts to control
the general supply of money and credit are first, rediscount; second,
open-market operations; and third, the reserve requirements which
the Board can impose on member banks; and I would like to ask you
whether you think the rediscount powers under the present conditions
of banking furnish any appreciable strength to the Reserve System.
Mr. ECCLES. By themselves, practically none.
Senator DOUGLAS. We had testimony last week which indicated that
the total amount of commercial paper rediscounted by the System
and held by the Federal Reserve banks amounted to less than 2 percent of the assets of the System.
Mr. ECCLES. So long as the banking system owns such a large
amount of Government securities, and there is an immediate market
for those securities, banks have little or no use for the rediscount
facilities, and therefore the discount rate by itself is not effective.
The discount rate may have some psychological effect, but it must
closely adhere to the Open Market Committee s buying rate on shortterm Government securities. Otherwise, it would be considered a
penalty rate, and would not be used at all to the extent that the buying
rate on short-term securities is very close to or below the discount rate.
The banks, in order to meet their reserve requirements, which in the
Reserve city and central Reserve city banks are figured on a weekly
basis, will sometimes borrow over-night funds, perhaps for 2 or 3 days,
rather than go through the market. The sale and the repurchase of
securities contains an element of cost in the commissions that they have
to pay in the buying and the selling.
I f , however, the discount rate is substantially higher than the buying
rate, of course, banks will buy and sell bills and certificates to adjust
with their reserve position.
Senator DOUGLAS. N O W may I ask some questions about the openmarket operations which imply not merely the purchase of Government securities by the System, in order to build up the reserves and
therefore to expand credit, but I take it also it was at least originally
intended to imply the sale of Government securities in order to reduce
the member bank reserves and therefore curtail expansion. That is
true, is it not?
That is a preliminary question. Then I was going to follow that
u p . Is that statement correct?



226

MONETARY,

CREDIT, A N D FISCAL POLICIES

Mr. E C C L E S . I f the banks have excess reserves, and the System does
not sell its Government securities, that is, the Open Market Committee
does not sell out of its portfolio of Government securities, then the
banks would bid up the prices of Government securities; interest rates
drop, and an exceedingly easy-money situation develops.
An example of that occurred when the emergency authority of the
Board to increase reserve requirements wTas permitted to lapse on the
1st of July. The banking system immediately received very substantial excess reserves. The Open Market Committee did not sell securities in the market, and as banks endeavored to invest their funds the
bill rate, which was approximately one and an eighth, went down to
three-quarters within a week's time or less. Certificate rates dropped
accordingly and bond prices went up. In order to keep the sliort-term
rate from practically going to the vanishing point, the System then
permitted the sale of sufficient securities to absorb the excess reserves.
Let me put it this way: The money market banks as well as most
of the Reserve city banks generally maintain practically no excess
reserves with the Reserve System. They immediately invest any excess reserves that they have in short-term Government paper, almost
irrespective of the rate. It has been definitely demonstrated that it
is impossible to maintain more than about tliree-quarers of a billion
of excess reserves, which are maintained largely by what are known
as the country banks—smaller banks throughout the country.
Reserves are supplied through gold imports, the return of currency
and Treasury operations which put funds into the market. The Treasury may also take funds out of the market, as would an increase in
currency or a loss of gold. Variations in reserves through all of these
immediately affect the short-term rate.
Senator D O U G L A S . Well, I take it that you believe that during the
period of expanding prices, and a period m which there is a tendency
toward inflation, one way of checking this would be, if it could be
made effective, for the System to sell Governments in the open market
and thus draw down the
Mr. ECCLES. It cannot be made effective.
Senator D O U G L A S . That is the next point I was coming to. But if
it could be made effective, that is what you would like to have done?
Mr. ECCLES. Oh, yes; if the banks or the public would buy securities
out of the portfolio of the System, that would be fine.
Senator D O U G L A S . That would draw down the reserves and therefore diminish the lending power?
Mr. E C C L E S . Yes; but there are not any reserves during those periods.
What really happens is that not only the banking system but nonbank
holders, such as insurance companies and investors, generally may
sell Government securities. The only market for the securities during
those periods is the Federal Reserve, and System purchases, of course,
monetize the public debt. Every dollar's worth of securities that the
Federal Reserve buys, whether from banks or otherwise, adds to the
total deposits of the banking system and the reserves of the banking
system upon which a multiple expansion of credit cjtn be created.
What would be required under the conditions which you have indicated
would be not that the Federal Reserve, the Open Market Committee,
sell securities in the market, but that it withdraw from the market
and refuse to buy.




227 MONETARY, CREDIT, AND FISCAL POLICIES

Senator DOUGLAS. Well, now, tliat was the next point. Are you saying that the weapon of the open-market operations has been virtually
made inoperative to check inflation because of the readiness of the
System to buy unlimited quantities of Governments at relatively
pegged prices ?
Mr. ECCLES. That is correct.
Senator DOUGLAS. And that as long as the banks can take bonds, go
to the Federal Keserve System, sell them and get reserves, that the
process of selling to them is taking money out of one pocket, which
they promptly proceed to put in the other ?
Mr. ECCLES. When the System buys securities it creates new reserves upon which the banking system can loan six times that amount
of money on the basis of the present reserve requirements.
Senator DOUGLAS. Now who decides whether or not the Federal
Reserve System shall buy Governments?
Mr. ECCLES. That is a decision that is made by the Open Market
Committee in conjunction with the Treasury.
Senator DOUGLAS. Well, do they determine the amount or do they
determine the rate?
Mr. ECCLES. Well, they do not determine the amount. You cannot
determine the amount not knowing what the supply of securities is
going to be.
The support price is really what is determined, and if you have
a support price, then whatever amount is offered is what we take.
The best example of that was last year when there was very heavy
selling of the long-term 2%-percent Treasury bonds. They were
mostly the 2y 2 marketable bonds not eligible for purchase by banks.
The insurance companies particularly were very, very heavy sellers,
and the System over a period of a few months purchased over $3,000,000,000 of these securites in the market and within a year such
purchases were nearly $7,000,000,000. In the same period over 2^2
billion of bonds—eligible bonds—were purchased by the System.
Senator DOUGLAS. Mr. Eccles, I have never believed that congressional hearings were designed to exploit administrative differences, but you have been a member of this Open Market Committee,
a very influential member, and yet now you are saying that this policy
that the commitee has followed is in your judgment incorrect ?
Mr. ECCLES. I did not say it was incorrect. I merely outlined the
effect of it. When I appeared before this committee November 25,
1947, this same committe of which Senator Taft was then chairman
and again before this committee on April 13, 1948, I discussed very
fully this whole question of monetary policy. You may recall that
there were some very important inflationary pressures in existence
in the fall of 1947 and in the spring of 1948. On those occasions I
requested for the Board certain powers.
I made this statement in April of last year. It is very short:
So far as the monetary and credit yield is concerned, we have tried to make
clear the action on these fronts alone cannot guarantee stability. Nevertheless
we believe that the Reserve System should be armed with requisite powers, first
to increase basic reserve requirements of all commercial banks, and. later ont
if the situation requires it, to provide that all such banks hold an additional
special reserve.

That was in the form of short-term Governments.




228

MONETARY, CREDIT, AND FISCAL POLICIES

Both of these would be protective measures. The first could be used to offset
gold acquisitions and purchases of Government securities by the Federal
Reserve—•

That is, from insurance companies and others. It would neutralize,
lock up the effect of such an operation—
and thereby restrict continued expansion and the already excessive money supply.
The second would be essential in case banks embark upon an inflationary credit
expansion through the sale of Government securities to the Federal Reserve, or
to assist the Government in case of large-scale deficit financing.

Now that was the gist of what was recommended at that time.
I supported a policy of maintaining a
percent rate for the
longest term Government securities at tne time when that policy was
being pursued.
That policy likewise had the support of the Reserve bank presidents
including Mr. Sproul, who was vice chairman of the Open Market
Committee, and also of Mr. Brown, who was the chairman of the
Federal Advisory Council of the Board, and of the great majority of
the bankers of the country.
Last October, before the Iowa bankers, in answer to Mr. Parkinson,
the insurance company executive who criticized that policy, Mr. Leffingwell of J. P. Morgan & Co., and Mr. Burgess of the National
City Bank—the three leaders opposed to the support policy—I presented a statement in justification of the support of the long-term
Qy2 percent rate, at that time, and gave the reasons for it. I will
read this later.
Senator DOUGLAS. Then you wanted the short-time interest rate on
Government notes, certificates, and so forth, to go up and not the longtime rate?
Mr. ECCLES. Over the last several years the Open Market Committee was, I believe, in almost unanimous agreement on the question
of raising the short-term rate. We advocated a much freer shortterm rate than was in effect. We ran into resistance always with the
Treasury. During the war period we had a pattern of rates for
the purpose of carrying out the war financing which seemed very
necessary and desirable. We assured the Treasury that we would see
to it that whatever deficit financing was required would be carried
out at a fixed pattern of rates. We did that because it seemed to us,
with the very large amount of deficit financing that the war required,
and not knowing, of course, just how large it would be or when it
would end, that we could not have a speculative Government bond
market. I don't mean to say there wasn't considerable speculation
on the "up side." There was too much speculative bidding up of
prices which was not our fault—but we realized that it would be exceedingly difficult to finance the Government with, increasing interest
rates, which would mean declining prices for securities after issuance.
When the war ended we tried to get out of what we called a straitjacket by raising the short-term rates. We had difficulty with the
Treasury, commencing with Secretary Vinson—Secretary Morganthau, of course, left the Treasury prior to the end of the war. We
continued to have difficulty with the Treasury in getting them to
agree to freeing the short-term rate. That couid have been a flexible
rate, if it could have been permitted to go wherever it would go, in
relation to the 2y 2 percent long-term rate. It may well have gone
as high as the long-term rate—short-term rates in the past have gone



229

MONETARY, CREDIT, AND FISCAL POLICIES

as high or even higher than long-term rates—and we would have
then followed up that change in the short-term rate with an increase
in the discount rate.
Senator DOUGLAS. May I ask: When did the Federal Reserve first
suggest raising the short-term rate Treasury bills ?
M r . ECCLES. I n 1 9 4 6 .
Senator DOUGLAS. But

it wTas not carried into effect until the
middle of 1947?
Mr. ECCLES. Yes. I think that is true. We had a buying rate of
bills of three-eighths.
Senator DOUGLAS. Was there a disagreement in Government circles ?
Mr. ECCLES. There was.
Senator DOUGLAS. You felt the short-time rate should go up ?
Mr. ECCLES. The Open Market Committee felt it should go up.
Senator DOUGLAS. The Treasury did not think it should go up ?
Mr. ECCLES. That is correct.
Senator DOUGLAS. Why did you think it should go up?
Mr. ECCLES. Well, I felt that you had no flexibility in the market at
all. You could, as many of the banks were doing, sell the shorter
securities to us and buy the longer-term securities. This practice,
which we call playing the pattern of rates, tends to force the longterm rate down as long as short-term rates are not permitted to rise.
In other words, we had a spread between short-term rates and longterm rates that didn't make sense, in view of the support policy. Why
should anyone want to handle any short-term securities at seveneighths if you could get 2 y2 percent for a demand liability in long-term
securities ?
Senator DOUGLAS. You were in favor of the pegging of the longterm rate?
Mr. ECCLES. I couldn't figure out any alternative. I didn't like it
but it seemed to me that we wTere confronted with a dilemma, that the
size of the public debt was so great, the amounts of E. F. & G. bonds
outstanding, which were demand liabilities, were likewise very great
and—I am going to read this from the Iowa statement, to which I previously^ referred, because really it is the heart of the problem, and I
might just as well cover this point here. [Reading:]
Now, just what does this type of program actually contemplate?
That

is pegging.

It seems to involve a continued willingness on the part of the Federal Reserve
System to take Government bonds and to supply Reserve bank credit, but at
yields higher than 2 % percent.

That is the policy that some were talking about.
Apparently, however, the System should follow a policy of gradually easing
bond prices down and yields up, but buying aggressively, if necessary, to maintain
orderliness in the market.
What would be the position of a Government bond owner or a potential
bond buyer under such circumstances? Would they have any confidence in the
market? Holders would tend to sell and potential buyers to hold back, creating
increasing downward pressure on bond prices, until substantially lower prices
were reached. If yields should rise only % percent on the longest
percent
bonds, their price would fall to less than 93. But in a falling bond market, with
general credit demand strong, rates on other securities and loans would tend
to rise at least proportionately as much.
Under these conditions, can it be
expected that insurance companies or savings and loan associations or other
institutional investors would act materially differently with the yield on Governments at 3 percent than they do now at 2*4 percent?




230

MONETARY, CREDIT, AND FISCAL POLICIES

We have had tax-free Governments, entirely tax free, selling at
almost 6 percent in the past with a small public debt.
Loans or investment, other than Government securities, would have as much, if
not more, relative attractivenes to lenders and investors. Few, if any, borrowers would be priced out of the market for funds by rate increases of the size
contemplated by advocates of this "flexibility" policy.

The long-term rate.
Any moderate rise in long-term interest rates would not, in itself, reduce
significantly tlie demand for money. Investing institutions, which are now
switching from long-term Government bonds to private credit forms, would
still be motivated to do so by a continuing margin of return between the two
kinds of investment.
Thus, under the "flexible" policy, tlie Federal Reserve System would still be
called upon to support the bond market and would thereby continue to create
bank reserves. It is possible that the amount of support required under these
conditions would be much greater than is now the case. Investors generally
would lose contidence in the market and would rush to sell their securities before
prices declined further.
Money and reserves created by Federal Reserve purchases below present
support prices would be just as high-powered as those created by support at
existing prices, and the reserves thus made available could support nearly six
times as much in bank loans.

Senator DOUGLAS. Mr. Eccles, may I interrupt for a minute. Your
program was not, therefore, to raise the yield on long-time securities?
Mr. ECCLES. That is right.
Senator DOUGLAS. But to raise the yield on short-time securities
nearer to the 2y 2 percent on long-time ?
Mr. ECCLES. That is right; that is correct.
Senator DOUGLAS. And this was opposed by the Treasury ?.
Mr. ECCLES. Well, the Open Market Committee and executive committee of the Open Market Committee meet regularly and discuss the
question of the open-market operations in relation to the constant and
current problem of debt management. As you know, with the billion
dollars of bills falling due every week, and with the 25 billion of certificates, something of that sort, outstanding, falling due, with several
billions of bonds falling due periodically, debt management is a current und constant problem. It is important that the Federal Reserve
policy be coordinated with the refunding operations, or the "rolling
off" operations of the Treasury with reference to short-term debt.
In other words, we couldn't let the short-term rates go completely
free. W e never proposed that it go free. But what we did propose
is that the bill rates and the certificate rates be permitted to go up.
The Treasury was unwilling to permit our buing rate to go up as far
as we recommended it, and thus permit the rates on short-term Government securities to rise.
Senator DOUGLAS. They didn't want the short-term rate to go up
because it meant a greater interest charge on the short-term debt; is
that right?
Mr. ECCLES. That was one of the reasons, I suppose.
Senator DOUGLAS. And they, also, did not want fluctuating prices?
Mr. ECCLES. During this period of time, over a period of 2 or 3
years, the rate did go up on the certificates from % to iy±. There
were three raises of an eighth in a period of a little over a year.
Senator DOUGLAS. Well, this is something that puzzles me a bit:
A s I remember it, the Federal Reserve System was supposed to be an
independent agency; the Treasury, another independent agency. Yet,



231 MONETARY, CREDIT, AND FISCAL POLICIES

it is inevitable that the views of one be taken into consideration by the
other, and highly desirable. What is the machinery for coordinating
the policies of the Reserve System with the policies of the Treasury?
Here was a case in which the Federal Reserve Board, or rather the
Open Market Committee, wanted a higher rate on short-time Government securities; the Treasury did not. Now, what is the process of
osmosis by which the views of one becomes communicated to the other?
Mr. ECCLES. Well, our staff of people are constantly in contact with
the Treasury staff people, giving them the point of view of the Federal
Reserve; and the Chairman of the Board was in close touch with the
Treasury. Mr. Sproul and I met with the Secretary of the Treasury
periodically to discuss with him the recommendations of the Open
Market Committee with reference to this question. We were successful in persuading the Treasury to permit some modest changes. That
is how we got the changes that we did, but we were never able to get
the short-term rate as free as we desired to get it, and there has
been
Senator DOUGLAS. Suppose you had gone ahead and raised the
short-term rate; what would have happened ?
Mr. ECCLES. Well, I suppose that the System could have done that,
in defiance of the wishes of the Treasury. My views of the independence of a central bank are these: That the Congress appropriate the
money; they levy the taxes; they determine whether or not there shall
be deficit financing. The Treasury then is charged with the responsibility of raising whatever funds the Government needs to meet its
requirements. They have the responsibility not only for raising new
funds and determining the types of issues" and the rates that should
be paid, but they also have the responsibility for the refunding: of
the debt.
The mechanism, however, for establishing money-market rates is
in the hands of the Open Market Committee.
I do not believe it is consistent to have an agent so independent
that it can undertake, if it chooses, to defeat the financing of a large
deficit, which is a policy of the Congress.
In other words, it seems to me that it is up to the Federal Reserve,
the Open Market Committee, to advise, to recommend, to the Treasury and to the Congress. But it is not the position, I believe, of the
Federal Reserve Board, or the Open Market Committee, to enforce
its will. It has its day in court. It has its opportunity to make its
views known. It has an opportunity to persuade and to influence,
to whatever extent it can. I feel, however, that the final responsibility
f o r making the decisions with reference to public financing is up to
the Congress and the Treasury.
Any open-market committee, or any central banking system, that
for any length of time did not go along with that conception would
not survive.
Now, I do think, when the policies pursued by the Government are
sufficiently displeasing to the central banking authorities, their redress
is to resign^but not to undertake to enforce their will.
Senator DOUGLAS. Mr. Eccles, I can quite understand that during
the period of the war, when the amounts collected in taxes and subscribed for bond purchase out of current income were not sufficient to
meet the total cost of the war, we had to create credit by banks. But
in the period of 1946 and the first part of 1947, of which you speak,



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MONETARY, CREDIT, AND FISCAL POLICIES

the Government did not have a deficit; it had a surplus, so that the
policy of low rates on short-time securities was not necessary for
current financing. You can say that it was desirable for refunding,
but not for current financing.
Mr. ECCLES. There was no current financing. It was all a problem
of refunding.
Senator DOUGLAS. Then the question comes, For how long will the
refunding needs of the Treasury dictate reserve policy? Is this going
to continue forever?
Mr. ECCLES. I think so. If Congress would, as a result of hearings
of this sort, make it apparent that this support policy on the part of
the Open Market Committee was not desirable, I think you would find,
maybe, a greater independence on the part of the Open Market Committee. But in the hearings that have been held up here during the
past 2 or 3 years we were unable, though the agent of Congress, to get
any indication from any of the committees of Congress as to whether
or not this support program should be discontinued. I don't think the
System expected to get an opinion, but it only indicated that they had
to do the best they could under the circumstances that existed.
Senator DOUGLAS. And in default of such a mandate you felt that,
while you should advise and conciliate and attempt to persuade the
Treasury, you should not act in opposition to its wishes?
Mr. ECCLES. That is correct. We felt that increasing the short-term
rates or permitting a long-term rate to go up would not necessarily
stop an inflationary development unless we went so far as to withdraw
from the market. To buy Government's, whether you buy Government's in the market at par or at 75 cents on the dollar, you still create
reserves. To stop the growth of bank credit, it would have been necessary to deny banks Federal funds, either through rediscounting or
through the support of the Government bond market. That, of course,
would have stopped the growth of bank credit and the supply of money.
An increase in rates of 1 percent or 2 percent, or even more, is not
going to stop, in a period of inflationary development, the borrower
from desiring to borrow if he needs that credit in order to do what he
considers necessary to clo business. The psychological effect on borrowers and lenders of such rate increases is, of course, hard to judge.
It would depend upon the degree of inflation, and the amount of confidence or lack of confidence in the Government security market.
Senator DOUGLAS. In order to get an appreciable increase in yields
and in interest rates, you would have to let the price of Government
bonds depreciate markedly ?
Mr. ECCLES. A half of 1 percent in interest rate would put the longterm Government bonds to 03. Now, you must consider what would
then happen to the fifty-some-odd billion of E, F, and G savings bonds
that are outstanding.
Senator DOUGLAS. I understand those are to be redeemed at par.
Mr. ECCLES. No, but they could be redeemed for cash. Those bonds,
first, are demand liabilities on the Treasury, and if
Senator DOUGLAS. The Treasury will redeem at par?
Mr. ECCLES. It will redeem them for cash at stated prices. But, if
the Treasury has to redeem those bonds, then the Treasury has got
to raise money in the market, in order to pay them off, and the Federal
Reserve would have to see to it that the Treasury could raise the money.
Therefore, you have a process of monetization there.



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MONETARY, CREDIT, AND FISCAL POLICIES

Senator DOUGLAS. In other words, what you are saying is that, for
the stability of the banking system, perhaps the stability of the
finances of the country, you can only permit minor changes in the
price of government; and, therefore, in yields—very minor changes?
Mr. ECCLES. I think so.
Senator DOUGLAS. And that these minor changes will not have very
much effect in damping down inflation ?
Mr. ECCLES. Well, if the demand for credit is great, or if the lack
of confidence in the long-term rates is greatly weakened, if confidence
in the purchasing power of the dollar, which usually takes place in a
rapid and continuing inflationary condition, developed, then certainly
merely a change of a few points in the interest rate is not going to
stop your inflationary development.
As was pointed out, there are two ways that inflation must be
stopped. One is through fiscal policy, budgetary surpluses. But
budgetary surpluses, in and of themselves, will not stop inflationary
development, if the effect of budgetary surplus, which is anti-inflationary, is neutralized or nullified by the banking system expanding
credit of an amount equal to the budgetary surplus. That is what
took place in 1946 and 1947.
Senator DOUGLAS. But couldn't the budgetary surplus be used to
purchase a portion of the bank-held public debt?
Mr. ECCLES. It was used entirely for that purpose.
Senator DOUGLAS. That should have diminished the reserves.
Mr. ECCLES. It diminished the amount of deposits and reserves, but
the banking system expanded bank credit, for housing particularly
under a Government-sponsored program, for consumer credit through
commercial loans, and various types of credit, which were encouraged.
The banking system expanded credit and created money by an amount
in excess of the budgetary surplus which the Government created
through a sound fiscal policy.
Senator DOUGLAS. But they expanded by less than would have been
the case had there not been a budgetary surplus.
Mr. ECCLES. One largely neutralized the other, or you would have
had a much more serious inflationary development.
Now, the principal reason why the Board proposed what was known
as the special reserve was in recognition of what I am saying. I t was
desirable to put the banks under pressure not to loan, not to expand
credit. Merely changing the interest rate further encouraged the
banks to want to loan. T o increase the rates wouldn't discourage bank
lending. The small increase in the rates would not discourage borrowers from borrowing. So, what seemed to us to be required was to
put pressure oil the banks by requiring that a substantial part of their
deposits be locked up against the short-term Government securities
which in their purchase created the deposits.
And I would like to read, in that connection, what I said on November 25, 1947, to the Joint Committee on the Economic Report, in hearings that were held for the purpose of considering inflationary problems, just a paragraph on this very point. [Reading:]
It is unfortunate, I think, that banking leaders oppose protective measures
against inflationary forces arising in the credit field. They seem to forget that,
in order to assist in war financing, the Government provided the banking system
with additional reserves which enabled the banks to buy Government securities;
that this created new deposits in the banks; and that banks have also had the
benefit of interest received on the Government securities they have held and will




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MONETARY, CREDIT, AND FISCAL POLICIES

continue to hold for an indefinite period. They object even to a temporary limitation on the further use of these funds as a basis for loans to private borrowers,
which would in turn create more and more deposits. The Government has an
obligation and a duty to step in at this time of national danger to say to) the
banks, " W e are not proposing to deprive you of benefits you have already derived
and will continue to derive from the vast increase in bank deposits resulting from
your purchases of Government securities, but we do say that you should be
willing to accept a reasonable limitation on using a war-created situation to multiply private loans in peacetime when they serve to intensify inflationary pressures "

Senator DOUGLAS. That was to be a limitation ON the purchase of
short-time securities?
Mr. ECCLES. That was to require a reserve to be held in short-term
securities.
Mr. WOLCOTT. May we identify what he is reading from, Mr.
Chairman ?
Mr. ECCLES. Hearings before the Joint Committee on the Economic
Report entitled "Anti-Inflation Program as Recommended in the
President's Message of November 17,1947," page 145.
Mr. WOLCOTT. Testimony which you gave before this committee or
the House Banking and Currency Committee ?
Mr. ECCLES. Before this committee.
Mr. WOLCOTT. What was the other one you read from; was that
testimony before this committee?
Mr. ECCLES. They were both before this committee.
Mr. WOLCOTT. On what dates?
Mr. ECCLES. November 25, 1947, the one that I have just read; and
the other was April 13,1948.
Extensive hearings were held before your committee, Mr. Wolcott,
in the House at that time. I appeared for two full days before your
committee in connection with this entire subject.
Mr. WOLCOTT. I remember you did. I thought there was something
nostalgic about what you were reading.
Mr. ECCLES. That is right. There will always be, of course, nostalgia, I think, about this subject of inflation and monetary and credit
control. There is nothing new about it, and there is not likely to be
over the ages.
Senator DOUGLAS. Mr. Eccles, when Mr. Burgess testified last week,
he contended that an increase in the member-bank reserves ordered
by the System could not restrict the growth of credit extended by the
banks so long as the Federal Reserve follows the policy of pegging
the prices of governments and is therefore committed to purchasing
all securities offered to it. Do you agree with that ?
Mr. ECCLES. I agree with it.
Senator DOUGLAS. S O that, in effect, you are saying that the openmarket operations of the Reserve System and the reserve requirements
o f the System are relatively inoperative as a means of checking inflation because of the debt-management policy?
Mr. ECCLES. Well, I think the debt-management policy is, of course,
the most important factor in this whole situation. What Mr. Burgess said, of course, is, like a great many statements, true as far as it
goes; but more could be said upon the subject of how to exercise more
effective credit controls through increasing reserve requirements to
offset the effect in reserves of Federal Reserve purchases of securities
sold by nonbank investors. When insurance companies or other longterm investors decide to sell, so long as the Federal Reserve is support-




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MONETARY, CREDIT, AND FISCAL POLICIES

ing the long-term 2%-percent rate, reserves are created in the banking system. The banks themselves don't create those reserves. They
get reserves and are under pressure then to use the money. Gold imports or silver purchases, or a reduction of currency in circulation, all
of those factors add to the excess reserves of the banking system; and
the banks themselves, either individually or collectively, have nothing
to do with the creating of those reserves. Yet when reserves are available, the banks are under pressure to expend credit, to use those funds
to drive interest rates down and to drive prices of securities up.:
Now, an increase in reserve requirements sterilizes the effect of
reserves going into tlie banking system from these sources. But to
increase reserve requirements very materially and not include nonmember banks would drive member banks out of the System. The
Reserve banks would be, in effect, holding an umbrella over the banking system as a whole, and that is why we argue strongly that reserve
requirements should be applied to all banks, so as to help the System
get new members and to help the System hold the members we have.
Now, there is one other point on that that I want to make. The
banker who chooses to sell securities doesn't see how or why he is
necessarily creating more money. He only sees that he has a good
customer who gets the credit. Even though that customer gets the
credit and uses it to compete for goods in short supply, the individual
bank doesn't see that you must stop the growth of bank loans and
investment in order to stop the growth of bank credit. The special
reserve requirement that would require the banks to hold a substantial
part of their demand deposits in short-term Governments would put
the banks under pressure to restrict loan expansion, because they
wouldn't be able to sell their short-term securities. They would have
much more hesitancy to sell the longer-term securities which give a
higher yield, and they would want to maintain such liquidity as was
left to them if a reserve of short-term securities was applied.
Now, I merely mention that as reviewing the proposal made, because
we saw this situation fully at the time. W e saw the dilemma, and we
tried to point out to the committees what we could do as an alternative
to withdrawing support from the Government security market, which
may have been necessary to prevent monetization of the public debt.
We hesitated to withdraw support for the reasons which I have indicated to you: Because of the effect upon the entire problem of management of the public debt, the problem of refunding, and particularly
the effect that might be had upon the demand liability in the form of
E, F, and G bonds.
Senator DOUGLAS. Mr. Eccles, earlier you said that in default of a
congressional mandate you felt that you should not disregard the considered judgment of the Treasury on the question of yield of Government securities.
Mr. ECCLES. That is correct.
Senator DOUGLAS. I would like to ask: Would it serve a useful purpose if Congress were to instruct the Treasury further as to the policies
to be followed in debt management and the procedures of cooperating
with the Federal Reserve System %
Mr. ECCLES. I think it would be of great assistance.
Senator DOUGLAS. D O you have any suggestions as to the policies
which Congress might instruct the Treasury to follow ?




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MONETARY, CREDIT, AND FISCAL POLICIES

Mr. ECCLES. Well, I hadn't thought of the subject, but I will be glad
to do so. I can't think of the practical language of a resolution or bill
that would be required. It would require action on the part of Congress. It would certainly be debated plenty within the Congress.
Senator DOUGLAS. But you are saying, if properly constructed, it
would be helpful. I take that if such an instruction were unwise it
could cause great damage. Therefore, we would appreciate it very
much if we might get some suggested standards, standards of instruction.
Mr. ECCLES. Of course, the Federal Reserve System—that is, the
Board in particular, more than the Open Market Committee—is in a
particularly diflicult situation. The Members of the Congress and the
public blame the Federal Reserve for not restricting credit expansion
and not preventing inflationary developments on the one hand, while on
the other hand the Board would, of course, be condemned by many
who would be opposed to such action. Certainly the Reserve Board is
no place for a person who does not have the courage to take unpopular
action.
It would be of great assistance, of course, to the Board if that were
made perfectly clear, that this responsibility for credit and monetary
control is theirs and not the Treasure's.
I don't know that it would be practical to work out an arrangement,
for the reasons I stated a while ago, to create an independent Reserve
Board, independent to the extent that it was expected to enforce its
will. It is now independent and should continue to be independent to
the extent that it has an opportunity to recommend and to advise.
That is, of course, desirable, and is a better situation than would be
the case if the Federal Reserve authority and power were vested in
the Treasury itself.
Senator DOUGLAS. Well, would you favor a national monetary council composed of the chief officers of the Gocernment who deal with
fiscal and credit policies, so that there might be a formal opportunity for them to meet and try to arrive at common decisions rather
than have these matters discussed at informal conferences on a staff
level?
Mr. ECCLES. I don't think that would improve the situation. It may
be desirable to have an interdepartmental statutory council, such as
the NAC in the foreign field, for the purpose of coordination of certain
credit activities. You have the Farm Credit Administration, and you
have the Housing Administration, you have the RFC, and you do
have a great many Government agencies whose activities affect the
field of money and credit. It might be desirable to have such an interdepartmental committee; but it would seem to me that, whatever the
policy of the administration was at the time, it would prevail in such
a council: and it would, if anything, reduce the independence of the
Board and not increase it.
Senator DOUGLAS. We asked Secretary Snyder a question as to how
we could get better coordination of fiscal policies; also, among other
questions we asked him, whether he believed that the Secretary of the
Treasury should be made a member of the Board of Governors of
the Federal Reserve System; and he replied [reading]:
The Secretary of the Treasury is the
seems to me that any proposal to make
of the Federal Reserve System for the
coordination of Federal Reserve and




chief fiscal officer of the Government. It
him a member of the Board of Governors
express purpose of bringing about better
Treasury policies would appear to sub-

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MONETARY, CREDIT, AND FISCAL POLICIES

ordinate the responsibility of the Treasury Department in fiscal-monetary matters. In the final analysis, the principal responsibility in the fiscal-monetary
area must rest with the President and his fiscal officers who are accountable to
the electorate for their actions (p. 11 of the committee print on Monetary, Credit,
and Fiscal Policies).

Now, if what you have been saying amounts to this, that on these
vital matters the Federal Reserve Board defers in its credit policies
ultimately to the Secretary of the Treasury, that means that the
Secretary of the Treasury ultimately has responsibility both f o r the
fiscal and for credit policies?
Mr. ECCLES. Well, there is no difference between money and credit.
They are one and the same thing. W e say "money and credit," but
credit is merely the basis for creating money.
Senator DOUGLAS. Debt management, perhaps.
Mr. ECCLES. That is right. There is a distinction, of course, between what we call fiscal policy and monetary and credit policy.
Now, I have advocated that the Federal Reserve Board or some
organization should have the sole responsibility in the field of monetary and credit policy; and, as I have indicated here, examinations
are closely related to that question of monetary and credit policy.
Senator DOUGLAS. Including the management of the public debt?
Mr. ECCLES. N O ; when it comes to the question of management of
the public debt, the Treasury is the huge borrower; and I don't know
whether you can, as a practical matter, improve a situation that merely
gives to an independent Federal Reserve agency the opportunity to
advise—the opportunity to recommend. I t is difficult f o r me to see
how you can go further than that. When the administration in power
at any given time is put there by the electorate and is responsible to
the electorate, to have an independent agency deprive them of the most
important tool in the economic kit doesn't seem to me to be very
practical.
I t has never operated that way in any other country. In Canada, in
England, France, and every other country in the world, so far as I
know, the central bank has never successfully used its authority to
enforce its will over any administration in power.
Senator DOUGLAS. Mr. Eccles, in connection with the responsibilities of the Treasury f o r debt management, which you now say you do
not propose to change, does not that necessarily carry with it, in the
final analysis, control over credit policy and therefore over money
policy?
Mr. ECCLES. Well, you could make a good argument f o r that.
Senator DOUGLAS. Isn't that just a statement of fact under the
present situation ?
Mr. ECCLES. I would question that% Certainly the desirability of it.
Senator DOUGLAS. I am not speaking about the desirability of i t
I am just saying, isn't that a statement of the situation?
Mr. ECCLES. Well, I must admit that that is where the logic of the
situation leads you; I must admit that. A n d yet we all know, I think,
as a practical matter, that to increase the direct authority of the
Treasury over the whole field of money and credit—in other words,
set up within the Treasury itself a division or a department of monetary and credit control—may well lead, in time, to a socialization of
the credit structure, which, I think, would be very undesirable and
very dangerous.
99076--50

16




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MONETARY, CREDIT, AND FISCAL POLICIES

Senator DOUGLAS. I want to make it clear that I am not advocating
that. I am merely raising the question as to whether, in the present
situation, the power of the Treasury to manage the debt, which you do
not question, does not, as a matter of fact, also carry with it the virtual
control over credit and monetary policy. That is all. I am not saying
this should be permanent.
Mr. ECCLES. I wouldn't say that it carried the complete control.
Senator DOUGLAS. No; predominant control.
Mr. ECCLES. I would say that it exercised a tremendous influence.
I would say that it possibly carries a much greater control than is
generally recognized and understood. That control, of course, can
be extremely dangerous if the Treasury would be, for political reasons,
enforcing a monetary and credit policy in connection with its debtmanagement responsibility that was contrary to the best interests of the
country at a given time. They could do that and it could be dangerous.
Senator DOUGLAS. Mr. Eccles, I am aware of the fact that I have
probably asked more questions than I should, in justice to my colleague, Congressman Wolcott, but I do have one or two more questions,
and then I will defer to him.
In hearings last week I asked a number of witnesses whether the
Federal Reserve Board, in their judgment, should not be given powers
to impose uniform reserve requirements on all banks, whether members or nonniembers, and their reply was almost uniformly "No." The
chief argument which they brought forward was that already 85
percent of the deposits of the country are in the Federal Reserve
banks, and that the dog in the System was a big dog, and that the
tail outside of the System was a relatively small tail, and that in practice the Federal Reserve Board did not need this control on reserve
requirements to control the total amount of credit.
Now, I replied to this argument of theirs by saying "Yes," but if
the Reserve Board raises requirements to check inflation there is
always the danger that State banks will resign from the System.
They replied, "Have any ever done so," and their implication was,
in practice, that the advantages of being in the System are such that
even if reserve requirements are raised that State banks, members of
the System, holding 35 percent of the total deposits, will not get out.
What is your judgment on that?
Sir. ECCLES. I don't agree with that at all. I think if reserve
requirements were substantially increased that you would not only
find a substantial number of State banks getting out, but you would
find national banks converting to State banks. You would weaken
the entire structure of Federal control over the banking system.
Not only would that happen but the State banks which are now out
of the System would certainly not come into the System.
Senator DOUGLAS. They only have 15 percent of the deposits.
Mr. ECCLES. That is right; but that is a pretty good size hole in
the dike. There is always a terrific opposition to an increase in
reserve requirements by member banks and national banks because
of the discrimination. That is one of the great arguments against
further increasing reserve requirements.
Now, as a banker with a good many years of practical experience
I can say that I cannot see any good reason why a bank would remain
in the Reserve S}Tstem under conditions of an expanding increase in
reserve requirements. The advantages of the System are very minor
aside from the use of its credit facilities.



239 MONETARY, CREDIT, AND FISCAL POLICIES

Senator DOUGLAS. What about the clearance of checks?
Mr. ECCLES. Well, you can clear checks through the banks which
are members. That is no problem. They are delighted to have your
balances.
In other words, most nonmember banks might get by on 15 percent
of their demand deposits held as reserves—in cash ancl correspondent
balances; whereas a member bank today cannot get by on less than
25 or 30 percent. Now, that is already a great penalty.
Senator DOUGLAS. That includes vault cash?
Mr. ECCLES. That is vault cash and correspondent bank balances
that member banks must carry, in addition to required balances with
the Federal Reserve, in order to get the services that the Reserve
System is unable to give them. Nonmember banks can count their vault
cash and balances with correspondents to meet any reserve requirements
they are subject to. There would be no good reason why banks should
stay in the Federal Reserve System so long as they have a large portfolio of (government securities which they are able to sell in order to get
funds to meet their situation.
Senator DOUGLAS. May I ask this, Has the fear that the raising of
reserve requirements might cause State banks to get out of the Federal
Reserve System ever operated to make the Federal Reserve Board
abstain from putting into effect an increase in reserve requirements
which otherwise it would have thought desirable ?
Mr. ECCLES. We didn't have authority to increase reserve requirements any further than we did.
Senator DOUGLAS. Then has this fear operated to restrain you in
the past ?
Mr. ECCLES. The fear hasn't operated to restrain the Reserve Board,
no; but had we gotten the authority that was requested it may well
have. I appeared before the committee ancl said that, unless authority
to increase reserve requirements applied to nonmember banks, the
Board did not want that authority, because they would be under pressure not to use it, because of the discrimination.
Senator DOUGLAS. How much more did you want to raise it?
Mr. ECCLES. We asked for authority, as I recall, of 10 percent. I
think that was in April 1948. In December of 1947 we had suggested
authority to impose a special reserve requirement of up to 25 percent
of demand deposits in short-term Governments, which would have
permitted the banks, of course, to hold their reserves in the form of
Governments, which are earning assets.
What I have said here this morning, of course, with reference to this
subject, had application in an inflationary situation that existed in
194T and 1948, and does not have the same application today.
This is now an academic discussion, which does not necessarily have
application to the present economic situation.
I see no urgency at the present time for increased authority. I f the
System had increased authority I can't see any use that they would
have for it at the present time. That does not mean, however, looking
to the future, that whatever authority may be necessary to deal with
inflationary situations, should not be available.
Senator DOUGLAS. I think those are all of the questions I have. Congressman Woleott;
Mr. WOLCOTT. Mr. Eccles, I don't know as you intended, and I
surely am not going to interpret your remarks as critical of the con


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MONETARY, CREDIT, AND FISCAL POLICIES

gressional action, but, of course, you have known for some time of the
difficulty which Congress has had in trying to reconcile the policy as it
was announced by the Treasury and the Federal Reserve Board—and
sometimes, as I recall it, you haven't been in hearty agreement with
other members of the Board in respect to these problems
Mr. ECCLES. I do not think that statement is correct.
Mr. WOLCOTT. Perhaps not on these problems, but on others.
Mr. ECCLES. I think that the statements I have presented are the
statements of the Board.
Mr. WOLCOTT. A t that time ?
Mr. ECCLES. At this time.
Mr. WOLCOTT. What I was leading up to is the statements you are
making today and the suggestions and recommendations which you
have made—are they your own, or are they the Board's ?
Mr. ECCLES. They are my statements. I am not Chairman of the
Board, and I was asked to come up here and express my own views.
Mr. WOLCOTT. D O you believe that they substantially conform to the
thinking of the other members of the Board ?
Mr. ECCLES. Well, it would be my judgment that they do conform,
in general, with certainly the majority of the Board. That is my
judgment. I may be wrong.
Mr. WOLCOTT. You have been dealing principally here in the past
tense as to what our attitude should have been in previous inflations.
Do you believe that the Government should, either through the Federal
Reserve or the Treasury, continue to support the Government bond
market?
Mr. ECCLES. Well, the Open Market Committee is not supporting
the Government bond market at this time.
Mr. WOLCOTT. If there should be a case where the Government bond
market has to be supported, do you believe they should? They are
surely influencing it to a point where it is supported in some measure
today.
Mr. ECCLES. Yes; as a matter of fact the Federal Reserve has reduced its holdings of Government securities during this year: it has
sold into the market something over $4,000,000,000 of securities; including $3,000,000,000 of bonds.
Mr. WOLCOTT. Why have they sold them?
Mr. ECCLES. Well, they have sold them to meet the demand. We
have let the market have securities; otherwise prices would have gone
sky high, interest rates would have gone exceedingly low.
Mr. WOLCOTT. All of the operations of the Open Market Committee are predicated upon the desirability of maintaining a stable market, are they not; that is, since 1935, when you were given this authority, these mandatory powers? Before that the Open Market Committee was purely advisory.
Mr. ECCT.ES. You mean the Board was advisory. The Open Market Committee was composed of the governors of the 12 banks.
M r . WOLCOTT.

Yes.

M r . WOLCOTT.

Yes.

Mr. ECCLES. The Board was advisory.
power.

The Board had the veto

Mr. ECCLES. But they had no initiative; the initiative was in the
hands of the governors of the 12 banks.




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MONETARY, CREDIT, AND FISCAL POLICIES

Mr. WOLCOTT. The Open Market Committee had no initiatory powers previous to 1935?
Mr. ECCLES. The Open Market Committee had initiative before
1935. The Open Market Committee was set up in 1933. Prior to
that they acted informally. From about 1922 they acted informally,
largely under the leadership of New York. But it wasn't until
the Banking Act of 1935 that there was an Open Market Committee
that had the authority to force the Reserve banks to buy and sell.
Prior to that time all the Open Market Committee could do was
to adopt a policy over which the Board had a veto power. But whatever policy they adopted, any Reserve bank could refuse to participate. It was, of course, a very impractical and unsuccessful
operation. That is why the Banking Act of 1935 changed that entire
open-market structure. A t the time of the Banking Act of 1935, and
I sponsored that legislation and carried it through Congress, it was
recommended that the authority of the Open Market Committee be
put in the Board, and the bill passed the House in that form. It was
the Senate that set up the present form, and that compromise was
accepted in the conference committee.
Mr. WOLCOTT. Mr. Eccles, can you give us some idea as to where
you think the bond market should be pegged, where the Government
bonds should be pegged?
Mr. ECCLES. I t seems to ine you asked me the question, Did I feel
the Government bond market should be supported ?
M r . WOLCCOT. Y e s .
Mr. ECCLES. And I

answered by saying that the Government bond
market was not requiring support, but the System was selling securities in the market.
Mr. WOLCOTT. Let me put it this way: What we are trying to get
at is whether the Congress should enact legislation to help in the
stabilization effort. I gather from what you have said that you
believe the authority to peg the Government bond market should be
continued ?
Mr. ECCLES. Well, there is no direct requirement that the Government bond market be> pegged. I am not saying, looking to the
future that the 2 ^ rate should be maintained.
I t seems to me that nothing could be worse than that the Reserve
system be given a mandate, or that it be indicated, either by the Congress or by the Open Market Committee, that it should peg the Government bond market at a 2^-percent rate indefinitely, as Mr. Harl
suggested the other day. Nothing could be worse.
It would be perfectly stupid then to have more than one rate.
W h y on earth, if the Open Market Committee, or the Congress, were
to publicly announce that from here on out the long-term rate of 2y 2
percent on Government securities was going to be maintained on
market securities would anyone want a bill or a certificate that
yields iy± or 1 y 8 ? All the Government would need to have is just one
security, which would be a demand liability of 2y 2 percent.
W h y have obligations maturing in 20 years ?
Mr. WOLCOTT. That brings up the question of the standards under
which you should be given the authority. M y point is, Should the
Congress just say that either the Treasury or the Federal Reserve,
through the Open Market Committee, shall have the authority to
support the Government-bond market, and stop there? What more
authority would that get you over what you have at the present time?



242

MONETARY, CREDIT, AND FISCAL POLICIES

Mr. ECCLES. It wouldn't give us any. W e have got that authority
now.
Mr. WOLCOTT. Then it becomes a question of standards. What
standards, as Senator Douglas has suggested, could the Congress
enact into law that would clarify your position in respect to supporting the Government-bond market any more than has been done by
giving the Open Market Committee initiatory powers under the Banking Act of 1935?
Mr. ECCLES. I don't know.
Mr. WOLCOTT. We don't know. That is what we have been trying
to find out here ever since 1935. Surely we should make it flexible
enough so that you wouldn't create a situation where you would
destroy your market for the short-term stuff.
Mr. ECCLES. What the Board suggested was that the authority
that the Open Market Committee has was not in itself sufficient and
that further powers were needed; namely, the authority to increase
reserve requirements or to apply special reserve requirements, as
supplemental to the other authority.
Air. WOLCOTT. All right.
Mr. ECCLES. The authority of the Open Market Committee was
adequate only to the extent that you denied the market Federal
Reserve funds by withdrawing.
Mr. WOLCOTT. We did give you authority in respect to reserve requirements, and you say they weren't operative and you couldn't
effect your purpose because we did not give you authority over reserves of nonmember banks ?
Air. ECCLES. N O ; we got authority about a year ago to increase requirements by 4 percent, but it was temporary and lapsed last June.
A i r . WOLCOTT. Y e s .
Air. ECCLES. It applied

to member banks only. I f you recall, that
authority was not given until a year after it was asked, and then we
were heading into a recession.
Air. WOLCOTT. You asked for a 10 percent authority?
A i r . ECCLES.

Yes.

Air. WOLCOTT. The reason that the Congress did not give you the 1 0
percent was because it was self-evident, it was thought, that if you
exerted that authority up to the limit you could have put almost
every bank in the United States out of business; we thought it was
too broad an authority. We eventually compromised on your 4 percent, and you did not use all of that, did you?
Air. ECCLES. We pointed out that the 1 0 percent at the time would
still leave the banking system with enough Governments. They had
about 50 percent of their deposits in Governments; and a 10 percent
increase, we pointed out, would leave them with nearly 50 percent of
their deposits in Government securities, and therefore it was not as
drastic as you have indicated.
Air. WOLCOTT. Well, we were told, as I recall, that you would never
use that much authority.
Air. ECCLES. Well, the very fact that we had the authority to use
Air. WOLCOTT. Because there was no other alternative given to the
Congress, we had to use our own good judgment as to wliat we considered equitable and what we considered sufficient authority to do
the job at the time, so we compromised on 4 percent.
Air. ECCI.ES. We got no authority at that time.



243 MONETARY, CREDIT, AND FISCAL POLICIES

Mr. WOLCOTT. You didn't get tlie authority, Mr. Eccles, because you
asked for this unwarranted amount, in the opinion of the majority of
the Congress.
Mr. ECCLES. N O ; they didn't even give us 4 percent; they gave us
nothing at the time.
Mr. WOLCOTT. Because there was no alternative. The Congress
had to create an alternative, as between 10 percent and 4 percent; and
they did; and you did not use it. That is purely academic, of course.
Mr. ECCLES. But that is just part of the truth of the whole.
Mr. WOLCOTT. This is what I am trying to find out. What do you
recommend as a figure that the Congress should enact in respect to
the reserve requirements over and above what they are at the present
time ?
Mr. ECCLES. I am not making any recommendations with reference
to what Congress should enact with reference to either reserve requirements or special reserves. I am merely pointing out here what the
problem has been and
Mr. WOLCOTT. Has the Board taken any action as to' the amount of
authority which it needs in that direction; has the Board agreed upon
any figure ?
Mr. ECCLES. N O ; the matter has not been discussed, because at the
present time, I think, it is academic. W e have been reducing reserve
requirements during the past year. Reserve requirements have been
reduced below the statutory limit by 2 percent. The Board would
have authority, of course, to increase reserve requirements by that
amount in the future. There is certainly no immediate problem today
with reference to undue bank-credit expansion. Outstanding bank
loans today are less than they were at the beginning of the year.
So there is no urgency at the present time. I have suggested in my
statement that I think the passing of a resolution—that was Senate
bill 1550, which called for the creation of a National Monetary Commission—is very important. I have said that such a Commission
should be set up and an extensive study made before any of these
questions are determined. I have tried to point out here only a few
of the high lights.
Mr. WOLCOTT. Should we give this Monetary Commission the
authority to dictate to the Federal Reserve, the Open Market Cotnmittee, the point at which Governments should be supported ?
Mr. ECCLES. The Monetary Commission was to be set up for the
purpose of making a study, and would not, as I understand it, be given
any authority.
Mr. WOLCOTT. I am not getting very far. I have been trying to
centralize this authority somewhere—perhaps that is the wrong
term—but I think we see here a need for coordinating these efforts;
and whatever is set up, whether it is a monetary authority or a commission or whether it is a credit council, do you think that any such
coordinating body should be given the authority to dictate to the
Federal Reserve the point at which the Governments should be
pegged ?
Mr. ECCLES. N o ; I don't.
Mr. WOLCOTT. Who should have the authority?
Mr. ECCLES. I think the Federal Reserve should have it.
Mr. WOLCOTT. Y O U are not in favor of transferring that authority
to the Treasury?



244

MONETARY, CREDIT, AND FISCAL POLICIES

Mr. ECCLES. No; I am not. As I have indicated, I think that the
Federal Reserve itself needs some reorganization, and I do think
that there should be a consolidation of the Federal supervisory agents.
Senator DOUGLAS. I can hardly keep still, because you are saying
that the Federal Reserve Board should have the power to determine
the price at which Federal securities are purchased, but previously
you have said that the Treasury should be given the power over debt
management
Mr. ECCLES. What I meant to say, Senator, is that, whether it be
the Board as now constituted or whether it be any other credit, monetary or credit organization, they should have the authority rather
than there being a direct authority of the Treasury. They should
liave the authority to manage the open-market operations, in line with
a policy that would have to be agreed upon with the Treasury.
Now they would be independent to the extent that they are able
to advise the Treasury, to recommend to the Treasury, and hence,
I think, have considerable influence upon the Treasury. I think that
that much independence must and should be maintained; whereas
if you put it in the Treasury directly, eliminating the Federal Reserve
Board, you would not have any agency with any independence of
expression on the subject.
benator DOUGLAS. On the principle that a subordinate can hardly
give independent advice to a superior who wants to be advised in a
different direction?
Mr. ECCLES. Well, in a degree I think that is correct. And I don't
know how you are going to get away from that. I think that the
history of central banking throughout the world would indicate that
they must be subordinate to treasuries, and particularly is that true
now that the public debt is 60 percent of the entire debt. •
Now, it was one thing prior to the First World War, and even
during the Twenties, and even prior to the Second World War. But,
with a public debt the size that the public debt now is and with the
prospect of running into another deficit, it seems to me pretty impractical to say that there should be a body with sufficient independence
that it can defeat the purposes of an administration that chooses
to create public deficits.
Mr. WOLCOTT. Mr. Eccles, do you think the trend, the immediate
trend, is toward further inflation, or reflation, or deflation, or are we
on a level that will remain more or less static for some time ?
Mr. ECCLES. Well, the statistics at the present time point to, I would
say, some inflationary developments, and I say that for these reasons:
Bank credit is beginning to expand a little. There is an excessively
rapid growth in consumer credit on more and more favorable terms.
There is a great growth in housing credit on very small down payments. There is a very rapid growth in State and municipal debt.
There is a very substantial public deficit, of about $5,000,000,000 in
this fiscal year. In addition, there is the payment to the veterans
of close to $2,800,000,000 that will be disbursed the first 6 months of
next year. There is the agricultural support policy of the Government, which, of course, tends to sustain the inflationary level in the
field of agriculture. There is the present labor wage policy that is
indicating^ a further increase in wages that must reflect itself, in many
instances, in prices. There are the private corporate pension programs,




245

MONETARY, CREDIT, AND FISCAL POLICIES

which, I think, are a big mistake, that are equivalent to wage increases
and that likewise tend to support or hold up prices.
That is just part of the picture. On the other hand I recognize
the increased productivity of our machine, and I think that any
inflationary development, unless it is followed up by larger budgets,
Federal budgets, which I hope will not be the case, and larger Federal
deficits, will be greatly moderated by the fact that supply may well
overtake the demand all along the line. It has done so now in many
fields, and prices are only being held up by Government action.
I think that our longer-range problem is not one of inflation. It is
one of deflationary pressures. It is one not of inadequate production,
not of capital for investment—of which I think there is plenty—but
it is one of consumption—being able to buy what our machine can produce. That doesn't mean ability to buy through a continued expansion of consumer credit. I think we are going to be confronted with
that problem before very long.
Mr. WOLCOTT. What do you think should be done in respect to supporting the Government-bond market in the face of this inflationary
threat; what do you suggest should be done by way of letting the
Government-bond market find its own level or pegging it at a higher
or lower figure than they are selling for on the market at the present
time?
Mr. ECCLES. I do not think that support of the Government-bond
market will be required for some time to come. The long-term Governments are selling at very high premiums; and I, for one, would like
to see those premiums reduced. The long-term rate, in my opinion,
is too low and not too high. The rate on the long-term securities on
the basis of which they are selling today is about 2*4. So there is
quite a way to go before the decision will have to be made as to whether
or not it is advisable, under the circumstances that exist, to hold the
long-term Governments at 2y2*
Mr. WOLCOTT. Would you "recommend that the rediscount rate be
changed at this time ?
M r . ECCLES. N o ; I d o n o t .

Mr. WOLCOTT. Do you think the amount of reserve requirements
should be increased, provided you have the authority to do it?
M r . ECCLES. I d o n o t .

Mr. WOLCOTT. What can Congress do to help stop inflation except
balance the budget and cut Government expense?
Mr. ECCLES. I thought I made the point that I understood this was
a discussion to determine what might be done to deal with a long-range
program.
Sir. WOLCOTT. Anything that would deal with a long-range program would, of course, have an immediate psychological effect. The
fact that Congress was considering limitations and standards, and so
forth, which might result in stabilizing our economy on a long-range
basis might have a psychological effect to prevent immediate inflation.
That is what I am thinking of in asking that question.
Sir. ECCLES. Well, I am not too much concerned about the psychological effect. I think that is very temporary. I think it is the basic
economic factors that are finally the determining factors.
Sir. WOLCOTT. Let me ask you. Do you think that sterilizing any
part of the Government debt which is held by the banks, so that no




246

MONETARY, CREDIT, AND FISCAL POLICIES

more than a certain amount would be monetized, would be of any
help?
Mr. ECCLES. I do. That was what we suggested in our special reserve program. That was exactly what it was. I think that would be
very helpful if you should begin to get an inflationary development
through bank credit expansion. You have to consider your fiscal situation in connection with this. If you are going to operate in a period
of great business activity financed in part by Federal deficits. That
creates an entirely different problem. It is pretty difficult to adopt a
restrictive monetary policy in the banking system under conditions of
a peacetime economy if the Federal Government is going to operate
heavy Federal deficits.
Mr. WOLCOTT. Because of the importance of the holdings by insurance companies of Government debt, in the stabilizing effort would
you recommend that the Federal Government be given more control
over insurance reserves ?
Mr. ECCLES. I don't think so. I think that you could sterilize pretty
largely the effect of the sale of securities held by insurance companies
by increasing bank reserves.
I do think howver, the study should take into account the operation
of these huge insurance companies. They are very important factors
in this whole field of money and credit. It may well be that certain
Federal laws, certain controls, would be necessary. I am not prepared
at this time to say. But I do think that you cannot ignore the effects
of any such large pools of investment money in private hands.
Senator DOUGLAS. May I say that the Investment Subcommittee of
our general committee is going into the question of the role of insurance companies and has scheduled about 3 days of hearings when these
monetary, credit, and fiscal policy hearings are closed.
Air. ECCLES. Yes. I just don't want to be put into the position of
suggesting anything with reference to that because
Air. WOLCOTT. We are dealing with fiscal matters here. It is the
influence of insurance holdings, or I can shorten it up by saying, on the
value of the American dollar, that is what I was asking about, and
whether there was any control you thought necessary over those holdings, which might embrace other large holders of Governments, in
Addition to insurance companies.
Air. ECCLES. A heavy sale of Government securities added to the
inflationary pressures last year.
Air. WOLCOTT. You mentioned silver, you slid over it pretty fast,
And for which I am thankful, but I wondered if you were in position
now to perhaps recommend changes in the Silver Purchase Act.
Air. ECCLES. Being from, I think, the No. 1 silver State in the
Union, maybe I better pass that up.
Air. WOLCOTT. Well, in the
Air. ECCLES. I would like to say, however, that I am just jesting,
because I haven't passed it up, and my position on silver is well
known. I recognize the program for what it is, a subsidy, but I see
no reason why there may not be a silver subsidy as well as many
other subsidies. When we take up the question of what to do with
the farm and other subsidies, I think it might be well to take up the
question of the silver subsidy.
Senator DOUGLAS. And you wouldn't give up the silver subsidy until
every other subsidy is given up ?



247 MONETARY,

CREDIT, AND FISCAL POLICIES

Mr. ECCLES. I wouldn't say that. I think there are a lot of subsidies that have more merit than the silver subsidy.
Mr. WOLCOTT. In the Banking Act of 1935 we legislated to force
all banks to come into the Federal Reserve System in order to participate in the Federal Deposit Insurance Corporation. We let that
authority lapse finally. Would you be in favor of restoring that
requirement?
Mr. ECCLES. I f the recommendations that I have suggested here be
adopted it would not be necessary to require that all State banks be
members, or all insured banks be members, of the Federal Reserve
System. The important thing is that they maintain the same reserves
that the member banks of the Reserve System do. Whether they are
members or not, and have to buy stock, and have to comply with the
other requirements, is not too important, and I would certainly be
willing to waive that.
Mr. WOLCOTT. One other question. This $ 5 , 0 0 0 , 0 0 0 , 0 0 0 overdraft
authority of the Treasury, 1 don't know whether you want to get
into that or not, but that expires this next year. I think you sponsored
that, didn't you ?
Mr. ECCLES. That is right.
Mr. W O L C O T T . D O you think it should be continued ?
Mr. ECCLES. I think it is desirable to continue it. I think it is a
proper instrument, I think it is a useful instrument, in the case of debt
management. It is often desirable to give the Treasury a substantial
overdraft in order to avoid undue money market strains during tax
payment periods. That authority has been helpful, and over the years
that it has existed in the Reserve System I am sure that it has never
been abused.
Mr. WOLCOTT. Thank you very much.
Senator DOUGLAS. Thank you very much, Mr. Eccles.
(Whereupon, the committee adjourned until 2: 30 p. m.)
AFTERNOON SESSION

Senator DOUGLAS. Mr. Brown, we are very glad indeed to have you
here. W e appreciate your public spirit in coming from Chicago to
testify on this subject.
STATEMENT

OF E. E. B R O W N , C H A I R M A N
NATIONAL BANK

OF

OF T H E B O A R D ,

FIRST

CHICAGO

Senator DOUGLAS. Mr. Brown, did you have a prepared statement
which you would like to read?
Mr. ' B R O W N . N O , Senator; I have no prepared statement. The
questionnaire of your committee offered such a wide variety of subjects
that it seemed to me difficult to give a prepared statement which would
cover the many points in it. I would like to express my views briefly
on three points.
Senator DOUGLAS. We will be very glad to have you.
Mr. B R O W N . After that I will be very glad to answer any questions
which you or the other members of the committee may desire to submit.
These three points are:
(1) The relationship of the Federal Reserve Board to the Treasury
ana the national administration;




248

MONETARY, CREDIT, AND FISCAL POLICIES

(2) The power that the Federal Reserve should have to fix the reserves of banks;
(3) The question as to what agency or agencies should examine and
supervise banks.
A s to the first, the relation of the Federal Reserve Board to the
Treasury and the national administration: Originally the Federal
Reserve Board was conceived as an independent body. World War I
broke out before the system was really functioning. Under the necessity of financing the war the policies of the Board had to be subordinated to those of the administration and the Treasury in practice.
After the war came the depression of 1921 and the Board policies continued in practice to be those of the administration during the period
up to 1933. When the Banking Act of 1935 was adopted, which gave
the Board additional powers, it was still the view of Congress that the
Board should be independent.
There were many statements to the effect that the depression
wouldn't have occurred if the Board had been an independent organization in the Hoover and Coolidge and Harding administrations,
and that the depression was partly caused by the fact that it had been
subservient to the administration. To make the Board more independent the Secretary of the Treasury and the Comptroller were removed as ex officio members. The Board, according to the debates in
Congress, was to be a supreme court of finance; statements were made
that it should be as free as the Supreme Court of political pressures:
the members were to have long terms, staggered, and to receive salaries
equal to those of Cabinet officers.
Then came deficit financing and World War I I with its legacy of a
tremendous Federal debt and the problems of its management.
The Federal Reserve Board could not, under such circumstances,
have been politically independent at any stage of its history. I do
not believe that at any time in the foreseeable future it or any central
bank can really be independent of the administration in power. The
Board, in the final analysis, must adapt its monetary policies to the
policies of the administration, no matter how it may feel about their
wisdom. It must bow to the judgment of the Secretary of the Treasury in matters affecting the handling of the public debt and the interest
rates thereon.
Granted that the Federal Reserve Board must conform its policies
to those of the administration and the Treasury, it does not mean that
it should become a subordinate bureau of the Treasury, or some other
branch of the administration, or that its members should hold office
only at the pleasure of the President or be appointed for short termsr
or that their judgment and ability are relatively unimportant.
Decisions and actions in the field of monetary policy affect the whole
economy. It takes a high degree of ability? technical experience, and
judgment to make them wisely and to appraise their effects in advance.
The giving of sound advice on monetary matters to an administration or to its Secretary of the Treasury that must make the ultimate
decision, and skillful carrying out of the monetary policies designed
to implement an over-all general policy, are much more probableT)y a
continuing board, made up of men of stature and of long tenure in
office, than by any subordinate bureau.
T o make it possible to get men of proper caliber and public stature
to serve on the Federal Reserve Board, terms should be long and tlie



Statement of Marriner So Eccles
before tke
)ul>committee on Monetary, Credit and Fiscal Policies




of tke
Joint Committee on tke Economic

Report

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Supplementary Letter to
Senator Dowglas of December 1, 1949

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BOARD OF GOVERNORS
OF T H E F E D E R A L RESERVE SYSTEM
WASHINGTON

STATEMENT OF MARRINER S. ECCLES BEFORE T H E
SUBCOMMITTEE ON M O N E T A R Y , CREDIT A N D FISCAL POLICIES
OF THE JOINT COMMITTEE ON THE ECONOMIC R E P O R T *

that prevailed before its establishment, they nevertheless constantly oppose measures that would enable the Reserve System to be far more effective in
carrying out its intended functions—functions that
help to protect not only all banking but the entire
economy.
T w o proposals—more than any others—stir up
this agitation. One is the proposal for the equal
application of a fair and adequate system of reserve
requirements to all insured commercial banks. The
other proposal is that the Federal Government apply
the principles and objectives of the Hoover Commission to the Federal agencies concerned with
banking, monetary and credit policy. Bankers believe in the objectives of the Hoover Commission,
at least as applied to all other activities of the Government—why not the banking activities?
The red herring of the dual banking system is
always brought up to obscure the real merits of the
fundamental questions involved in the proper administration of fiscal, monetary and credit policy,
which concerns commerce, agriculture, industry and
the public as a whole; it is by no means the sole
concern of bankers.
The major responsibility of the Federal Reserve
System is that of formulating and administering national monetary policy. It does this chiefly through
the exercise of such influence as it may bring to
bear upon the volume, availability and cost of commercial bank reserves. It must operate through the
commercial banks of the country because they, together with the Federal Reserve Banks, are the institutions through which the money supply is increased
or decreased. It is of paramount importance to the
entire country that someone have the means as well
as the ability to discharge this responsibility. It
cannot be left to the voluntary choice of some 14,000
individual and competing banking institutions. It
cannot be split up among the various agencies of the
Federal and State Governments. The framers of
the Federal Reserve Act undoubtedly intended that
it should be in the Federal Reserve Board under the
direct control of Congress.

Mr. Chairman, I am here as you know in response to the invitation in your letter of October
31, 1949, to discuss issues that have been raised during the study initiated by your Subcommittee in
the field of monetary, credit and fiscal policies. I
shall be glad to try to answer such questions as may
be uppermost in your mind but I should like first
to present for your consideration a short statement
which I hope may anticipate and answer some of
your questions. My views are the cumulative results of 15 years of participation in developing and
carrying out policies of the Federal Reserve System,
preceded by long experience in private banking
under State as well as national authority and membership in the Federal Reserve System.
I therefore could not fail to be aware of the
vigorous opposition that has so often been voiced
against new proposals with respect to Federal authority over banking. In recent years it has seemed
that nearly every recommendation emanating from
the Federal Reserve Board has been assailed as a
threat to destroy the dual banking system. As one
who has spent his business life in that system, I
have been unable to see the justification for such
agitation.
Our commercial banking system is composed of
banks that receive deposits subject to withdrawal
upon demand, make loans, and perform other services. About half of the total dollar amount of bank
deposits are insured up to $5,000 for each depositor
by a Federal agency, the Federal Deposit Insurance
Corporation. Banks holding eighty-five per cent of
the resources of the banking system are in the Federal Reserve System, another Federal agency. Approximately 5,000 of these banks operate under
Federal charters, issued by the Comptroller of the
Currency, and about 9,100 under charters from the
48 States. This is the dual banking system. While
I am sure that those who are its most vociferous
supporters would not seriously contend for the
abolition of the Federal Reserve System, with the
consequent restoration of the intolerable conditions
* Presented November 22, 1949.




1

STATEMENT BEFORE T H E SUBCOMMITTEE O N T H E ECONOMIC REPORT
Others have pointed out that existing bank reserve requirements are inequitable, unfair and ineffective at the very time when they are most urgently needed to restrain excessive expansion of
bank credit. They should not depend as they do
now on whether a bank is located in a central reserve city or in a reserve city or whether it is outside of one of these cities or away from its downtown area, nor should they depend on whether a
bank is a member or a nonmember. There is no
good reason for such distinctions from the standpoint of effectuating monetary policy.
In addition to other handicaps of membership,
members of the Federal Reserve System are subject
to much more onerous reserve requirements than
nonmember banks. Member banks are required to
carry certain percentages of their demand and time
deposits in non-interest-bearing cash balances with
the Federal Reserve Banks. Apart from these re
quired reserve balances, member banks necessarily
carry some vault cash to meet deposit withdrawals,
and in addition they carry balances with correspondent banks, none of which can be counted toward
statutory reserve requirements. On the other hand,
nonmember bank reserve requirements not only are
generally lower in amount but may also consist entirely of vault cash and balances carried with city
correspondents. In some instances reserves of nonmember banks may be invested in U. S. Government and other specified securities. Thus to a considerable extent nonmember banks may receive direct or indirect compensation for a substantial part
of their reserves. These discrepancies are most
obvious and difficult to explain when two banks,
one a member and the other not, are doing the same
kind of business as competitors on opposite corners
of the same town. Member banks therefore bear
an undue and unfair share of the responsibility for
the execution of national credit policy.
There should be a plan under which the responsibility for holding reserves to promote monetary
and general economic stability would be as fairly
distributed as possible.
This would require a
fundamental revision of the existing basis for bank
reserve requirements. They should be based on
the nature of deposits rather than mere location;
they should be somewhat higher upon interbank
deposits than upon other demand deposits. Vault
cash should be given consideration because it has
much the same effect as deposits at reserve banks.
In any such revision of reserve
2




requirements

it is of primary importance to take into account
the fact that they are a means of contracting or
expanding the liquidity position of the banking
system and of making other credit instruments
more effective. Reserve funds of banks may expand through large gold inflows or silver purchases, or return of currency from circulation, or
borrowing from Reserve Banks, or Federal Reserve purchases of Government securities through
necessary open market operations. There should
be sufficient authority over reserve requirements
to permit taking such developments into consideration when necessary.
There is widespread misunderstanding even
among bankers of the function of reserve requirements as a means of expanding or contracting the
supply of bank credit. In sharp contrast with
State reserve requirements, those applied to member banks under the Federal Reserve Act are primarily designed to affect the availability of credit
—that is to say, the money supply. T h e Federal
requirements are not primarily applied for the
purpose of providing a cushion to protect the
individual bank. They are not basically reserves
in that sense at all, and incidentally the Reserve
Banks do not and cannot use them to buy Government securities.
T h e Federal Reserve System is a creature of
the Congress. You can make it weak or you can
make it strong. W e have recited to the Congress
over and over again the dilemma that we face.
It is perfectly simple. So long as the Reserve
System is expected to support the Government
bond market and to the extent that such support
requires the System to purchase marketable issues, whether sold by banks or others, this means
that the System is deprived of its only really effective instrument for curbing overexpansion of credit.
It means that the initiative in the creation of reserves which form a basis on which credit can be
pyramided rests with banks or others and not with
those responsible for carrying out national monetary policy. T o the extent that banks can at will
obtain reserves they are thus able to monetize the
public debt. In view of this situation, if the Congress intends to have the Reserve System perform its functions, then you should by all means
arm it with alternative means of applying restraints.
T h e only effective way to do that is through revision
and modernization of the mechanism of reserve
requirements. The Congress will not have done

STATEMENT BEFORE T H E SUBCOMMITTEE O N T H E ECONOMIC REPORT
the job at all if it fails to include all insured banks.
Reserve requirements that are limited only to member banks of the Federal Reserve System impose
upon them a wholly unfair and inequitable burden
which becomes the more intolerable as the need
arises to increase reserve requirements as a means
of curbing overexpansion of credit. Of course, organized banking and its spokesmen, chiefly large
city banks, do not want any change. They never
do.
Throughout the long history of banking
reform in this country—and it is still very far
from complete—the same bankers or their prototypes have been for the status quo.
Beginning
with the National Banking Act they have fought
every progressive step, including the Federal Reserve Act and creation of the Federal Deposit Insurance Corporation. If you abide by their counsels or wait for their leadership you will never
do anything in time to safeguard and protect
private banking and meet the changing needs of
the economy in such a way as to avoid still further
intrusion of the Government into the field of
private credit—to which I am really very much
opposed—an intrusion which the public has demanded in the past because private banking leadership failed.
I may add that whenever Congress sees fit to
enact into legislation the principle of equitable
reserve requirements applied uniformly without
regard to membership in the Federal Reserve System, there might well be changes in other relations
of the Federal Reserve System which would be of
benefit to all commercial banking as, for example,
to offer the credit facilities of the Reserve Banks
on equal terms to all banks which maintain their
reserves with the Reserve Banks, together with
further improvements in the check collection system. These and other beneficial changes could
well be brought about with great advantage to
banks and to the public in general.
T h e role of the Reserve System in relation to
Government lending to business also should be
clarified. This is particularly important as to the
functions exercised in that field by the Reconstruction Finance Corporation and with respect to the
authority of the Reserve Banks to extend credit to
industrial enterprises under section 13b of the
Federal Reserve Act. T h e latter should be modified as proposed in S. 408, the bill favorably reported by the Senate Banking and Currency Com-




mittee in 1947, and the enactment of which was
again recommended by the Board in 1948.
There is unquestionably a need for such an
agency as the Reconstruction Finance Corporation
in emergency periods for direct Government lending for projects outside the field of private credit,
but I have always taken the position that the
Government should not compete with or invade the
domain of private banking and credit institutions.
W h e n aid is necessary to facilitate the functioning
of private credit, then such aid should take the
form of guaranteeing in part the loans made by
private institutions, just as was done in the Vloan program of the Federal Reserve for financing
war production. That is what S. 408 proposes.
T h e profound difference in the principle at stake
here ought to be obvious.
In relation to the second question, that of organization, which I mentioned at the outset, I feel
that students of Government and particularly those
who endorsed the objectives of the Hoover Commission ought to be more interested than they
appear to have been in the problems of organization of the agencies of Federal Government concerned with bank supervision.
Some however
may have been misled into thinking that there is
no problem in this field because the expenses of
these agencies are not paid from governmental
appropriations.
The establishment of a system of insurance of
deposits by the Federal Government was one of
the great accomplishments of the Congress in the
direction of fostering public confidence in the
banking system. I favored Federal Deposit Insurance legislation at a time when most of my fellow
bankers were denouncing it. But I never expected,
and I am certain Congress never intended, that
this protection for depositors would be used either
to hamper effective national monetary policy or
to give any class of banks special advantages over
others. I regret to say that the Federal Deposit
Insurance Corporation has been used to discourage membership in the Federal Reserve System and
to weaken effective monetary policy.
There is no logic whatever in the present provisions of law which say, in effect, to a bank " Y o u
can't join the Federal Reserve System unless you
also join the Federal Deposit Insurance Corporation but you can join the Federal Deposit Insurance Corporation without joining the Federal Reserve System." The law compels a national bank
3

STATEMENT BEFORE T H E SUBCOMMITTEE O N T H E ECONOMIC REPORT
to join both but a State bank has the option of
joining one or the other, or neither. I should like
most earnestly to urge upon you the importance
of making this a two-way street by providing that
a bank can be a member of the Federal Reserve
System without joining the Federal Deposit Insurance Corporation, in the same way that a State
bank is now privileged to be a member of the
Federal Deposit Insurance Corporation without
being obliged to join the Federal Reserve System.
T h e Federal Deposit Insurance Corporation was
designed in the public interest and it should be
maintained for that purpose, but this is not to say
that the continued existence of three Federal agencies performing similar or allied functions in the
field of bank supervision, regulation, statistical
and other services is justifiable. There is unnecessary duplication and triplication of offices,
personnel, effort, time and expense. While the
maintenance of separate and often conflicting viewpoints may serve selfish interests, on the old principle of "divide and conquer," it seems to me that
this should not prevent improvements wherever
possible in the organization of a Government already overburdened with complexity and bureaucracy.
In this connection various suggestions as to
where responsibility should be lodged for the examination of banks subject to Federal supervision
have been offered, ranging from the setting up of
a new agency, with no other responsibility, to
maintaining the status quo.
The Reserve System must have currently accurate information, procured through examination,
bank condition reports, special investigations, constant correspondence and contacts with the banks.
The System must have examiners and other personnel responsible to it, specially trained and directed for the purpose of procuring such information. The Reserve System is in position to determine policies to be pursued by examiners; to
coordinate them with credit policies; and at the
same time decentralizes the actual administration by
utilizing the facilities of the twelve Reserve Banks
and their twenty-four branches. They examine all
State member banks, receive copies of examination
of all national banks, are in close touch in this and
in other ways with all member banks, as well as
the State and National supervisory authorities.
Through their daily activities of furnishing currency, collecting checks, seeing that member banks
4




maintain their reserves, and extending credit to
them, the Reserve Banks obtain current information about banks which is invaluable for purposes
of bank supervision. The Federal Reserve is and
must be at least as vitally concerned with the soundness of the individual bank as any one in the
organization of the Comptroller or the Federal
Deposit Insurance Corporation. T h e Federal Reserve Act places in the Federal Reserve a specific
responsibility for effective supervision over banking
in the United States. Soundness of the individual
bank and soundness of the economy must go hand
in hand. Therefore, Federal Reserve concern with
the maintenance of stable economic conditions
should be and is in the interest of sound banking
as well as the public welfare. It has not destroyed
the effectiveness of Federal Reserve supervision over
State member banks, and it is absurd to think, as
I understand has been suggested to you, that it
would destroy the effectiveness of supervision or
examination of other banks. Moreover, is it reasonable to believe that the intelligence of the officials of the Federal Reserve Banks combined with
the judgment of a seven-man board appointed by
the President, confirmed by the Senate, responsible
to the Congress, should be regarded as less independent than a Bureau in the Treasury under one
official whose deputies are appointed by the Secretary of the Treasury? N o single individual in the
Federal Reserve System determines its policies.
Since examination supplies information essential
to the right conduct of the business of the Reserve
System and since the Reserve authorities must review reports of examination of all member banks,
it is illogical to argue that they should be deprived
of all examination authority. Examination procedure is a tool of bank supervision and regulation
which should be integrated with and responsive to
monetary and credit policy. If directed as though
it were not concerned with such policy it could
nullify what otherwise could be effective monetary
and credit policy. In fact, too often in the past,
bank examination policy became tighter when conditions grew worse, thus intensifying deflation, and
conversely examination policy has gone along with
inflationary forces when caution was needed.
Only one of the three Federal supervisory agencies, the Federal Reserve System, is charged by Congress with responsibility over the supply and cost
of credit, which is directly affected by reserve requirements, discount policy, and open market opera-

STATEMENT BEFORE T H E SUBCOMMITTEE O N T H E ECONOMIC REPORT
tions. The Reserve System views the economic
scene principally from the standpoint of national
credit conditions as effected by monetary, fiscal and
related governmental policy. Other agencies do not
have these responsibilities. Their differences of interest often lead to prolonged discussions which
delay or prevent agreements.
Let me turn now to the question of the composition and responsibilities of the Board of Governors
and the Open Market Committee, which Committee is composed of the seven members of the Board
plus five Reserve Bank Presidents. I do not suggest that the present system has not worked. It
was a compromise and your Committee is interested, and properly so, in the question whether the
present structure could be improved. I feel that I
should point out its defects and how they could be
remedied.
While the Board of Governors has final responsibility and authority for determining, within statutory limitations, the amount of reserves that shall
be carried by member banks at the Federal Reserve
Banks, for discount rates charged by the Federal
Reserve Banks for advances to member banks, and
for general regulation and supervision of the lending operations of the Reserve Banks, the responsibility and authority under existing law for policy
with respect to the Government security market,
known as open market operations, is vested in the
Open Market Committee. These operations have
become an increasingly vital part of Federal Reserve
policy. In practice they are the principal means
through which debt management policies of the
Government are effectuated. They are the means
by which an orderly market for Government securities is maintained. With the rapid growth of the
public debt, chiefly as a result of wartime financing,
with the continuance of a budget of extraordinary
size, with major refunding operations in view and
the prospect of deficit financing, there can be no
doubt of the responsibility that will continue to rest
with the Federal Reserve System for open market
policy.
Suggestions have been made and I believe will
appear in answers to your questionnaire, with a
certain degree of logic in their support, that the
interrelations between the considerations of policy
governing open market operations and those governing reserve requirements, discount rates, and
perhaps other functions, are such as to justify transferring these major instruments of policy to the




Federal Open Market Committee, leaving to the
Federal Reserve Board as such only matters of secondary importance. This would not justify the
continued existence of a seven-man Board of Governors. T o the extent, however, that such suggestions recognize the principle that responsibility for
overall credit and monetary policy should be fixed
in one place, I would agree. O n the other hand,
they accentuate the major inconsistency in the present setup.
It should be noted in this connection that the
President of a Federal Reserve Bank is not a director of that bank but is its chief executive officer. H e
is elected for a five-year term by a local board of
nine directors, three of whom are appointed by the
Board of Governors and the other six by the member
banks of the district. In addition to making the
appointment, the directors fix his salary. Both of
these decisions are subject to approval of the Board
of Governors. Neither he nor the directors of the
bank have any direct responsibility to the Congress.
When a Reserve Bank President sits as a member
of the Federal Open Market Committee, however,
he participates in vital policy decisions with full-time
members of the Board of Governors, w h o are appointed by the President of the United States and
confirmed by the Senate and whose salaries are fixed
by Congress.
Those decisions, which must be
obeyed by his bank as well as by the other Federal
Reserve Banks, affect all banking. So far as I
know, there is no other major governmental power
entrusted to a Federal agency composed in part of
representatives of the organizations which are the
subject of regulation by that agency.
President
W o o d r o w Wilson expressed himself very vigorously
on this subject when the original Federal Reserve
Act was under consideration. If this principle is
not to be discarded, it follows that further inroads
should not be made into the functions of the Federal
Reserve Board and on the other hand that responsibility for open market policy should be concentrated in the Board. I am convinced in this connection that there is no need for more than five
members, instead of seven as at present, and that
the Congress should recognize by more appropriate
salaries the great importance of the public responsibilities entrusted to the Federal Reserve System,
of which the Federal Reserve Board is the governing body. Such recognition would be more likely
to attract to the membership of the Board men fully
qualified for the position.
5

STATEMENT BEFORE T H E SUBCOMMITTEE O N T H E ECONOMIC REPORT
If however it is believed preferable for national
credit and monetary policy to be determined in
part by some of the Presidents of the Reserve Banks,
then the Presidents of all twelve Reserve Banks
should be constituted the monetary and credit authority and they should take over the functions of
the Board of Governors, which body should be
abolished. T h e governmental responsibility of such
a body should be recognized by requiring their
appointment by the President of the United States
and their confirmation by the Senate; their salaries
should be fixed by Congress, to whom they should
report. May I point out that if the Presidents of the
Reserve Banks can, in addition to performing their
manifold duties as chief executive officers of these
very important institutions, take on in addition the
principal functions of the Federal Reserve Board, it
must be that these functions do not justify a fulltime seven-man Board, and this would be another

6




reason for abolishing it, and substituting a parttime Board composed of the twelve Presidents.
The views I have expressed have developed out
of a long experience in and out of Government and
they have not been altered by the fact that I have
ceased to be Chairman of the Board after serving
in that capacity for more than twelve years or by
the fact that I expect sometime to return to the
field of private banking.
In the foregoing I have not attempted to include
some other important matters which may be of
interest to the Committee in its deliberations and
might well be considered by a National Monetary
Commission such as that proposed in S. 1559 which
I strongly support. Accordingly, I would appreciate it if you would permit me to file a supplemental memorandum for the record in the event
that it appears to be desirable to do so in order to
complete my statement.

SUPPLEMENTARY LETTER TO SENATOR DOUGLAS
BOARD OF GOVERNORS OF THE FEDERAL
RESERVE SYSTEM

December 1, 1949.
Dear Senator Douglas:
In connection with my testimony presented on
November 22 before your Committee, I indicated
that I had not attempted to include in my statement
some important matters which may be helpful to
the Committee. You granted me the privilege of
filing a supplementary statement should that appear
desirable.
In the course of my testimony you asked if it
would serve a useful purpose if Congress were to
instruct the Treasury further as to the policies to be
followed in debt management where they are dependent upon the monetary policies of the Federal
Reserve System. You also stated that you would
appreciate it if you could get some suggested standards of an instruction that might be given to the
Treasury by Congress with reference to Treasury
relations with the Federal Reserve.
Since presenting my testimony I have given a
great deal of thought to this subject. In reading
over the record of my remarks, it was apparent to
me that I had not responded as fully as I could have
to some of your questions. Therefore, I should like
to take advantage of the privilege of making a
supplementary statement.
A very fundamental dilemma confronts the Federal Reserve System in the discharge of the responsibilities placed on it by Congress. The System
has by statute the task of influencing the supply,
availability, and cost of money and credit. In peacetime, the objective is to do this in such a way that
monetary and credit policy will make the maximum
possible contribution to sustained progress toward
goals of high employment and rising standards of
living. Federal Reserve System powers for carrying
out this responsibility are at present basically adequate. But the System has not, in fact, been free
to use its powers under circumstances when a restrictive monetary policy was highly essential in the
public interest. It has been precluded from doing
so in the earlier postwar period in part because of




the large volume of Government securities held by
banks, insurance companies and others who did not
view them as permanent investments. Reasons for
supporting the market under these conditions I
have already presented before your Committee.
This policy of rigid support of Government securities should not be continued indefinitely. The
circumstances that made it necessary are no longer
compelling. But the Federal Reserve would not be
able to change these policies as long as it felt bound
to support debt-management decisions made by the
Treasury, unless these were in conformity with the
same objectives that guide the Federal Reserve.
The Treasury, however, is not responsible to Congress for monetary and credit policy and has had
for a long time general easy-money bias under
almost any and all circumstances. As long as the
Federal Reserve policy must be based upon this
criterion, it could not pursue a restrictive money
policy to combat inflationary pressures.
Decisions regarding management of the public
debt set the framework within which monetary and
credit action can be taken. As the size of the debt
grew through the period of deficit finance in the
'thirties and particularly over the war period, Treasury needs came to overshadow and finally to dominate completely Federal Reserve monetary and
credit policy. When the Treasury announces the
issue of securities at a very low rate pattern during
a period of credit expansion, as it did last Wednesday, the Federal Reserve is forced to defend these
terms unless the System is prepared to let the financing fail, which it could not very well do. T o maintain a very low rate pattern when there is a strong
demand for credit, the System cannot avoid supplying Federal Reserve credit at the will of the market.
Under these conditions it can hardly be said that
the Federal Reserve System retains any effective influence in its own right over the supply of money
in the country or over the availability and cost of
credit, although these are the major duties for which
the System has statutory responsibility. Nor can it
be said that the discount rate and open market operations of the System are determined by Federal Reserve authorities, except in form. They are predetermined by debt-management decisions made by
the Treasury. This will be true as long as the
7

SUPPLEMENTARY LETTER TO SENATOR DOUGLAS
System is not in a position to pursue an independent
policy but must support in the market any program
of financing adopted by the Treasury even though
the program may be inconsistent with the monetary
and credit policies the System considers appropriate
in the public interest.
T h e Federal Reserve System was established by
Congress primarily for the purpose of determining
and carrying out credit and monetary policy in the
interest of economic stability and is responsible to
Congress for that task. There is a seven-man Board
of Governors, appointed for 14-year terms with approval of the Senate. T h e Board is assisted by an
experienced and highly qualified staff of experts.
There are twelve presidents of the Federal Reserve
Banks, each with a staff of specialists, and each
Federal Reserve Bank has a Board of Directors
composed of leading citizens in its district drawn
from professional, business, farming, banking, and
other activities. There is also the Federal Advisory
Council, composed of a leading banker from each
of the twelve districts, established by Congress to
advise the Board. All of these supply information
and advice and many participate in formulation of
monetary policies appropriate to the needs of the
economy.
Under present circumstances the talents and efforts of these men are largely wasted. Views of the
Federal Reserve Board and Open Market Committee
regarding debt-management policies are seldom
sought by the Treasury before decisions are reached.
The System, however, has made suggestions on its
own initiative to the Treasury in connection with
each financing, but very often these have not been
accepted. Decisions are apparently made by the
Treasury largely on the basis of its general desire
to get money as cheaply as possible.
In a war period or a depression, there is reason
for financing a deficit through commercial bank
credit—that is, by creating new money. The Federal Reserve System has supported such financing
at very low rates by purchasing Government securities in the market at such rates, thus pumping the
needed reserves into the banking system. In the
early postwar period some support was desirable,
especially for the 2x/i per cent long-term bonds, but
it should not have been as inflexible as it was for
short-term rates.
T h e outlook at the present time is for an expanding economic activity with high employment. W e
also now anticipate a Government cash deficit of
8




over 6 billion dollars in the calendar year 1950. It
would be inexcusable to finance this deficit at very
low rates of interest by creating new money should
inflationary pressures resurge. But if the Treasury,
under these conditions, insists on continuation of
the present very low rates, the Federal Reserve will
have to pump new money out into the economy
even though it may be in the interest of economic
stability to take the opposite action. In making a
cheap money market for the Treasury, we cannot
avoid making it for everybody. All monetary and
credit restraints are gone under such conditions; the
Federal Reserve becomes simply an engine of inflation.
With respect to the problem of how future monetary and credit policies are to be established, it seems
to me Congress must choose from the following
three general alternatives if the present dilemma
confronting the Federal Reserve System is to be
resolved:
( 1 ) Congress can permit the present arrangement to continue. T h e Treasury would control
in effect the open market and other credit policy
as it does now by establishing such rates and terms
on its securities as it pleases, with the requirement
that the Federal Reserve support them. It should
be recognized that under this course, limitations
over the volume of bank credit available both to
private and public borrowers, and accordingly
limitation over the total volume of money in the
country, would be largely given up. Such credit
and monetary restraint as might be required from
time to time to promote economic stability would
be entirely dependent upon the willingness of the
Treasury to finance at higher interest rates, and in
the past the Treasury has been resistant to doing
this. If this alternative is followed, which is the
present arrangement, Congress should recognize
that the responsibilities for monetary and credit
policies are with the Treasury and not with the
Federal Reserve System and that the principal
purpose of the Federal Reserve System is then to
supply additional bank reserves on the demand
of any holder of Government securities at rates
of interest in effect established by the Treasury.
( 2 ) T h e Congress could provide the Federal
Reserve System with a partial substitute for the
open market and discount powers which debt
management decisions of the Treasury have rendered and can continue to render largely useless

SUPPLEMENTARY LETTER TO SENATOR DOUGLAS
for purposes of credit restraint. Some measure of
control over the availability of credit under inflationary circumstances could be regained if the
System were given substantial additional authority
over basic reserve requirements of the entire commercial banking system. With such authority,
the System could, if necessary, immobilize new
bank reserves arising from a return of currency
from circulation, gold inflows, and System purchases of securities from nonbank investors and
thereby prevent the multiple expansion of the
money supply. In addition, the System would
need authority to require banks to hold a special
reserve in Government bills and certificates. This
would be necessary in case banks entered upon
an inflationary credit expansion through the sale
of Government securities to the Federal Reserve
or in the event it was necessary to assist the Government to finance large deficits without creating
additional bank reserves which serve as a basis
for multiple credit expansion.
( 3 ) Congress, if it wishes credit and monetary
policy to be made by the Federal Reserve System
in accordance with the objectives of the Federal
Reserve Act and the Employment Act of 1946,
could direct the Treasury to consult with the
System in the formulation of its debt-management
decisions in order that these decisions may be
compatible with the general framework of credit
and monetary policy being followed by the System
in the interest of general economic stability. It
is obvious, of course, that Government financing
needs must be met and the responsibility of the
Federal Reserve to insure successful Treasury
financing must continue to be fully recognized.
But Treasury financing can be carried out successfully within the framework of a restrictive
credit policy, provided the terms of the securities
offered are in accordance with that policy.
T o sum up briefly my views, I believe that Congress should fix clearly the responsibility for national




monetary and credit policy. Although the Federal
Reserve System was established as an agency of
Congress for determination of monetary and credit
policy, as it must function n o w it is responsible both
to Congress and to the Treasury for that policy.
These two responsibilities are often conflicting, and
both cannot be satisfactorily discharged. T h e responsibilities and authority of the System need
clarification and for that purpose one of three
alternative actions might be taken by Congress:
( 1 ) Recognize in the statute that responsibility
for monetary and credit policy is with the Treasury and recognize the Federal Reserve for what
it is today—an agent for advising the Treasury
and carrying out monetary and credit policy determined by the Treasury;
( 2 ) Give the Federal Reserve System such additional authority over bank reserve requirements
as would adequately serve as a partial substitute
for discount and open market powers;
( 3 ) Give the System a mandate to determine
monetary and credit policies on the basis of guide
posts stated in terms of the language of the Full
Employment Act of 1946, with the Treasury required to advise and consult with the Federal
Reserve and take into account the mandate of
Congress in connection with its debt-management
decisions.
I recognize that monetary or credit policy by
itself cannot assure economic stability. It should
be accompanied by a fiscal policy, as well as a bank
supervisory policy, in harmony with it.
I appreciate very much having the opportunity
to express my views on this matter.
Sincerely yours,
(Signed)

M . S. ECCLES

Honorable Paul H . Douglas,
United States Senate,
Washington, D . C.

9