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.3 X-9121 STATEMENT FOR THE PRESS For release at 5 P* M* Eastern Standard Time, Tuesday, February TFrT9 i n n Summary of address by Marriner S. Eccles, Governor of the Federal Reserve Board* at the Mid-winter Meeting of the Ohio Bankers Association, in Columbus, Ohio: , MONETARY PROBLEMS OF RECOVERY• Governor Eccles began his address by saying that this was his first opportunity to speak before a large number of bankers ^ since he became Governor of the Federal Reserve Board and also his first opportunity to discuss before a public audience the Banking Bill of 1935, ”which expresses the general objectives of the Admin istration in the field of banking” • He confined his discussion to two of the main objectives of the proposed legislation -- namely, to make the banking system a more efficient instrument for the promotion of stable business conditions in the future, and, more immediately, to aid in business recovery* ”The fundamental premise underlying the Bill and underlying my discussion this afternoon”, Governor Eccles said, 1,is that busi ness stability is a desirable objective* I feel sure that no one will disagree with this premise, and to my way of thinking agreement on this one vital point alone will lead you to lend your whole-hearted -2- V -9121 support to the Banking Bill of 1935* "If we had a perfectly flexible cost and price structure - which would have to include, 1 may remind you* an equally flexible wage and interest structure our economy could probably adjust it self to rapid expansions and contractions with little resultant unemployment. Without such flexibility expansion and contraction, instead of calling into play forces that adjust and correct such movements, tend, to feed upon themselves. "It is not realistic, however, to say that all that is necessary is to introduce more flexibility into our system. Numerous rigidities and inflexibilities have developed in our economy, and the trend in the recent past plainly points to more rather than less rigidity in the future. If there is one thing that to me seems clear it is that, unless conscious effort is made to prevent them, booms and collapses will continue to recur in capitalistic democracies. It also seems evident to me that neither capitalism nor democracy can survive another depression of the magnitude of the one from which we are just emerging." Taking up the question of monetary control, Governor Bccles asserted that the operation of the banking system, left to itself with no conscious effort of control, tends to intensify rather than to counteract business fluctuations. "for example", he said, "in the period from 1929 to 1933, when expenditures were falling rapidly and the national income was N-9121 -3- being cut in half, the supply of deposit money decreased by approxi mately one-third* Part of the decrease can be attributed to bank failures, accentuated by withdrawals of cash for hoarding, and part to the contraction of loans and investments by surviving banks* one person or body is responsible for this decline. No The responsibility must be shared by the entire system. "The fact is that laissez faire in banking and the attain ment of business stability are incompatible. If variations in the supply of money are to be compensatory and corrective rather than inflammatory or intensifying, there must be conscious and deliberate control. The difficult and controversial question is -who should do the controlling. "The pov/er to coin money and to regulate the value thereof has always been an attribute of a sovereign power. It was one of the first powers given to the Federal Government by the Constitutional Convention. The development of deposit banking in the latter half of the Nineteenth Century, however, introduced into our national economy numerous private agencies which have the power to create and destroy money without being aware of it themselves and without being recognized as creators or destroyers of money by the Government or the people. The trend since 1913 represents a gradual recognition of this condition and a reassertion by the State of a power which it always, possessed.t! In developing this point, Governor Fccles quoted as follows fO 1'.^ X-9121 4- ' from the speech of President Roosevelt to the American Bankers Asso ciation last October • "The old fallacious notion of the bankers on the one side and the Government on the other as more or less equal and independent units has passed away* Government bv the necessity of things must be the leader, must be the judge of the conflicting interests of all groups in the community, including bankers. The Government is the outward expression of the common life of all citi zens ." Governor Bccles made it clear that he was not arguing for a "highly centralized control of all banking activities11• The ad ministration of certain interests, he said, could obviously be handled more efficiently locally, whereas others could be handled more efficiently on a national scale. "Vie should consider each case on its merits," he continued, "and provide for local control or national control, whichever is in the public interest." He explained the operation of this principle as follows: "Banks in this country perform two main services. They act as middle men for the investment of a substantial portion of the community* s savings, and, through the provision of checking facilities, they supply the bulk of the community’s means of payment. So far as the investment of savings and the determination of individual credits are concerned, chief reliance must rest on the judgment and knowledge of the individual banker; I 1 Ct o -5- X-9121 "When we come to the second function of banks -- namely, that of providing the community1s money supply -- a different range of factors must be taken into consideration. The effect of varia tions in the supply of money is nationwide and cannot be localized. The Reserve Administration may make conditions favorable for the creation of new deposits, but it cannot insure that the new money will be used in any particular section of the country, or spent on any particular kind of goods. ”Since, therefore, the effect of monetary policy is nation wide, the formulation of monetary policy should be by a body which represents the nation, and which is activated by national considera tions. It is inconceivable that variations in the community's money supply should be left to the individual decisions of some fifteen thousand local bankers. It is scarcely more logical that the varia tions should reflect uncoordinated decisions of the twelve Federal Reserve banks.” After reviewing the origin of the open market machinery of the Federal Reserve System in 1922 and 1923, and the development of this mechanism since then, Governor Socles said: "The System itself, by virtue of necessity, has developed a large measure of coordinated activity in regard to open market operations, the single most important instrument of reserve control. This coordination, while it repre sented a great advance over the situation which prevailed up to 1925, nevertheless leaves much to be desired.” The proposed legislation, -K—9121 -6- therefore, provides for "a small, responsive body which is charged with the duty of acting in the national interest in formulating open market policy and in accepting responsibility for its consummation and results." ' Governor Ticcles placed great stress on the provision in the new bill that would permit banks to make loans on improved real estate up to 75 per cent of its appraised value and on an amortized basis for a twenty-year period, and in an aggregate amount up to 60 per cent of their time deposits. He said that he regarded this provi sion as the most important aid to business recovery in the Bill, but at the same time the one most susceptible to misunderstanding• "It has been asserted” , he said, "that this is an invita tion to banks to make loans of a character that do not conform to sound banicing principles or standards. The collapse of real estate values is cited as an illustration of the dangers associated with such loans. It is constantly stated that the troubles of our banking system were due entirely to the acquisition of long-term assets by the banks. It is suggested that banks in the future should confine themselves to short-dated commercial loans and investments. But I need not tell you that, if this suggestion were acted upon, the result would be fatal to the barks. "In October 1934, the eligible paper of member banks, within the meaning of the Federal Reserve net, amounted to only slightly more than two billion dollars, hven in 1929 this paper amounted to ~7~ only four and a half billion dollars. A-9121 Banks cannot live on the inter est from such a small volume of loans, and an attempt to confine them selves to these loans would greatly curtail the scope of banking. The more business the barks refuse, the more will be handled by other agencies, including the Government, and the less room will remain for the operations of the private banking system. "I am fully aware of the fear with which banters view the ex tension of other lending agencies and the uneasiness they feel at having to rely more and more on the holdings of government obligations to keep up their income. I might point out, however, that these devel opments are a consequence of the failure of the banking system to perform its functions adequately.' If the banking system, would utilize in real estate loans and other long term investments the savings and excess funds that it now possesses, business activity would be greatly stimulated, and the Government would then be able to withdraw rapidly from the lending field. "The barkers also feel a deep concern about the constant growth of the Government’s deficit and of the public debt, and yet a considerable part of this debt is incurred in refinancing mortgages and in undertaking other functions which the banks have been failing to perform.. Release of banking funds in those fields would enable the Government to diminish its expenditures and to reduce the rate of growth of the public debt. "You will carefully note that I am criticizing the banking 4 -8- X-9121 system and not the bankers as individuals. I do net see how you as individual bankers, having to secure liquidity alone and unaided, could safely have followed a different lending policy than you did. 11This, then, is the dilemma that faces the banks: If they go into the longer term, loaning business they run the risk of depreci ation and of inability to realise quickly upon their assets in case of need; if they do not go into this business, they cannot find an outlet for their funds — their earnings will suffer and the cation for their existence diminishes, justifi how can this dilemma be solved? It is proposed in the bill to solve it by removing the problem of liquidity as such from the concern of the banks — by bestowing liquidity on all sound assets by making it possible to borrow on them at the Reserve barks in case of need. "Reliance on the form of paper as a guide to soundness and eligibility has not protected the banking system, from disaster. We wish to divert bankers* attention from the semblance of paper to its substance; to emphasise soundness rather than liquidity. "What we are proposing is that the problem of liquidity shall cease to be an individual concern and shall become the collective con cern of the banking system. A single bank which adopts a policy calculated to pay off all of its deposits at a momentTs notice, even though the national income is cut in two, cannot adequately perform its duty of serving its community. "What we want to accomplish is to make it possible for banks, 147 -9- jt-9121 without abandoning prudence or care, to meet local needs both for short and for long time funds. Y/e want to make all sound assets liquid by making them eligible as a basis of borrowing at the reserve banks, and then to use the powers of monetary control in an attempt to prevent the recurrence of national conditions which result in radical declines of national income, in the freezing of all bank as sets whether they are technically in liquid form or not, and in gen eral unemployment and destitution. nLet me make myself clear that I do not expect the passage of the Banking Bill of 1935 to solve the problem of the business cycle. What I do expect is that its passage m i l make conditions more favorable for its eventual solution. My own view is that, while through the compensatory action of the banking system much can be dene to eliminate fluctuations, it will be necessary for the govern ment also to help in offsetting and counteracting rapid expansion and contraction of expenditures on the part of the community at large. It can do this by varying its expenditures and by the use of the tax ing power in securing a better distribution of income. "One thing is certain. we work for it. We will not obtain stability unless A policy of laissez faire presupposes an economy possessing a flexibility which I think it is hopeless for us to expect to achieve. Therefore it is absolutely essential to develop agencies which by conscious and deliberate compensatory action will obviate the necessity of drastic downward or upward adjustments of costs and -10' prices, wages and capital structures. X-9121 If we do not develop such agencies our present economy, and perhaps our present form of govern ment, cannot long survive. In conclusion Governor Eccles said; nIt behooves all of us who are charged with the responsibility of managing our money and credit mechanism to devote our best thought and greatest effort to promote an intelligent understanding of the monetary and economic problems confronting the nation. By supporting the proposed legisla tion which I have outlined to you and, what is even more important, by cooperating with the policies for the promotion of which the changes in our banking structure are proposed, the bankers of the country will be working not only in their own best interests but als in the interests of recovery and the establishment, within our economic and political framework, of a more stable and equitable national economy.n
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