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Federal Reserve Bank of St. Louis
H E A R I N G S
(47)
(48)
Joint Economic Committee
(Senator Paul Douglas, Chairman)
Subcommittee No. 2 of the House
Banking and Currency Committee
(Paul Brown, Chairman)
(49) . . . . Senate Subcommittee on Production
and Stabilization (Paul Douglas,
Chairman)
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Federal Reserve Bank of St. Louis
(I960, Folder 1,
Page 1)
Economic Report
of the President . . . 2/2/60
S. 1062, to regulate
bank mergers
2/16/60
S. 2755, requiring
disclosure of
finance charges in
connection with
extensions of credit. 4/5/60
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Federal Reserve Bank of St. Louis
JOINT ECONOMIC COMMITTEE
Senators
Representatives
Paul H. Douglas (111.) CHAIRMAN
John Sparkman (Ala.)
J. W. Fulbright (Ark.)
Joseph C. O'Mahoney (Wyo.)
John F. Kennedy (Mass.)
Prescott Bush (Conn.)
John Marshall Butler (Md.)
Jacob K. Javits ( N . Y . )
Wright Patman (Tex.) VICE CHAIRMAN
Richard Boiling (Mo.)
Hale Boggs (La.)
Henry S. Reuss (Wis.)
Frank M. Coffin (Maine)
Thomas B. Curtis (Mo.)
Clarence E. Kilburn ( N . Y . )
William B. Widnall ( N . J . )
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Federal Reserve Bank of St. Louis
For release on delivery
Statement of
William McChesney Martin, Jr.y
Chairman, Board of Governors of the Federal Reserve System
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Federal Reserve Bank of St. Louis
before the
Joint Economic Committee
February 2, I960
I
c
MONETARY POLICY AW ECONOMIC GROWTH
Mr. Chairman:
It seems to me that perhaps the most helpful contribution I
can provide to your Committee's annual review of the President's economic
report is to make some supplementary comments on financial and monetary
developments over the last year.
Our financial environment changes constantly, as this Committee knows well, but some of the changes that took place last year
were dramatic indeed.
During 1959, credit expanded by $60 billion in all»--one-third
more than the previous peacetime record. Mortgage debt, most of it for
housing, increased by a record $19 billion. Consumer credit outstanding
rose about $6.5 billion, equalling the previous record of 1955* New
borrowing by State and local governments continued in near-record volume,
and new borrowing by the Federal Government exceeded all peacetime records.
At the end of the year public and private debt was at the highest level
in history.
The American economy and the American people would be in a
very different and a vastly worse position today if this enormous expansion of credit had been financed by the large-scale creation of additional
funds by the banking system and a consequent rapid and inflationary
increase in the money supply.
Fortunately, that danger was averted—in 1959 at least. To date,
the task of supplying this huge demand for credit without severe inflationary
consequences has been accomplished chiefly by the sound and democratic
process of letting those who would borrow provide those who would save
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-2-
with an inducement to risk voluntarily the loan of their savings. The
role of the "banking system, which obviously is inf3.uenced greatly by
Federal Reserve policy and operations, has been held to that of an
intermediary between borrowers and savers.
Let me illustrate the working of this process by referring
briefly to the events of 1959 as they are reflected in the Federal
Reserve1s flow-of-funds accounts, a body of quarterly published data
developed in part as an outgrowth of investigations set in motion by
one of your subcommittees into the need for improved statistical information.
The commercial banks, it is true, did expand their loans in 195?9
by almost $12 billion—thereby equalling the previous record of 1955.
The important thing for the economy, however, is that the banks raised
the funds for this lending in large part by selling Government securities
they owned to the nonbank public.
Thus, the banks performed an intermediary service by obtaining
funds from savers, to whom they transferred investment securities, and
by passing the funds on to others who had a need to borrow. This flow
I
of funds from savers to banks to borrowers did much to assure that the
need for credit was met without a dangerous increase in the money supply.
It did, however, bring about an increase in the turnover or rate of use
of the existing money supply and, by so doing, produced much the same
economic and financial effect as would have been produced by a modest
increase in the money supply without the accompaniment of a faster rate
of use.
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Federal Reserve Bank of St. Louis
The activity last year of the nonbank public—meaning for the
most part consumers and business concerns—in supplying borrowers with
funds through the process of investment was truly extraordinary, and it
did not stop with the purchase of Government securities sold by the banking
system. The upswing in this activity shows up strikingly in the flow-offunds data that I mentioned earlier. There, it appears that consumer and
business investors increased the net amount of their purchases made
directly in securities markets from about $4 billion in 1958 to almost
$20 billion in 1959—a jump of 400 per cent in a single year.
The efficient and economically healthy flow of funds from savers
to borrowers,, directly and through intermediaries, did not come about
without a price. The price was, of course, a rise in interest rates,,
These rates, representing a penalty to those who use someone else's money
and a reward to those who save and risk their funds in loans and investments,
rose in some instances to the highest levels in three decades. What
happened is readily apparent: the pressure of demand for funds arising
from a combination of forces—a large Federal budget deficit, high
I
residential construction activity, rising expenditures for consumer durables
and for inventories and to some extent fixed capital, plus the continued
high level of expenditures by State and local governments on community
facilities—converged to bring about a competition to borrow that drove
interest rates upward; the rise in interest rates, in turn, operated to
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Federal Reserve Bank of St. Louis
-k-
induce the savings and investment necessary to supply borrowing demands.
In summary, the direct effect of the greatly enlarged credit demand was
to bid up interest rates generally and to cause some changes in the
relationship of interest rates among the different credit markets; the
resultant effect was to draw more funds into the credit market and to
shift some funds from accustomed uses.
Let me add something here to what I said about the banking
system's service in 1959 as an intermediary between the saving public
and the borrowing public.
On the one hand, the saving public, besides
purchasing a large volume of securities as I described, increased their
time deposits by about $1.5 billion. On the other hand, the borrowing
public increased the amount of their loans obtained from commercial
banks by nearly $12 billion. To raise funds to meet the heavy demands
on them for loans, the commercial banks sold about $8 billion of their
Government security holdings in the open market, while the nonbank
public, as stated earlier, was increasing their purchases in that market,
Thus the banks, in effect, drew out of the market, from individuals and
corporations not engaged in lending, the funds to meet the specialized
credit demands of borrowers--as, for instance, many small business concerns --who could not themselves have raised funds in the market because
their needs were unsuitable for general market participation3
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Federal Reserve Bank of St. Louis
. (
.
-5-
i
The vital role that the Federal securities market plays as a
clearing house for credit flows is apparent in the circumstances
described. In 1959y this role was much larger than in other recent
years. Federal net borrowing of $11 billion and bank sales of Governments of nearly $8 billion required absorption of around $19 billion
in Federal securities by other investors.
This, taking into considera-
tion that the Treasury was having to raise new funds while shifts were
taking place in Government security ownership, goes a long way toward
explaining the rise in both long- and short-term rates that we experienced
during the year.
It is also illuminating evidence of the responsiveness
of nonbank investors to attractive interest yields.
The relation of Federal Reserve policy to changes in interest
<-^>
rates isf often misunderstood. Federal Reserve operations to release or
absorb bank reserves unquestionably influence short-term and also longterm interest rates, but the extent of this influence is easily exaggerated,
Monetary policy is effective only so long as it works in general consonance
with the economic realities underlying the situation. These realities
4
include the basic demands for funds, whether to meet seasonal" needs,
other short-run needs, or for capital formation, and the basic supply
of funds through saving. Federal Reserve actions cannot for long enforce
rates of interest on the market that are either above cr below the rates
that maintain a balance between saving and investment.
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Federal Reserve Bank of St. Louis
Changes in the rate of monetary growth can represent only a
very small part of the total flow of funds through credit markets.
If
the rate of monetary growth were raised with the specific objective of
adding to the supply of funds in an attempt to keep interest rates down,
the additional do!3.ars in the spending stream would certainly work to
raise average prices.
The process of monetary inflation is widely
understood by both savers and borrowers.
Such action would generate
expectations of further inflation on the part of both groups. The
incentives of the market place, present and prospective, would unquestionably
tend to increase borrowing and discourage saving and in all likelihood
rates would increase.
In the longer run, the way that monetary policy can contribute to
a lower level of interest rates is through its role in maintaining a stable
value for the dollar.
It is only in an environment of confidence in such
stability that savings will accumulate and credit will flow in an orderly
way and in expanding volume. Efforts to maintain an artificial level of
interest rates, either too high or too low, can only lead to cumulative
I
financial disequilibrium, first distorting and then disrupting healthy
eco nomic growth•
'Whether monetary policy as administered by the Federal Reserve
System has been, at particular times, too easy or too tigjht is a matter
of judgment. At one time or another, we have no doubt erred in some
degree in each direction.
But the System has consistently endeavored
to cultivate confidence in the stability of the dollar—by combatting
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deflationary tendencies in periods of slack and inflationary pressures
in periods when resources were being intensively utilized.
I want to emphasize again that the Federal Reserve System wants
low and not high interest rates; it wants as low a level of interest irates
as is consonant with sufficient
savings to finance the investment
necessary for desirable and rapid economic growth.
We cannot say that a
steadily swelling stream of savings and investment is the only essential
for satisfactory growth, but, especially in a country where the natural
resources are already highly developed, it is a vital element,
Record of Economic Growth
The subject of economic growth has received exhaustive study by
your Committee during the past year.
It is an important subject because
only growth can produce the substance with which to achieve our individual
and national aspirations.
At the same time, economic growth is a
confusing subject because it means so many different things to different
people.
Some seek growth primarily as a requisite of effective defense
against potential enemies.
living standards.
employment of
Others want it as a means of improving civilian
Still others regard growth as a way of assuring
a growing labor force.
Transcending and including
all
of these, perhaps, is the idea that economic growth is needed to express
the vitality of our economic and political way of life.
As economic abundance in the United States expands and is more
widely shared, agreement on appropriate economic goals becomes more
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Federal Reserve Bank of St. Louis
-—
-8-
urgent. These goals can never be blueprinted exactly—as has been
brought out so clearly in the hearings before this Committee. They are
*r~'
not solely msterialistic and they are not all subject to expression in
statistical terms. They include, for example, the improved quality of
our educational system and of our health services--not just additional
school rooms or hospital beds.
Despite difficulties in measuring true
growth precisely with the tools now at hand, we have made scrae progress
and now know much more about the nature of growth than was known some
years ago*
Barly in its existence, the Board recognized that measurement
of physical output was essential for proper formulation of monetary policy,
and undertook a special responsibility for the statistical measurement of
industrial output and its change and growth. This, it is true, is only
part of our nation r s total output of goods and services, which is measured
by gross national product.
However, in an advanced economy, in which
industrial activity is a dynamic central element, growth in the physical
volume of industrial output merits special study in its ova right because
of its central role as a force shaping total growth,
When I appeared before this Committee last summer, I noted some
preliminary findings of the recent revision of the Board's index of
industrial production, principally the greater industrial growth shown
by the newly revised index.
Since then, the final results of the
new index have been published, thus supplementing the tools for
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Federal Reserve Bank of St. Louis
-9analyzing past and future changes in the industrial sectors of our
economy 0
Industrial production is the output of real goods produced by
our factories, mines, and electric and gas utilities.
Our revised indez
shows that, since 19^7;? industrial output has grown ltd per cent per year,,
as compared with 1 0 7 per cent for populations
This is a growth in
real industrial output per capita of over 2 per cent per year,
In
other words, we are producing 31 Per cent more industrial product for each
man, woman, and child in America than we were at the beginning of the
periods
Output per industrial worker has increased even more rapidly—
at the rate of 3 0 7 per cent per annum over the same periodo
The revised index of industrial production also introduces a
new grouping of total output a
Output measures for finished goods have
been grouped into the broad market categories for consumer gpods and
equipment, and the measures for output of materials have also been grouped
together.
Briefly, this new grouping suggests that over postwar years,
civilian production, and particularly the production of consumer goods,
has expanded almost without any evident slackening in pace at* a rate of
growth of 3.7 per cent.
Moreover, the cyclical interruptions in the
output of civilian goods, especially consumer goods, have been relatively
small0
It is mainly in the production of equipment, including defense
goods, that output has shown greater fluctuation about its expanding
trendo
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Federal Reserve Bank of St. Louis
•410Conditions Required for Continued Growth
irfhile industrial growth, as measured by the production index,
reflects physical volume of output, many measures of growth are expressed
in terms of current dollars.
We must constantly guard against mistaking
increases in dollar magnitudes for real economic growth.
It is sometimes
suggested, when the rate of expansion slows down because the economy is
operating close to capacity, that a more rapid expansion of bank credit
and money would stimulate greater aggregate output.
In fact, such an
attempt would only lead to a bidding up of costs and prices as various
sectors compete for limited resources.
It is true that this would increase
temporarily the gross national product measured in current dollars, but
it would not involve any real growth.
Quite aside from its other evils,
inflation brings about misapplications of resources that actually reduce
the true value of current production. There must be sustained confidence
in a stable dollar for such adverse developments to be avoided.
Sound growth depends on a number of factors besides confidence
in a stable dollar.
In my own view, the following are the chief
supplementary factors:
1. Balanced and sustained demands for labor and for the
products of business;
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2.
Improvement in technology and skills;
3.
Adequate capital formation based on voluntary savings;
U.
Greater mobility of resources; and
5>.
Sufficient flexibility of individual prices.
Although there have been three postwar recessions, demands for
labor and for the products of business have been reasonably well sustained
over this period. During each of these recessions, stability of
consumption helped to stimulate early revival.
This stability in final
demand encouraged entrepreneurs to maintain capital expenditures at
surprisingly high levels even during temporary recessions.
Such
expenditures fluctuated moderately considering their long history of
instability0
How much further the process of economic stabilization can be
carried remains an uncertain issue. All men of good sense want to see
our economic resources used fully and all men of good will want to have
employment opportunities available for those willing and able to work.
Satisfactory economic growth and reasonable price stability are not only
compatible goals, in my view, but they are necessarily interdependent.
At the same time we all recognize that some fluctuations in prices and
employment are probably unavoidable and that, in the present state of
the economic arts, it is hard to see how complete stability^ could be
achieved without stifling some developments in our economy potentially
favorable to growth.
Advancing technology and improvement of skills depends on
educational processes and the general cultural environment. Our national
pride has been pricked by discovery that other nations have beaten us in
some aspects of technological development. This evidence is found not
only in military hardware but also in the mounting competitiveness of
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Federal Reserve Bank of St. Louis
-12the rest of the world.
Products from abroad are increasingly penetrating
our markets. This challenge, however, may well provide the stimulus for
new achievements on our part.
If we are to maintain our competitive position in the world,
we must also make regular additions to our productive capital and to our
efficiency. Adequate capital formation depends both on the drive of
business to make the capital investment and the availability of adequate
funds; from voluntary saving.
Mobility of resources must receive continuous attention.
Near
the top of successive postwar peaks in activity, unemployment has tended
to be somewhat higher.
In part, this may be due to structural imbalances
growing out of the problem of transferring the labor force from industries
made obsolete by growth to areas of higher labor demand. Such imbalance
may also stem from the problems of adapting workers to the technological
and sociological derands of the service industries, which are the more
rapidly growing sources of urban employment.
Flexibility in the shifting of resources, of great importance
for maximum growth, is extraordinarily difficult to achieve4 One of
the effects of growing productivity is to reduce the amount of resources
required in particular industries, especially those in which end-product
consumption, such as consumption of food, grows at a slow, steady rate,
The process of moving resources aggravates our cyclical
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difficulties and creates a problem of structural unemployment*
Steps
to lessen the economic loss to the nation and the hardships for
individuals resulting from shifts in the pattern of production are an
important public responsibility.
If we are to be able to continue to rely on the price mechanism
to effect the necessary adjustments in a growing economy, piices of
both end products and the factors of production must move freely in
response to shifting demand and supply conditions. Imperfections in
the price mechanism must be rooted out wherever they may exist, if our
free enterprise economy is to realize its full potential.
Prospects for I960
In early I960 the economy continues to show a sharp pick-up
from the period of hesitation caused by the steel strike,
Economic
activity is vigorous and prices are reasonably stable«, Nevertheless, it
is possible we may encounter a renewed spiral in the upward movement of prices,
or, perhaps, find that the underlying strength in the situation is not so
great as most observers now feel,
In these circumstances, all of us are
faced with a particularly sensitive problem of maintaining prosperity
by endeavoring to prevent either a renewal of inflationary pressures or
development of deflationary tendencies*
I sincerely hope that our part in this task as monetary authorities
can be aided by a healthy budget surplus of an amount at least as large
as the one outlined in the President's Budget Message. Experience since
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1957 suggests that a surplus of this size is a minimum condition of
reasonable fiscal health. The relatively brief decline in economic
activity that occurred in 1957-58 resulted in a deficit of over $12 billion
in fiscal 1959.
If a level of economic activity as high as marked 1959>
and which is projected in the budget estimate for 1960,results in a barely
balanced budget in I960 and a budget surplus of no more than &U.2 billion
in fiscal 1961, the average result of the full period is a net deficit.
Such an outcome would hardly represent symmetrical economic
policy.
It would therefore appear that larger budget surpluses are needed
in times of prosperity if we are to avoid having to make regular and
persistent increases in the public debt. The relatively favorable outlook
for balance between saving and investment in the period ahead, with the
accompanying prospect of less pressure on the rate of interest, depends in
large part on the improved fiscal position of the Federal Government.
I doubt that anyone could be more aware of the real limitations
of monetary policy than are the members of the Federal Reserve Board.
It is, however, the area of responsibility which has been given to us
and in the discharge of that responsibility it has seemed to tis that the
most constructive contribution monetary policy can make to the vigrroua,
healthy growth of the economy in the present circumstances is to maintain
confidence in the value of money, and thus encourage people to save and
invest in the basic capital improvements that add to our nation's
productive strength.
It is relevant to here refer to some statements that I mad0
in the closing portion of a letter to Chairman Douglas on December 9:
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Federal Reserve Bank of St. Louis
(
-15"My interest in a monetary policy directed toward a dollar of
stable value is not based on the feeling that price stability is
a more important national objective than either maximum sustainable
growth or a high level of employment, but rather on the reasoned
conclusion that the objective of price stability is an essential
prerequisite to their achievement*
"I want to emphasize that I am most concerned with the preservation of freely competitive markets and the correction of any
institutional imperfections which exist in the working of the price
mechanism.
While such imperfections cannot be corrected simply by
a sound monetary and fiscal policy, they surely cannot be corrected
by an unsound financial policy.
"Nor does a sound general monetary policy necessarily, in
itself, accomplish the optimum distribution of loanable funds among
various sectors of the economy.
It is not only the right but the
duty of Government to assure that socially necessary programs are
adequately financed.
But, again, this objective can never be well
served by unsound general monetary or fiscal policies. tlf, as a
matter of public policy, the financing of school construction, for
example, should have an overriding priority in the allocation of
resources, this can be accomplished in a number of ways, but we
can be sure that it would not be accomplished by the general expansion
of bank credit and money,"
In conclusion, I should like to add a word about what monetary
policy can and cannot do.
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It cannot effectively peg Interest rates.
It
M E M O R A N D U M
March 8, I960
To
Chairman Martin
From
Jerome W. Shay
Subject: Testimony re margin
requirements for trading in
Government securities.
In connection with such study as may be in progress concerning the matter of requiring or establishing margin requirements
for financing transactions in Government securities, it was felt
desirable to call attention to the attached excerpt from the transcript of your testimony at the Joint Economic Committee hearing
on February 2, I960, on the President's Economic Report, It is
understood that these hearings will not be printed and available
for distribution before the end of the month.
Attachment
cc: Each Board Member
Messrs, Young
Thomas
Molony
Fauver
Sherman
Hackley
Solomon
Noyes
Farrell
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Federal Reserve Bank of St. Louis
Excerpt from Stenographic Transcript of Hearings before the Joint
Economic Committee on February 2, I960, on Margin Regulations for
Trading in Government Securities
The Chairman.
.... Should not margins be required on the
purchase of Government securities just as now required on the purchase of stocks?
Mr. Martin. We are making a study of that now with the
Treasury and we have not come to a conclusion.
The Chairman.
It has been a year and a half since this
happened. You made a three volume study. How much longer before
you are going to make up your mind?
Mr. Martin. I am inclined to think that some margins ought
to be required but we have not arrived at a decision on this.
The Chairman. That is, you think that some margins should
be required?
Mr. Martin.
Yes, indeed, I do.
The Chairman. That is what the majority of this Committee
believes, too, and that is what we recommended. Perhaps we will be
able to work together on this and we will be interested i*n the actual
degree to which you carried these policies out. The absence of margins can lead to undue speculation in Government securities, is that
right?
Mr, Martin. It can.
The Chairman. And when Government securities declined in
price during the summer of 1958, did not this lead to the forced selling of securities by speculators and did not this forced selling cause
a still further fall in the price of Government securities and did not
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-2-
this damage the credit of the United States so far as European countries and bank authorities were concerned?
Mr. Martin. The 1958 experience was an unfortunate one
and unquestionably there was too much speculation in securities.
The Chairman.
And this speculation had been stimulated
in part by the absence of margins?
Mr. Martin.
That was one of the factors, Senator, yes, sir,
The Chairman. And the imposition of margins would have
diminished the speculation and contributed a greater steadiness in
the price of Government bonds and less damage to the public credit
at least so far as foreign governments are concerned?
Mr. Martin. Yes. Let me point out, Senator, that there is
no legal authority.
The Chairman. Have you asked for that authority?
Mr. Martin. We have not asked for it yet.
The Chairman, Let me say that if you do ask for that
authority, I for one and I think the majority and members of my party
would loyally support you in this. We hope very much that you will
\
give us a lead and help us out.
Representative Curtis. Will the gentleman yield?
The Chairman. Surely.
Representative Curtis. Why does the gentleman make a political issue out of it without consulting the minority?
Maybe we might
agree.
* ** * #
The Chairman. We will gladly share what sainthood we have
with you. You need it very much. We will pass it around.
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Federal Reserve Bank of St. Louis
-3Then when can we expect some recommendations on this question of margins on the purchase of Government securities?
Mr. Martin, I have learned from long experience not to make
any precise time on this topic.
The Chairman, Can you make a recommendation in one month?
Mr. Martin. No, I would not want to say.
The Chairman. Could we give you two months?
Mr. Martin.
No, I would not pick any time.
The Chairman. Three months?
Mr. Martin. No, sir.
The Chairman. Four months?
Mr. Martin, We will do it. We might do it in a week. We
might do it in a year.
The Chairman. Can we look for this in two months?
Mr. Martin.
I make no promises.
The Chairman. You see, we are going to adjourn around the
Fourth of July, so please examine in time for us to act. Do not
resort to the old army game of stalling. At times we have suspected
\
that the studies of the Federal Reserve Board are sort of elastic and
have gone out and searched to avoid action.
Will you speed up your study of recommendations, Mr, Martin?
Mr. Martin.
This Government securities market study has
been pursued by Mr, Young on my right, who is Secretary of the Open
Market Committee now, as vigorously and accurately as we can pursue it.
The Chairman. May we expect recommendations in the next
month?
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Federal Reserve Bank of St. Louis
Mr. Martin. I cannot promise.
-uThe Chairman.
You know by failing to make recommendations,
by failing to make decisions, you really make decisions. By failing
to make recommendations for the imposition of margins you are making
decisions not to impose margins. This is very important.
Mr. Martin. That is a valid point and one that we are
very aware of.
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Federal Reserve Bank of St. Louis
May 10, 1960.
Mr. Alfred Hayes,
President,
Federal Reserve Bank of New York,
New York 45, New York.
Dear Ai:
Thank you for your letter of May 6 with respect to
my comments regarding the guarding of the integrity of the
Desk at the Federal Reserve Bank of Hew York and minimizing
any chance of people charging the Desk with favoritism to one
group or another contained in the hearings before the Joint
Economic Committee on February 2.
1 want to assure you that I was not suggesting that the
integrity of those officials connected with the Desk was open
to question. On the contrary, 1 was attempting to make clear
that limitation by Open Market Committee policy of the discretion permitted to grant or deny favors was a protection to such
officials and to the System. Clearly, it would be unfortunate,
and indeed unfair, lor these officials to be exposed unnecessarily
to rumors and suspicions that they either can or do exhibit
favoritism. The best protection against such ill-founded
criticism is to point out that they cannot. Hence 1 do feel that
one of the best answers I have been able to give has been the
limited scope of the actions of the Desk and our emphasis on
trading in short-term securities, preferably bills. In my
mind, and 1 should cite it just as clearly as your people have
stated the contrary view, trading in bills only constitutes an
important safeguard vis-a-vis the public in connection with
System activities.
I am glad you wrote me about this so you can give
this letter to anyone who may have misunderstood my remarks
as a clear indication of my confidence in their integrity.
Sincerely yours,
(SIGNED' WM. Mc.< •- '• AR1 !N. Jr.
W». McC. Martin, Jr.
WMM:mnm
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Federal Reserve Bank of St. Louis
FEDERAL Reserve
• BANK or New YORK
NCW YO*« 49. N. Y.
• STOO
ALr KOHAT
"
"
Hay 6, I960
Hon. William McC. Martin, Chairman
Federal Open Market Committee
c/o Board of Governors of the
Federal Reserve System
Washington 2t>, D. C.
Dear Bill:
Before I left the Bank on my recent trip to Europe
I had hoped to talk with you or write you about one aspect of
the hearings conducted by the Joint Economic Committee on
February 2, I960, but time passed and I didn't get to It. I
was disturbed by possible implications of, or Interpretations
that might be placed upon, a statement you made at tihe hearing•
In response to a question by Senator Douglas regarding
the "bills only" policy, you said, in effect, that an important
reason for the policy is to guard the Integrity r the Desk at
the Federal deserve Bank of New York, and to minimize any chance
of people charging the Desk with favoritism to one groap or
another. (Page 225 of stenographic transcript.) This expression
of views, was reported in the newspapers; it received wide circulation in financial circles and engendered a variety* of comments.
As you can well understand, there have been some unfortunate
effects on the morale of those of our staff engaged iri open
market operations.
\
As you know, the Federal Reserve Bank of tfew York,
acting for others than the System Open Market account, has engaged
over the years in a large volume of transactions in Government
securities.of varying maturities, including long-term bonds. No
question &as ever been raised, so far as we know, either within
the System or outside the System, regarding the integrity of the
Desk or favoritism on its part in the handling of these transactions.
. The operations of the personnel on the Desk are carefully
reviewed by their-superiors; indeed, most of the details of the
transactions are agreed upon by their superiors before the transactions are executed. The procedures for auilts by our* own General
Auditor and for examination by the examiners
of the Board of Governors
11
are intense. Going beyond these "technical safeguards, 1 have been
impressed time and time again, since I have been with the Bank, with
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the integrity and personal dedication with which the officers and
employees concerned with the operation* of the Desk have undertaken
their work.
Perhaps one Bay question the Judgment of the Desk with
respect fco a particular transaction just as one nay question «y
Judgment or the Judgment of any other member of the Federal Open
Market Conmittee as to the type of credit policy called for at
any particular time. But judgment and integrity are quite different.
There has never been any doubt In my Bind about the integrity of
our staff or about its capacity to carry out open Market operations
directed by the Committee without showing favoritism to one group
or another and without giving any basis for any reasonable man
to charg« favoritism*
1 know that 'Congressional hearings can be very trying
at times and there is no doubt that the hearing on February 2
was especially trying for you. Under such circumstances it is
difficult to phrase one's responses and to foresee all the implications of what one might say. I did think, however, that you
should know about our reaction*
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Tours sincerely,
Alfred Mayas,
President
(
3 O A R D OF G O V E R N O R S
Chairman Martin
OF THE
F E D E R A L R E S E R V E SYSTEM
Office Correspondence
To
pate February 29,1960
Board of Governors
Subject! Joint Economic Committee Report
Jerome W. Shay
on the Presidents Economic Report
Senator Douglas is expected to submit to Congress
today the Report of the Joint Economic Committee on the
January I960 Economic Report of the President. Copies of the
Committee's Report may not be available for distribution until
Wednesday or Thursday of this week.
However, according to the advance press copy of the
Committee^ Report, the Democratic majority views will criticize
the President's Economic Report and also his Budget for Fiscal
1961 as na status quo budget and report11 in that they fail to
lay out programs for promptly achieving full use of the labor
force and production facilities and for increasing the rate of
growth. The majority views, in large part, reiterate the need
for the "reforms" recommended by the majority in the Committee1s
recent report on its year-long study of Employment, Growth and
Price Levels. The minority of the Committee strongly criticize
the majority views.
Mr. Patman devotes most of his Supplemental Views to
urging his various proposed changes in the Federal Reserve
System, including the need for annual audits of the System by
the GAO in order to stop what he calls the "free-handed spending of public funds.11
cc: Mr. Thomas
Mr. Young
Mr. Molony
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FOR RELEASE WITH ECONOMIC REPORT
February 29, 1960 - P.M.
From the Office of:
Senator Paul H. Douglas (D,-I11,)
109 Senate Office Building
STATEMENT BY CHAIRMAN DOUGLAS ON TH2 RELEASE OF THE COMMITTEE'S REPORT
The Chairman released the following statement:
The minority of our Committee have engaged, in their views on
this Report and previously in their views on the special study of
the Committee on Employment, Growth, and Price Levels, in charges
of extreme partisanship and have used some very intemperate language
with respect to our Committee Report. We have been accused of
political blackmail, of disregarding freedom, and of using phony
figures. We shall leave it to the public to decide who has engaged
in "extreme partisanship" and who has used intemperate language.
There are in fact very serious differences of opinion between
and among us. It is my view that in a political democracy we should
express differences of opinion about economic matters which actually
exist. Otherwise the public remains uninformed about the issues
before the country, party lines and party responsibility are obscured,
and the political environment suffers from the absence of criticism
which is necessary in a functioning and vital democracy.
What the Minority wants us to do is to put our stamp of approval
on the President's Budget, Economic Report, and economic policies.
Since we disagree with these policies it is better that we express
that disagreement and the reasons for it so that the people and the
country may decide these issues for themselves.
At the same time we have observed those limits on criticism
which are necessary, namely that they are in good temper, sincere,
and that they avoid personal abuse of individuals. We believe we
have done this better than the Minority.
^
»•
But we cannot agree with the President's economic policies.
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--Unemployment for 1959, a so-called prosperous year,
averaged 5.5 percent. This is almost the same figure as
in the recession year of 1954 when it averaged 5.6 percent.
This is a serious problem and we do not intend to sweep it
under the rug.
--The economy has grown at a rate of only 2.3 percent
between 1953 and 1959. We have had two recessions. This
rate is below the historical average. It is about half the
potential of our economy, and it is considerably below that
achieved by Western European nations and especially the
Russians. This rate of growth is inadequate and may mean
the difference between doing those things which are vital
to our defense abroad and our welfare at home or not doing
them.
-2-
— In the last two years our price levels have been as
stable as at any time in our history. Yet this is the tine
when the Administration renewed its fight on "inflation."
The consequences have been a slow rate of growth, a high
level of unemployment, and the highest interest rates in
some 35 years.
--The President's Budget and Economic Report fall well
below those levels of maximum employment and production
called for in the Employment Act. Employment for 1960 will
probably average close to 5 percent for the year.
These facts could be swept under the rug. This is primarily what
our minority colleagues wish us to do. When we point them out in temperate language we are accused of "extreme partisanship."
and extensive
Curiously enough, some of the most bitter/remarks have been made
by a aQDber of our Committee who has not attended a single hearing or
a single meeting of the Committee since he has been a member.
In this day of "moderation" and competition for the "middle of the
road," responsible comment, unfortunately, is too often confused with
irresponsible or destructive criticism.
We believe in a vigorous debate of the issues. This is healthy and
constructive. Platitudes to put people to sleep will not help either our
country or its people.
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\
[JOINT COMMITTEE PRINT]
1960
J O I N T ECONOMIC REPORT
REPORT
OF THE
JOINT ECONOMIC COMMITTEE
CONGRESS OF THE UNITED STATES
ON THE
JANUARY 1960 ECONOMIC REPORT
OF THE PRESIDENT
WITH
MINORITY AND OTHER VIEWS
FEBRUARY —, 1960
Printed for the use of the Joint Economic Committee
UNITED STATES
GOVERNMENT PRINTING OFFICE
51604
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WASHINGTON : 1960
JOINT ECONOMIC COMMITTEE
(Created pursuant to sec. 5(a) of Public Law 304, 79th Cong.)
PAUL H. DOUGLAS, Illinois, Chairman
W R I G H T PAT MAN, Texas, Vice Chairman
SENATE
J O H N SPARKMAN, Alabama
J. WILLIAM F U L B R I G H T , Arkansas
JOSEPH C. O'MAHONEY, Wyoming
J O H N F. K E N N E D Y , Massachusetts
P R E S C O T T BUSH, Connecticut
J O H N MARSHALL BUTLER, Maryland
JACOB K. JAVITS, New York
JOHN W.
II
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LEHMAN,
HOUSE OF R E P R E S E N T A T I V E S
R I C H A R D BOLLING, Missouri
HALE BOGGS, Louisiana
H E N R Y S. REUSS, Wisconsin
FRANK M. COFFIN, Maine
THOMAS B. CURTIS, Missouri
CLARENCE E. KILBURN, New York
WILLIAM B. WIDNALL, New Jersey
Clerk and Acting Executive Director
CONTENTS
Introduction
The President's budget and Economic Report
Summary of needed programs for growth, maximum employment, and
stable prices
The President's budget and Economic Report and the Nation's needs_
Economic outlook for 1960
General outlook
Employment and output
Price stability
Policies to achieve the Employment Act objectives in 1960
Fiscal policy: The 1961 budget
1. Reordering priorities
2. Tax reform
3. Gains from fiscal reforms
Monetary policy and debt management
Needed reforms in Treasury, debt management, and monetary policy.
Market structure
Note by Senator J. W. Fulbright
Committee and subcommittee activities in the past year
President's 1959 Economic Report
Study of Employment, Growth, and Price Levels
Subcommittee on Economic Statistics
Subcommittee on Automation and Energy Resources
Subcommittee on Defense Procurement
Staff participation in meetings with outside groups
Committee publications
Committee and subcommittee plans for the coming year
Full committee
The relationship between monetary and fiscal policy actions in
the postwar period and the objectives of the Employment Act_
Tabulation and summary of questionnaires submitted by 17
security dealers
Study of governmental subsidies
Economic implications of alternative agricultural policies
Subcommittee on Economic Statistics
Review of Economic Indicators and preparation of 1960 edition
of Supplement to Economic Indicators
Subcommittee on Automation and Energy Resources
Bringing previous hearings on automation up to date
Further study of energy resources
Subcommittee on Defense Procurement
Study of the impact of defense procurement
Supplemental views of Representative Wright Patman
Supplemental views of Senator Joseph C. O'Mahoney
Minority views
Additional views of Senator Prescott Bush
Additional views of Senator John Marshall Butler
Additional views of Senator Jacob K. Javits
Publications of the Joint Economic Committee—January 1947-February
1960
Study of Employment, Growth, and Price Levels publications
in
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)
)
8 6 T H CONGRESS
2d Session
SENATE
(
(
REPORT
No.
JOINT ECONOMIC C O M M I T T E E R E P O R T ON T H E
JANUARY 1960 E C O N O M I C R E P O R T OF T H E P R E S I D E N T
FEBRUARY — , 1960.—Ordered to be printed
Mr.
DOUGLAS,
from the Joint Economic Committee, submitted the
following
REPORT
together with
MINORITY AND OTHER VIEWS
[Pursuant to sec. 5(a) of Public Law, 304, 79th Cong.]
INTRODUCTION
This committee believes that the existing and potential skills of the
American people and the Nation's natural resources, productive facilities, and technological development can provide both for the military
defense which is necessary to national security and for the growing
needs of the economy. T h e needs for growth in the private sector
of the economy and the public responsibility for defense, schools,
health, resource development, slum clearance, and other public services can be met.
They can be met within the existing framework of our free political
and economic system and call for no fundamental changes in our
system. They do call, however, for greater effort and dedication to
these goals if they are to be achieved.
We believe that the economy can grow a t a faster rate than in t h e
past, that relatively full employment can be brought about and maintained, and that this can be done with a stable price level. These
ends cannot be met without effort. We must follow correct policies
and be willing to do the right things to gain them.
The committee's extensive studies of employment, growth, and
price levels, which were recently completed, indicate in specific terms
where public and private efforts have fallen short, what our potential
is, and the things t h a t need to be done to close the gap between our
performance and the economy's potential. I t is not our purpose here
to repeat the specific details of the studies. An important conclusion
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1
2
I960 JOINT ECONOMIC REPORT
of those studies is: With the necessary will and resolution this Nation
need not fear either for its military security or for its economic wellbeing due to any fundamental deficiency in its present or potential
productive capacity.
I t is not a question of whether these things can be done. I t is a
question of whether we will organize our people, resources, and institutions to do them.
THE PRESIDENT'S BUDGET AND ECONOMIC REPORT
The programs outlined in the President's budget and Economic
Report will not achieve the objectives of the Employment Act in 1960.
Moreover, they do not call for the actions which, as a result of its
studies, this committee believes are necessary to raise the rate of economic growth while achieving a high and steady rate of employment
and a stable price level. The public responsibilities for schools, slum
clearance, resource development, the elimination of depressed areas,
and other functions which are among the major keys to economic
growth are either starved for funds or their programs are limited in
scope.
Furthermore, while this committee cannot pass on whether the specific parts of the defense budget are adequate for our military needs,
there is a considerable body of expert and nonpartisan opinion which
believes that much more must be done in the fields of missiles, space,
and combat strength if we are not to jeopardize our security and our
defense. If more needs to be done, we are confident that it can be
done without endangering our economy, if the proper policies are
followed.
SUMMARY OF NEEDED PROGRAMS FOR GROWTH, MAXIMUM EMPLOYMENT,
AND STABLE PRICES
The conclusions arrived at as a result of the committee's recent
investigation of the economy were:
(1) The slow rate of growth in the economy in the recent past has
been caused in large part by public policies which created instability
in the economy and brought too frequent recessions.
To meet this problem there must be both fiscal and monetary
reforms. The Government must act more quickly and more promptly
to offset declines, especially through tax policy. The automatic fiscal
stabilizers must be improved, especially unemployment compensation.
(2) In the interests of a higher rate of economic growth, we must
place greater reliance on fiscal policy. This includes larger budget
surpluses in prosperous periods than we have had, a tax structure
which is both more equitable and which will promote a faster degree
of growth, and a reordering of the priorities in Federal expenditure
programs to promote those programs which stimulate growth and to
cut back or eliminate those programs or subsidies which support
inefficiency in the economy.
(3) We need a less restrictive monetary policy within the framework of a more effective fiscal policy. Specifically, the money supply
should grow in line with the growth in output. Interest rates could
then be lower and would support a more adequate rate of growth and
investment without inflation. With a more effective fiscal policy,
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1 9 6 0 JOINT ECONOMIC REPORT
3
monetary policy would be more effective in stabilizing the economy
than it has been in recent periods.
In recent times the administration has relied heavily upon the
monetary authorities to carry out stabilization policy which should
properly be the concern not only of the monetary authorities but of
the Government as a whole. In turn, the monetary authorities have
limited their actions almost exclusively to only one aspect of the
problem, i.e., stabilizing the price levels, while they have largely
ignored the problems of economic growth and excessive unemployment.
(4) The problem of market power must be attacked. This is the
ability of some to set prices without relationship to the demand for
their goods or services because of their monopoly or semimonopoly
position. Various private and Government devices which protect
the ability of these groups to exercise market power should be reduced
or eliminated. Basically, there must be a more effective antitrust
policy. In addition, tariffs should continue to be lowered in order to
provide more competition; the continued lowering of tariffs should be
accompanied by vigorous bargaining on specific items to achieve in
greater degree the objective of reciprocity. This would improve the
structure of the economy.
(5) Both private and Government groups must emphasize growth
producing policies and programs. This means especially improving
the skills and education of our people through Federal aid to education without Federal control; the creation of greater economic opportunity for all of our people, especially the unskilled, women, the
aged, and minority groups whose talents are not now used to the full
and whose potential abilities and productivity are wasted; improving
the health of our people through both private and public programs;
placing major emphasis on research, including basic research; and
better programs of unemployment compensation, retraining, and the
reduction of frictional and technological unemployment through
appropriate means.
THE PRESIDENT'S BUDGET AND ECONOMIC REPORT AND THE NATION^
NEEDS
We do not see in the budget for fiscal 1961 and the President's
Economic Report for 1960 any fundamental changes in the directions
which we think are necessary. By and large they are a status quo
budget and report. Comprehensive programs to promote improvements in the skills of our people—schools, health, and retraining—
are not adequately emphasized.
The Economic Report does not recognize the basic changes which
must be made in our antitrust program if the sources of market power
are to be dealt with. We say this even though the specific recommendations for the antitrust program are good in general.
Monetary policy for the current and coming years is not discussed
in any constructive way.
There is no reordering of the priorities in this budget over past
ones, either for new programs which are needed or for old programs
which are wasteful.
The major tax loopholes are not mentioned and there are no recommendations concerning them, although some relatively minor changes
are proposed.
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4
I 9 6 0 JOINT ECONOMIC REPORT
The public policies required for economic stability in 1960 are not
adequately dealt with.
The Economic Report does contain a large number of proposals
which, while appropriate subjects for consideration by the legislative
committees of the Congress, are not of sufficient importance in the
context of the broad purposes of the Employment Act to warrant
j&lling the pages of the Economic Report year in and year out with
their detailed enumeration.
The President's Economic Report endorses in general terms programs such as school aid or aid to depressed areas which are important for the Nation's long-run growth. But the specific legislation proposed by the President to carry out these objectives would build
almost no schools or give little aid to those who need it. Each problem is broken down into a series of minute recommendations which
give the appearance of support and action but which when added
together provide no effective program.
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ECONOMIC OUTLOOK FOR
GENERAL
1960
OUTLOOK
As in the past several years, the President's Economic Report avoids
any clear-cut statements in quantitative terms of the levels of employment, production, and of prices in general which are likely to
prevail in 1960. In the budget message, however, the President
explicitly assumes a gross national product of $510 billion for calendar
1960. Corporate profits of $51 billion and personal income of $402
billion in 1960 were estimated by the Secretary of the Treasury in
his press conference when the budget was released. These estimates
are in terms of the level of prices which prevailed in the middle of the
last quarter of 1959 and assume little, if any, general price increases
beyond those already realized by the end of 1959.
On the basis of the information provided in the budget and in the
Secretary of the Treasury's press conference, and by the expert
witnesses appearing before the committee during its hearings on the
President's report, the highlights of the economic outlook are—
A. The gross national product in current prices is likely to be
at least equal to the $510 billion which is estimated by the President in the budget and may be slightly higher.
B. Corporate profits of $51 billion and personal income of
$402 billion, as estimated by the Secretary of the Treasury, are
in line with this estimate of the gross national product.
C. Price increases, as measured by the implicit deflators for
the gross national product, will be limited and will probably
account for not more than roughly 1 percent of the increase in
gross national product from 1959 to 1960.
D. An expected $510 billion gross national product for 1960
would be $20 billion to $30 billion below the economy's potential
output, based upon a 4 percent rate of unemployment.
E. A gross national product less than the economy's potential
implies either that—
1. the increase in the labor force will be less than usual,
or hours of work may be shorter, or
2. productivity increases will be less than those which
might be achieved if the economy were operating at a higher
level, or
3. unemployment will average close to 5 percent for the
year 1960 as a whole and might average as much as 4}£
percent or more, seasonally adjusted, even during the fourth
quarter of 1960.
F . Since the economy at the beginning of 1960 was so far from
full employment, achieving the potential output for the year 1960
as a whole would require a more rapid increase in production and
employment than would be consistent with stability in the
general level of prices. Nevertheless, it is possible to accelerate
the expansion of economic activity, without inflationary conse5
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6
I960
J O I N T ECONOMIC REPORT
quences, in order to approach maximum employment and output
more nearly by the end of the year.
EMPLOYMENT AND OUTPUT
The outstanding fact which emerges from this analysis of the
Nation's economic prospects in 1960 is that unemployment is generally
expected to continue at a high rate compared to prosperous years in
the past.
Unemployment has averaged 4.9 percent or more of the labor force
in each month since November 1957. For 1958 as a whole, unemployment averaged 6.8 percent. In 1959, a year characterized by the
President as one of rapid economic advance, unemployment averaged
5.5 percent. This is virtually the same unemployment rate as that
experienced during the recession year 1954 when unemployment
averaged 5.6 percent. I t appears, therefore, that under the policies
now being pursued, the rate of unemployment is higher both in good
periods and in recession periods than it had been previously in comparable postwar years.
To the extent that the programs proposed by the President are
consistent with the estimate of a $510 billion gross national product
for the year, they will not meet the objective of providing the conditions in which full recovery in employment and output can be
attained.
The persistent failure to achieve maximum employment and production deprives the private sectors of the economy of a major impetus
for investment in expanding and improving our production facilities.
Moreover, by failing to use the labor force and production facilities
as fully as is possible without promoting inflationary price developments, the Nation will be sacrificing output which could contribute in
important ways to discharging the public responsibilities we face.
When unemployment is as high as it has been for a period of 27
months and when production facilities are used at rates which are
significantly below their maximum efficiency, there is simply no merit
in the contention that we cannot afford the programs needed to make
the United States militarily supreme and to provide the education,
research and development activities, improvements in health standards, elimination of poverty and low productivity in depressed areas,
elimination of city blight, and the many other advances upon which
rising living standards in the United States depend.
PRICE STABILITY
Another important conclusion which emerges from a review of the
economic outlook for 1960 is that the stability in the general level of
prices which prevailed during 1958 and in 1959 will continue in 1960.
All of us welcome this prospect of a continuation of a stable price
level. We must, however, be concerned about the undue emphasis
on fighting inflation which continues to dominate the administration's
policies and those of the monetary authorities.
We do not suggest that public policy should disregard the possibility that inflationary pressures will arise. But the primary emphasis
in public policy at this time should be on promptly achieving the full
use of the labor force and of our production facilities and on laying
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1 9 6 0 JOINT ECONOMIC REPORT
7
the basis for a higher rate of economic growth over the long run.
This emphasis is not found in the policies of the administration and
of the Federal Reserve, who appear to be focusing primarily on the
fight against inflation despite the fact that the price level has been
remarkably stable for many months past. The Wholesale Price
Index, for example, in December 1959 was at exactly the same level
as in January 1958; in the same 2 years, the Consumer Price Index
increased by only 1.3 percent annually. Either the built-in upward
bias of the index, because of its failure to account for improvements
in quality, or the normal statistical margin of error, could account for
this modest increase.
The administration's fight on inflation resumed in November of
1958 after a year of stable prices and continued during a period of
stable prices. The result is an unemployment rate higher than it
need have been or should have been under the terms of the Employment Act.
This stability in the price level and the absence of any noticeable
inflationary thrust in the economy today has been noted repeatedly.
The prospect for continuing price level stability was affirmed by the
consensus of the expert witnesses testifying before the committee
during its hearings on the President's Economic Report.
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POLICIES T o
A C H I E V E THE EMPLOYMENT ACT OBJECTIVES IN
1960
If the demands which arise from our defense needs and other public
responsibilities to promote progress in the American economy are to
be met adequately, more vigorous programs than those set forth b y
the President will be required in 1960. Important changes are needed
in the areas of fiscal policy, monetary policy and debt management,
and the policies affecting the structure of the American economy.
In summary, to achieve our shortrun stabilization objectives of
maximum employment and production, and stability in the general
price level, we need Federal policies which will encourage a somewhat
more rapid expansion of total demand than now seems likely. In the
interest of promoting economic growth, easier monetary and credit
conditions are needed than those that appear to be in prospect at
this time. In addition, we should begin now to make major advances
in increasing the productivity and improving the mobility of the labor
force and in improving the structure of the economy.
FISCAL P O L I C Y : T H E 1961
BUDGET
The President's budget for fiscal 1961 envisages a surplus of $4.2
billion, based in part on a $554 million increase in postal revenues
from increasing, in the main, first-class postal rates. The surplus also
assumes that outlays for agriculture under the present programs will be
$5.6 billion, about $500 million more than is currently estimated for
fiscal 1960, but $900 million less than in fiscal 1959. (It is also proposed to increase the excise on gasoline by % cent and to put back into
the general fund certain excise receipts diverted to the highway trust
fund. These actions would not affect the conventional budget results
for fiscal 1961.) If a more realistic estimate of the cost of the present
farm program is used and if the proposed postal rate increase does not
pass, the surplus at the estimated levels of income will amount to
about $3 billion instead of $4.2 billion.
The $4.2 billion surplus which the President gave as his estimate
would result from an automatic $5.4 billion increase in revenues
accompanying the rising levels of income, while he expected that
Federal expenditures would be about $1.4 billion above those for the
present fiscal year. The revenue estimates are based on an extension
of the present corporation income tax and excise tax rates. We recommend that these rate extensions be enacted, though possibly with
some revisions.
The proposed surplus, when translated into terms of Federal
Government payments to and receipts from the public, amounts to a
little more than $2 billion in calendar 1960, or about one-half of 1
percent of expected gross national product. For fiscal 1961, the
estimated cash surplus is $5.9 billion, slightly more than 1 percent of
the likely gross national product for the fiscal year. These are low
ratios of surplus to the gross national product by postwar standards.
9
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1 9 6 0 JOINT ECONOMIC REPORT
Since the levels of income upon which these budget estimates are
based are less than full employment levels, it is perhaps just as well,
assuming the President's programs were to be accepted, that no larger
surplus be achieved, unless there were assurance that materially
easier monetary and credit conditions would be provided by action of
the Federal Reserve System.
We could, however, more fully discharge the responsibilities facing
the Federal Government, and at the same time realize a larger budget
surplus which would facilitate the easing of credit conditions, by (1)
reordering the priorities in the Federal expenditure programs, and
(2) undertaking urgent reforms in the Federal revenue system.
1. Reordering priorities
I n general, Federal expenditure programs should be revised to place
greater emphasis on providing a more effective national defense and
on programs which will make important contributions, over the long
run, to the Nation's economic growth.
(a) Defense.—Military expenditures by the Department of Defense
in fiscal 1961 are estimated in the budget at $42,745 million, the same
as in fiscal 1960. This amount is $828 million less than the actual
expenditures in fiscal 1959. Moreover, the proposed fiscal 1961
outlays for military hard goods show a reduction in every major
category—aircraft, missiles, and ships.
We recognize that the mere dollar volume of purchases for the
military does not necessarily measure the adequacy of our defense
effort. The costs of military hardware, however, are rising, not
falling. A reduction in total purchases for these hardware items,
therefore, necessarily means that a smaller addition to our arsenal will
be made in the current fiscal year than in past years. There is no
objective evidence that the Soviets are reducing the rate of their
military buildup. Cutbacks in the real volume of our outlays, while
the Soviets continue to increase the volume of theirs, requires a more
convincing explanation than has yet been offered to assure the American public that the proposed defense program for fiscal 1961 is not to
be unnecessarily limited on the basis of budget-balancing
considerations.
The joint committee has observed repeatedly in the past, and we
repeat the assertion again, that decisions about the volume and character of defense procurement should be made on the basis of judgments
about the Nation's long-term military needs. They should be separated from short-run budgetary considerations.
A greater volume of outlays for major procurement programs of
the Defense Department and for an increase in combat strength and
^efficiency does not necessarily require at this time any significant
increase in the overall defense budget. The recent hearings by this
committee's Subcommittee on Defense Procurement brought out the
fact that very substantial savings—as much as $2 billion to $3 billion—
can be realized by eliminating the current wasteful procurement practices and by more effective control over surplus stocks and stockpiles
of obsolete material. This conclusion is confirmed by the findings of
the Hoover Commission. 1
i Senator O'Mahoney wishes to emphasize this point:
Military hard goods expenditures, particularly for new items, have a highly expansionary impact on the
economv. Much of this impact is likely to be concentrated in those sectors of the economy in which increased demands will result promptly in rising prices which will in turn raise costs and push prices up elsewhere in the economy. For this reason, it is essential that the utmost care be taken to prevent waste in
our military assistance programs abroad and the type of waste in defense procurement practices as revealed
in our recent hearings.
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These savings could be applied to the missile and space programs,
and for combat troops, and would be a major step toward improving
our defense position relative to that of the Soviet Union. If on the
basis of expert and dispassionate evidence it is determined that further
efforts are required we should not be deterred from undertaking them
by considerations of budgetary prospects.
A responsible budget policy proceeds first from the determination of
needs. If, despite savings from better procurement procedures, needs
exceed the budget totals which are estimated by the President, we are
certain that the American people will respond unhesitatingly and
ungrudgingly to provide the additional revenues required in the
interest of military security.
(b) Foreign aid.—Since the end of World War I I , the United States
has assumed the major burden of the leadership in the free world for
aiding nations in their recovery from the war, in building up their
defense capabilities against future aggression, and in providing for
economic progress in less developed nations. The discharge of these
functions continues to be a major responsibility which faces the
United States. However, economic progress of our NATO partners
should be given careful consideration in reviewing our foreign-aid
program.
With respect to defense, the NATO countries, particularly those
whose balance-of-payments situations have shown significant improvement, should be called upon to assume a larger portion of the
burden for their own and for the NATO defense effort. While the
United States will and should continue to remain the mainstay of
the NATO defense program, our contribution should be reexamined
and adjusted in the light of the expanding resources and capabilities
of our NATO partners. The patterns set in 1951, when many of our
European allies suffered from serious balance-of-payments problems,
are no longer appropriate in 1960. I t is proper that they devote more
funds to their own defense.
The second major aspect of our foreign-aid program is to assist the
economic progress of the less developed nations. The efforts of the
United States in this respect should be maintained. Additional efforts by our allies are now possible and we believe that they should
make a greater effort. Nevertheless, the demands for real resources
in the world's underdeveloped areas are so great and the returns are
so promising in terms of improvement in the living conditions and in
the political and economic stability and freedom in these areas that
we should not consider reducing our own economic contributions for
these purposes even if those of our friends in other parts of the world
increase.
(c) Education.—Despite
the recognition of the fact that the Nation's economic growth over the long run depends upon improving
our education achievements, the President offers an inadequate program to assure that progress toward this goal can be made. The
committee's study of employment, growth, and price levels brought
out very clearly that the rising standards of education in the past
have made a major contribution to the Nation's economic progress.
At the present, it is clear that a rapid pace of technological advance
will demand a more highly educated and skilled labor force.
A vigorous program of Federal aid to education should be adopted
during the current session of this Congress. This program should
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include no Federal control over the content of what is taught, the
salaries or promotion of teachers, tenure, discipline, or any other feature of educational programs which historically have been controlled
by local authorities. The Federal Government should also provide a
national scholarship program, in addition to the present loan program, to provide the incentives and the necessary financial resources
so that the more promising high school graduates may enroll in advanced educational institutions. Far too high a proportion of students of the top quality and ability in high school do not go to college
because of the lack of motivation, financial limitations, religion, race,
sex, and other factors which should not be allowed to bear on developing our most valuable resources.
(d) Research and development.—The research and development
activities which have been supported and promoted by the Federal
Government in the postwar period have been one of the most important sources of dynamic economic growth in the United States. Although most of these activities have been associated with the defense
effort, they have yielded huge returns in civilian byproducts and in
medical advances.
The National Science Foundation estimates that in 1959-60, the
Federal Government will, directly and indirectly, supply well over
half of the total funds going into research and development activities.
I t is essential for economic growth that the Federal Government
continue and expand its support of research and development activities, even if the Nation's defense needs were to be reduced by an
easing of world tensions.
Federal funds for research and development should be distributed
more broadly, particularly to smaller firms, instead of being so heavily
concentrated among industrial giants.
(e) Farm expenditures.—One of the most expensive aspects of the
present farm program is that price supports are paid on corn and feed
grains without any requirements by the Secretary of Agriculture for
production controls of any kind. In his farm message, the President
proposed the same program for wheat. Under the law, when the
Secretary of Agriculture pays out funds in price supports for any crop
he also has the authority to establish production controls. This has
not been done and under the program of open-end payments the production and surpluses of corn and feed grains has increased at a fantastic rate. In addition, a large proportion of these payments go to
a very small number of farmers.
By applying some form of production controls—either bushels,
acres, or dollar limits—this vast expenditure for these crops could be
limited. While this action would not solve the basic farm problem,
it is certainly essential in the short run to avoid unnecessary expenditures and to see that the payments which are made go to those who
need them most of all. Such production limitations could be imposed
without any legislative changes. I t should be done with the emphasis
on promoting a rise in the income of the family sized farm and in the
interest of Government economy.
(J) Business subsidies.—In the present budget there is provision
for aids and special services to business of some $864 million. To this
should be added the postal deficit of $554 million. Thus, business
groups receive direct subsidies of at least $1.4 billion per year exclu-
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sive of numerous programs which guarantee many business operations
against loss.
While the President has asked t h a t rates be increased in the main
on first class and air mail, the postal deficit is found in the second,
third, and other classes of mail. For fiscal 1959, the total post ofiice
deficit, adjusted to show the full year effect of the postal rate changes
in 1959, was $334.8 million. First-class and domestic-air mail each
showed a surplus totaling $164.2 million, while other classes of mail
showed a deficit totaling $499 million. The actual results for fiscal
1959 were a surplus of $156.8 million for first class and air mail and
a deficit of $726.6 million for second, third, fourth, and other classes
of mail. If the post ofiice deficit is to be eliminated, it is evident that
rate increases should be confined to second-, third-, and fourth-class
mail and controlled circulation publications, for they are those which
now receive the subsidies. Further cuts could and should be made
in other business subsidies.
2. Tax reform
Putting greater emphasis on Government programs to promote
economic growth is not a plea for big spending or deficit spending.
On the contrary, these programs can and should occur in the framework of a much tighter fiscal policy than there has been during the
past several years.
I t is quite possible that these expenditure programs, even with the
elimination of wasteful subsidies, would involve a somewhat greater
total outlay than is contemplated by the President in his budget for
fiscal 1961. In terms of the national income accounts, the expected
level of Federal outlays for 1960 represents no larger a fraction of total
output than has prevailed on the average in the post-Korean period.
The revisions in Federal expenditure programs which we suggest
would not significantly affect this relationship.
We recognize, nevertheless, that if a major start were to be made on
these programs in 1960, their effect in promoting a more rapid expansion of gross national product in 1960 and 1961 might demand a larger
budgetary surplus than that proposed by the President and certainly
more than will probably be achieved under his specific proposals. If
these urgently needed changes in Federal expenditures are provided,
and if gross national product in real terms tends to rise to a level of $530
billion to $540 billion, which would be a full employment level of total
demand for 1960, a larger surplus would be called for. A larger budget
surplus devoted to debt retirement would make possible easier monetary conditions, which would also promote a higher rate of growth.
These larger budgetary surpluses are well within our reach without
harm to the economy. Just a few of the major steps in a constructive
reform of the Federal income, estate, and gift taxes could add $4 to $5
billion to Federal budget receipts. Such reforms should aim at broadening the tax base by eliminating the most flagrant and inequitable
loopholes. These reforms include repeal of the dividends-received
credit and exclusion, provision for the withholding on interest and
dividend payments, rigorous limitations on employee expense accounts, limiting the types of income to which capital gains treatment
is given to true capital gains, progressively reducing the percentage
depletion rates allowed on oil and gas, improving the enforcement of
51504—60
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the income tax laws, and elimination of the numerous preferential
provisions in the estate and gift taxes. Even a modest beginning on
this tax reform program could produce $2 billion to $3 billion in
additional revenues. 2
These loopholes should be closed in any event simply in the interests of having a fair tax system which interferes as little as possible
with taxpayers' decisions about how to obtain and to dispose of their
incomes. Those with equal incomes should pay equal taxes. Tax
reform is all the more urgently needed when the public responsibilities
facing the Nation are so pressing.
Further evidence of the lack of concern by the administration with
the needs of sound fiscal policy is found in the very limited recommendations for tax reform offered in the Budget and Economic Report.
While the President's Economic Report states explicitly on page 6
that we should continue to review our tax system from the standpoint
of equity, of encouraging productive effort, and of facilitating mobility
and efficient use of capital, the only reform proposals made are—
* * * to preclude unintended and excessive percentage
depletion allowances for mineral products * * * to make
certain corrective amendments in the tax laws applicable to
cooperatives; * * * and to tax as ordinary income any gain
realized by the sale of depreciable personal property used in
business. * * *
We are told that tax reform is still being considered. Such reforms
are the concern of all Americans. The administration should make
a complete public statement of its proposals in this area and exert
full leadership in pressing needed reforms through the legislative
process.
By revising our expenditure programs and by providing tax reform,
Federal fiscal policy in 1960 can contribute materially toward a more
rapid recovery in employment and production and toward laying the
groundwork for a higher rate of economic growth in the long run.
Moreover, this can be done in ways which will produce a budget
surplus as large or larger than that proposed by the President.
3. Gains from fiscal reforms
If the budget priorities were reordered in a manner such as we
have pointed out and if a start were made on tax reform, we could
increase expenditures for missiles, space, and combat troops by $2
billion; add $2 billion for schools, health, depressed areas, and other
pressing social needs; commit $1 billion to reducing excises and income
tax rates (including those in the upper brackets if loopholes which
are primarily for the benefit of upper bracket taxpayers are closed),
and yet have a surplus larger than the President has anticipated.
This would also mean a larger increase in total output, an easier
monetary policy, and less unemployment. The general details of
how this could be achieved are set out in the table below:
2 Mr. BOGGS. I agree that the rate of growth of the American economy is lagging and that the policies
recommended in the Budget and President's Economic Report are not adequate. However, I want to
withhold judgment on some of the recommendations contained in the majority report, particularly with
respect to tax reforms, debt management, and the shipbuilding program. The tax matters have been the
subject of intensive studies before the Ways and Means Committee, and I would not want to prejudge
these studies until that committee has had time to make its own recommendations.
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The effects of a reordering of the priorities
15
in the budget
[In billions]
PROPOSED SAVINGS
Program
Realistic budget surplus under
present p r o g r a m
Postal increase for 2d- and 3dclass mail
Reduction in business and agricultural subsidies
Closing of most urgent t a x loopholes
Savings on military surplus and
procurement programs
Cuts in military aid
Total
PROPOSED EXPENDITURES
Amount
Program
Increase for missiles, space, a n d
$3. 0
c o m b a t troops
Increase for schools, depressed
.6
areas, and social p r o g r a m s
Revenue loss from t a x revision ac1.0
companying loophole closing. _
2. 5
Subtotal.
2. 0 P a y m e n t on d e b t
.9
Total
10. 0
Amount
$2. 0
2. 0
1. 0
5.0
5. 0
10. 0
As can be seen, we could achieve a greater surplus while we met our
military and domestic needs if this kind of program were to be supported actively by the administration and the Congress. This greater
surplus would be achieved at higher levels of economic activity. Such
a program is a constructive alternative to the position that we cannot
afford additional expenditures for defense, schools, elimination of depressed areas, and slum clearance.
MONETARY POLICY AND DEBT MANAGEMENT
This year's Economic Keport by the President, like those of the
past several years, offers no guides for monetary policy in 1960.
Fiscal developments, it is generally agreed, necessarily affect monetary and credit conditions. This relationship makes it essential to
consider fiscal and monetary policies together in the interest of achieving the Employment Act's objectives. The silence of the President's
Economic Report on this subject cannot be justified on the basis of
preserving the independence of the monetary authorities. I t represents, instead, a major deficiency in the administration's economic
policy formulation.
In the area of monetary policy, we offer as a general prescription
that the supply of money—i.e., currency held outside the banks and
adjusted demand deposits—should increase over time at about the
same rate as gross national product, allowing for normal velocity.
This does not mean that the money supply should be adjusted to every
short-term fluctuation in the level of total demand, but rather that
over a period of years the rates of increase in both should be about
the same. Much more reliance should be placed on fiscal policy—i.e.,
on adjusting Government receipts to expenditures—as a means of
stabilizing the level of total demand in the interests of a high, steady
rate of employment and of a stable price level.
Whenever this prescription is offered, the usual rejoinder from the
Federal Reserve is that it ignores the increase in the velocity of
money—that is, the frequency with which the money supply is turned
over. But repeated expert testimony has shown that, at least up to
some upper limit, an increase in velocity results from an inadequate
growth in the supply of money and consequent rising interest rates.
A more liberal monetary policy, therefore, would result in a somewhat
lower velocity of the money supply.
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Achievement of the Employment Act's objectives in 1960 calls for
easier monetary and credit conditions.
If a budgetary surplus of the level estimated by the President is
to be achieved with the present degree of monetary restraint or that
likely to prevail under present Federal Reserve policies in 1960, it is
improbable that a level of gross national product can be realized
which would bring maximum employment.
The fiscal policy proposals offered above would make possible a
larger budgetary surplus than that proposed in the President's budget
for fiscal 1961, and larger than that which we believe will actually
occur under his specific proposals. The use of the budget surplus for
debt retirement would contribute to the easing of monetary and credit
conditions. I t is important that such an impetus toward monetary
and credit expansion not be offset by restrictive action by the Federal
"Reserve.
Easier monetary and credit conditions are essential to a sound
public economic policy for promoting long-term economic growth.
A tight money policy impedes economic growth by slowing the rate
of State and local government outlays for schools and other public
facilities which are necessary for an expanding population, and the rate
of private investment, particularly by small and new businesses. At
the same time, tight money and high interest rates have little if any
effect on the rate of saving. A more effective way to assure an adequate volume of total saving in the economy is to run a large budget
surplus. An easier money-tighter fiscal policy, therefore, is the proper
mix of public policies in the interests of economic growth.
Preventing inflation does not depend on tight money. In fact, we
will do a much better job of preventing inflation with an easier monetary policy and a vigorous and alert fiscal policy. At the same time,
such a policy combination will do a much better job of promoting
economic growth.
NEEDED REFORMS IN TREASURY, DEBT MANAGEMENT, AND MONETARY
POLICY
With appropriate changes in fiscal, monetary, and debt management policies, easier credit and monetary conditions can and should
be provided in 1960.
In summary, our major recommendations are—
The Federal Reserve should—
(a) abandon its discredited "bills only" policy,
(b) agree to build up its portfolio of long-term bonds, and
(c) use open market operations rather than lowering reserve
requirements as the means of bringing about the secular expansion of credit which the Federal Reserve and the banks desire.
The Treasury should—
(a) avoid seeking advice on new issues from organized groups
of their customers who are interested parties,
(b) institute a system of callable bonds so that the public is
not saddled interminably with high interest rates,
(c) extend the auction method to other than short-term bills,
and
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(d) agree to sell long-term bonds in the main when interest
rates are low.
In addition, the Federal Reserve should immediately take the steps
necessary to regulate the presently unregulated New York bond market and to apply margins to its customers.
These reforms could begin now. They would bring down interest
rates, make the market more competitive, and could do this without
recourse either to "pegging" or to inflationary devices.
We do not seek a policy of pegging Government bond prices a t
artificially high prices and low yields. We do seek abandonment of
policies aimed at pegging Government bonds at artificially low prices
and high yields.
I t is for these reasons that, pending reforms in fiscal, monetary, and
debt management policies, we have opposed the elimination of the
present 4 ^-percent statutory ceiling on the rate which may be offered
on Federal Government debt instruments with a maturity of more
than 5 years. 3 Since December 1952, the average maturity of the
Federal debt has fallen by a full year (as of January 30, 1960). Much
of this decline occurred when long-term rates were below the statutory
4 ^-percent ceiling and before the administration requested the elimination of the ceiling. Moreover, little has been done since 1952 to
lengthen the debt, even when long-term rates were low.
The Federal debt can be efficiently managed well within this 4 ^ percent rate ceiling, if appropriate reforms are undertaken. Moreover, these reforms, which can be made effective very quickly, should
be undertaken quite apart from the question of the interest rate ceiling. Indeed, if progress is made in this direction, the interest ceiling
will again become an academic issue.
In this area, too, we are familiar with the reply of the administration's supporters. I t is that even if the proposed reforms are undertaken, they could not be achieved overnight and in the meanwhile
the enforced reliance on short-term financing is inflationary.
With respect to the first point, these reforms would begin quickly.
The second argument that is made is t h a t short-term issues are near
money while long-term issues are not.
In fact, this is not a pertinent argument. If the total volume of
credit is fixed by the monetary authorities, then any new debt issue—•
whether it is long or short term—reduces the amount of credit which
may be extended for other purposes. Whether the debt issue is a
long-term or short-term instrument, therefore, is not a relevant question in this respect. I t is relevant, however, in determining whether
high interest rates are to be paid on debt issues with a short life or on
those with long maturities. Clearly, even if high interest rates cannot
be avoided for the relatively short period of time in which the proposed
reforms in debt management are undertaken, they should not be fixed
on the economy for 10, 20, or 30 years through the issuance of longterm debt by the Treasury.
MARKET STRUCTURE
To achieve the objectives of the Employment Act, the third major
concern of public economic policy should be with the market structure
3 Mr. Boiling and Mr. Coffin: "As we have indicated in the Committee Report on Employment, Growth,
and Price Levels (S. Rept. 1043, 86th Cong., 2d sess., p. 36, footnote 56), we do not object to removing the
4J4 percent ceiling, if accompanied by the initiation of other basic reforms."
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REPORT
of the economy. In its study of employment, growth, and price
levels, the committee noted that serious deficiencies of market structure frequently impede the prompt change in resource use essential in
a dynamic economy and that these impediments contribute to persistent upward price pressures. Inflationary tendencies and inefficient
resource use are the price paid for not mounting a much more vigorous
attack on these structural weaknesses.
The sources of these weaknesses are varied. Government programs
which subsidize uneconomic production activities include those in
shipbuilding, agriculture, and, through the use of tariffs, in a wide
array of manufacturing. A more efficient economy and one substantially less subject to inflationary pressures calls for progressive
reduction in tariffs, elimination of some business subsidies, and a
thoroughgoing revamping of the Federal Government's agricultural
program to provide such support for farm income as may be necessary
for prosperity and progress in this sector of the economy.
In addition, the Federal Government must substantially increase its
efforts to reduce the extent of market power in the business community
and to prevent the exercise of this power against the well-being of the
economy as a whole. The specific proposals of the President in the
antitrust area, while steps in the right direction, are far too limited to
be of major consequence in improving effective competition.
The basic problem which limits the curbing of market power is that
under the present statutes the courts have insisted upon some direct
evidence of collusion or concerted action to support a finding of antitrust violations. Modern pricing and other practices, however, even
when clearly monopolistic, do not require and do not usually involve
such direct or contractual collusion. In addition, legal delays have
been long, and the resources of the Antitrust Division and of other
agencies responsible for enforcement have been inadequate to deal with
their responsibilities and the importance of the tasks they must
perform.
Within the past few years, the courts appear to be more aware of the
broader economic meaning of size as a factor in market power, even
when this is independent of concerted action. The courts have also
become more critical of the role of mergers on the effectiveness of
competition. I t is to be hoped that these trends will continue.
In addition, however, the Government should take more specific
steps to strengthen our present antitrust policy. Specifically we need
more effective application of antitrust legislation to industries in which
a high degree of market power is possessed and exercised by large
producers, even where no evidence of direct or overt collusion or
conspiracy can be shown.
The Antitrust Division should be substantially strengthened. Even
after recent increases, the funds provided to the Antitrust Division are
less than $4.5 million, much too meager an amount for the functions
it is expected to perform. The professional staff of the Division should
be expanded, and salary levels should be set high enough to prevent
the drain of experienced personnel into private industry.
The Congress should review the policies of the regulatory agencies
in those industries which are granted exemptions from the antitrust
laws. More knowledge of the effects of regulatory practices on
competition in these particular industries is needed.
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1960 JOINT ECONOMIC REPOET
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In particular the 1950 amendment to section 7 of the Clayton Act,
closing the loophole as to mergers through acquisition of assets,
should be extended to apply to bank mergers, and the Antitrust Division of the Department of Justice should continue to have jurisdiction
over enforcement of the act as to bank mergers.
Further, the Bank Holding Company Act of 1956 should be
strengthened to encourage the continuation and growth of our historic
system of independent locally owned banks. Before they approve a
bank holding company's acquisition of stock in a bank, the Board of
Governors of the Federal Reseive System should be required to determine whether the laws of the State affirmatively permit such an
acquisition.
The more serious market power as a source of inflationary strain
and economic inefficiency becomes, the greater is the urgency for
devising new techniques and methods for dealing with it. The
Federal Government should take the lead in trying to make large
industries and unions exercise this power with restraint. The Federal
Government could, for example, bring together in an annual labormanagement conference the leaders of both of these groups so that
they could be given the general economic outlook and informed of the
relation of their actions to the national economic welfare. Such a
conference could result in a useful exchange of views between business,
labor, and Government officials. Over the long run, it might have a
good effect on prices and wages in important industries. Because of
this, we recommend that such an annual conference be started.
Moreover, as we noted in Senate Report 1043, while we recognize
the difficulties and dangers of, and share the presumption against,
Government participation in the price-wage setting process, ther? is a
need, at least on a standby basis, for a factfinding procedure covering
key price and associated wage increases which seriously threaten
economic stability, to be invoked at the discretion of the President,
and to result in the issuance of a report and recommendations regarding the justification and desirability of such proposed increases.
The problem of national emergency disputes between labor and
management also needs further attention. Whatever emergency
legislation is adopted, it must be clearly specified that the stability of
the price level is one criterion to be applied.
In addition, there are numerous actions which the Federal Government should take to increase productivity and improve the structure
of the economy. The major steps are—
1. A program of assistance to chronically depressed areas
should be started. Both technical and long-term financial aid
will be required to help these areas to become self-sustaining and
to help themselves. Where necessary, retraining of workers
should be undertaken.
2. The activities of the various State employment agencies
should be coordinated into an effective national system in which
information about job opportunities and available workers will
be provided to both employers and workers throughout the
country. In addition, the financial burden of unemployment
should be reduced by encouraging a more liberal system of
unemployment insurance, particularly for workers in chronic
labor surplus areas.
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3. Besides general policies designed to strengthen the forces of
competition, special programs to promote small business must be
continued and improved. Small business has brought manyinnovations to the American economy. The Federal Government must see t h a t capital is available to small business, and
should help to protect it against predatory practices.
NOTE.—Senator Fulbright was unable to participate in the hearings or committee meetings on this report. For that reason, the findings and conclusions
herein set forth are neither approved nor disapproved by him.
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COMMITTEE AND SUBCOMMITTEE ACTIVITIES IN THE P A S T Y E A R
The Joint Economic Committee is directed by the law creating it
(Public Law 304, 79th Cong.) to report to the Congress on the main
recommendations of the President's Economic Report and to make a
"continuing study" of the economy. During January and February
of 1959 the committee held hearings and prepared its report on the
1959 Economic Report of the President.
Committee and subcommittee studies announced in that report provided for a broad inquiry into overall economic policies for employment, growth, and price levels by the full committee, and a special
assignment to the Subcommittee on Economic Statistics to examine
the problem of comparisons of United States and Soviet economic
growth.
Subsequently the committee also announced plans for a study of
U.S. energy resources by a Subcommittee on Automation and Energy
Resources and a study of the impact of defense procurement by a
Subcommittee on Defense Procurement.
The work of the full committee and the subcommittees, for the
period March 1959-February 1960, is summarized below.
P R E S I D E N T ^ 1959 ECONOMIC REPORT
Hearings on the January 1959 Economic Report of the President
provided an opportunity (1) for the executive branch to indicate the
economic assumptions and reasoning underlying the President's economic program and to justify major economic policy recommendations; (2) for a limited number of outside experts to set forth their
views on the President's economic analysis and program; and (3) for
the economic interest and research groups to submit their views. The
committee's report on the President's report was transmitted to the
Congress on March 9, the March 1 deadline being extended by unanimous consent. The report included supplemental and dissenting
views of committee members, and materials on the economic outlook
for 1959 prepared by the committee staff (S. Rept. 98, 86th Cong.,
1st sess.)
STUDY OF EMPLOYMENT, GROWTH, AND PRICE LEVELS
Senate Concurrent Resolution 13, 86th Congress, 1st session, passed
March 23, 1959, charged the Joint Economic Committee with conducting—•
* * * a full and complete study of, and investigation into,
the problems of providing maximum employment and an
adequate rate of economic growth, as well as maintaining
price stability and preventing inflation * * *.
A budget of $200,000 was provided for the study and a special staff
recruited to carry out the work, with the assistance of several members
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of the permanent staff. The permanent staff also provided administrative services. In the course of the study the committee heard
nearly 100 witnesses in 9 sets of hearings covering 40 separate days.
Twenty-three special study papers were prepared by outside consultants and the committee staff for use in connection with the special
study. In addition, the special study staff prepared a comprehensive
report setting forth fundamental data and technical analyses bearing
on the problems with which the study was concerned.
The committee's own report on the study of employment, growth,
and price levels, with minority and individual views, was submitted
to the Congress January 26, 1960, and printed as Senate Report 1043,
86th Congress, 2d session.
SUBCOMMITTEE ON ECONOMIC STATISTICS
The Subcommittee on Economic Statistics is composed of Representative Richard Boiling, chairman; Representatives Hale Boggs,
Frank M. Coffin, and Thomas B. Curtis; and Senators John Sparkman, J. W. Fulbright, Prescott Bush, and Jacob K. Javits.
The subcommittee in accordance with instructions from the full
committee (S. Rept. 98, 86th Cong., 1st sess., p. 20) conducted a study
of "Comparisons of the United States and Soviet Economies." Expert
witnesses prepared 33 papers on 9 subject areas covering comparisons
between the 2 economies. These study papers were released early in
the fall and the authors then discussed their papers in a series of hearings held from November 16 to 20. The hearings began on Friday,
November 13, with testimony by the Director of the Central Intelligence Agency. The summary and policy implications of the study
were covered by the concluding panelists' papers and in the discussion
in the final session of hearings.
SUBCOMMITTEE ON AUTOMATION AND ENERGY RESOURCES
The Subcommittee on Automation and Energy Resources is composed of Representative Wright Patman, chairman; Representatives
Henry S. Reuss, Clarence E. Kilburn, and William B. Widnall; and
Senators Joseph C. O'Mahoney, John F . Kennedy, and John Marshall
Butler. The subcommittee held hearings October 12 to 16 on the
anticipated needs and adequacy of U.S. energy resources and the impact of technology on the production and efficient use of the energies
required for sustaining economic growth. Witnesses were heard from
research organizations, Government bureaus and the oil and coal
industries.
SUBCOMMITTEE ON DEFENSE PROCUREMENT
The Subcommittee on Defense Procurement is composed of Senator
Paul H. Douglas, chairman; Senators John Sparkman, Joseph C.
O'Mahoney, and Jacob K. Javits; and Representatives Wright Patman, Richard Boiling, Thomas B. Curtis, and William B. Widnall.
In announcing hearings on the impact of defense procurement which
were held January 28 to 30, 1960, the chairman explained that the
subcommittee would not be concerned with questions of military
strategy, weapons, size of forces, etc.—nor with the broad problem
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of the overall economics of disarmament—but with the purely economic and budgetary issues involved in the way the Nation spends
over two-thirds of its budget. The witnesses heard were from the
agencies of the Federal Government with primary responsibility for
procurement and disposal of defense materials, and from the Hoover
Commission task force members.
STAFF PARTICIPATION IN MEETINGS WITH OUTSIDE GROUPS
In addition to conducting formal studies and arranging hearings for
the committee, the staff participated in discussions of economic
problems and research techniques with outside groups. The following list of meetings illustrates the nature of these activities in which the
staff took part during 1959: Economic workshop, West Virginia
University, annual sessions of the National Tax Association, Investment Bankers Association, Mortgage Bankers Association of America,
the National Bureau of Economic Research, National Industrial
Conference Board, Federal Statistics Users' Conference, American
Economic Association, American Statistical Association, the National
Association of State Tax Administrators, American Society' for
Public Administration, and the National Planning Association;
conferences with groups of foreign economists brought here under
the sponsorship of the State Department and the International
Cooperation Administration; seminars of the Industrial College of
the Armed Forces; meetings of local chapters of the American Statistical Association; meetings of the Brookings Institution, the
Chamber of Commerce Committee on Business Statistics, and other
meetings of business groups, civic organizations, and university classes.
COMMITTEE PUBLICATIONS
In the period March 1959 through February 1960 the Joint Economic Committee and its subcommittees issued 48 publications.
Over 250,000 copies of current and previous committee publications
were distributed during the year to fill individual requests. Committee publications are also on sale by the Superintendent of Documents. In the past year, individual copy sales and quantity orders
of committee publications, current and past, have exceeded $30,000.
This figure does not include the 8,400 paid subscriptions for the
monthly publication of Economic Indicators. A checklist of committee publications will be found at the back of this report.
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COMMITTEE
AND
SUBCOMMITTEE
PLANS
FOR
THE
COMING
YEAR
FULL COMMITTEE
The relationship between monetary and fiscal policy actions in the
postwar period and the objectives of the Employment Act.—Chapter 8 of
the "Staff Keport on Employment, Growth, and Price Levels" discussed some of the economic consequences of the postwar trend with
respect to the relative emphasis on fiscal and monetary policies.
The manner in which Federal fiscal and monetary actions are combined in seeking the Employment Act's objectives appears to be at
the heart of some of the major current issues of public economic
policy. The staff, therefore, is directed to inquire further into the
changes in the combination of fiscal and monetary policies which have
occurred in the postwar era and the consequences of such changes
for the rate of growth of the Nation's productive capacity, for stability
in the rate of employment and output, and of the price level, and for
the distribution of income.
Tabulation and summary of questionnaires submitted by 17 security
dealers.—In connection with the committee's hearings conducted as
part of the study of employment, growth, and price levels, the 17
firms dealing in Federal Government securities were asked to submit
detailed information on a number of aspects of their business over the
last 10 years. The assembly and submission of this information is
now nearly completed. The designated staff is directed to tabulate
and summarize the data from the dealers for committee consideration,
in accordance with committee rule 23, in a manner which will not reveal
the identity of any individual, partnership, corporation, or entity.
Study of governmental subsidies.—The committee will begin a broad
inquiry into the extent and impact of Federal Government subsidies,
direct and indirect. The subject is closely related to the objectives
of the Employment Act, in part (1) because of its relation to fiscal
and tax policies as they relate to economic stability and growth, and
in part (2) because subsidies are a part of the "plans, functions, and
resources" of Government which can contribute to—or through
unplanned, perverse behavior partly negate—efforts to promote
maximum employment, production, and purchasing power. The
growth of our subsidy pattern has been piecemeal and gradual and
a listing and reexamination of aggregates and priorities seems to be
in order although there is no doubt that many items will be found to
have their sufficient reasons in public policy.
The study will be carried out initially by calling upon the staff to
find out what subsidies are being granted, to estimate their amounts,
and to summarize their origins and rationale. This will be done without any attempt at appraisal of desirability or relative merits. Such
a study must rely primarily on an analysis of the budget to estimate
which subsidies are being paid but we must also be alert for items of
omission which give rise to identifiable special group benefit.
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Decision as to the committee's further action, including the possible
hearing of advocates and critics, will be postponed until members of
the committee have had an opportunity to study the materials gathered by the staff. The study is a long-range one and no schedule for its
progressive stages can be set at this time.
I t is worth noting at this point, however, that a formidable problem
of such a study is one of differentiating or at least of arriving at a
working basis of precisely what items should be brought within the
purview of the inquiry. The directive to the staff takes notice of the
criteria set forth in the dictionary: To subsidize is "to aid or promote
as a private enterprise with public money"; a subsidy is a "governmental grant to assist a private enterprise determined advantageous
to the public." The problem and scope will be made easier if it is
recognized that the characterization of any governmental assistance
or grant as a "subsidy" is not to stigmatize but to prepare the ground
for examination of justification upon which of course opinions may
well differ. Whether a given subsidy is to be regarded as desirable
or undesirable is for the people as a whole to determine through
democratic political processes. The ultimate decision, it may be
hoped, can be made upon some more profound basis than short-term
self-interest of beneficiaries.
Economic implications of alternative agricultural policies.—The last
special work by the Joint Economic Committee in the field of agriculture was the compendium, hearings, and report on "Policy for
Commercial Agriculture" done by a Subcommittee on Agricultural
Policy in 1957.
Since that time the Senate Agriculture Committee has arranged
for a staff analysis of probable levels of production, prices, and farm
income in 1960-65 if production controls were removed and price
supports were lowered to market levels. This report, begun last
M a y by the technical staff of the Department of Agriculture, with
the counsel of an advisory committee of agricultural economists from
the land-grant colleges, was published January 20, 1960, as Senate
Document 77.
Starting from this staff study for the Senate Agriculture Committee
which covers the range of what might be expected under conditions
approaching a free market, the Joint Economic Committee will
explore the economic implications for what appear to the the most
feasible alternatives to such a free market policy. The committee's
concern with the need for such a study arises from the projections
in this report which indicate production would continue to rise during
1960-65 in spite of falling prices and that realized net farm income
of farm operators by 1965 would fall about 40 percent below 1955-57
levels—46 percent from 1958 levels.
Several leading agricultural economists will each be asked to
prepare a paper on one of the alternatives proposed. These papers
will synthesize the latest research results and best professional
thinking on t h a t particular alternative, for use of the committee in
reviewing the economic implications of agricultural policy proposals
next year.
While final decision on the exact alternatives to be studied would
await review and counsel of an advisory panel to be set up from
the agricultural colleges for t h a t purpose, these alternatives would
probably include—
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(1) Unrestricted production and marketing except for a
conservation reserve of about 60 million acres.
(2) Unrestricted production and marketing except for production controls on key basic crops such as tobacco, cotton, rice,
and wheat and supplementary payments to family farmers under
specified income situations.
(3) Limited Government controls and price supports for feed
grains and livestock, with improvements in existing production
controls and price supports for wheat, cotton, rice, and tobacco.
(4) Comprehensive supply management and price supports.
SUBCOMMITTEE ON ECONOMIC STATISTICS
Review of Economic Indicators and preparation of 1960 edition of
Supplement to Economic Indicators.—The staff under the direction of
the Subcommittee on Economic Statistics, and in consultation with
the Council of Economic Advisers and its staff, is directed to conduct
one of the periodic reviews of the committee's monthly publication,
Economic Indicators. These reviews are undertaken to insure the
timeliness of the indicators and its maximum usefulness to the Congress and the Executive, as well as the 8,000 persons who subscribe
to Economic Indicators monthly.
I t is also time for another issue of the Historical and Descriptive
Supplement to Economic Indicators, the last one being prepared in
1957. This publication provides current descriptions of the uses and
limitations of the statistical series published in the monthly Indicators
and gives data for back years not available in the monthly issues.
The staff is asked to work with the Council of Economic Advisers'
staff and the various statistical agencies in preparing a 1960 edition
of the Historical and Descriptive Supplement to Economic Indicators.
SUBCOMMITTEE ON AUTOMATION AND ENERGY RESOURCES
Bringing previous hearings on automation up to date.—The Subcommittee on Automation and Energy Resources is asked to continue its
study of the impact of automation and technological change upon
economic stability and growth.
The committee, in its report to the 84th Congress (No. 1308),
pointed out that the subcommittee's investigations at that time had
demonstrated that the problems of automation are by no means
negligible or settled and that the committee considered it desirable
to review periodically the progress of technological change. The
hearings and report of October 1955 were followed by other hearings
in December 1956, November 1957, and, with a special emphasis on
energy resources, in November 1959. The plans of the subcommittee
for the coming year involve, first of all, a directive to the staff, acting
under the guidance of the chairman, to solicit, through a questionnaire
or other means, information as to developments during the interim
since earlier hearings, from the persons or organizations who appeared
at these previous hearings. The objective will be essentially that of
bringing the previous hearings up to date and getting the views of
labor leaders, businessmen, and engineering experts as to the problems
of automation and technological change in the light of developments
during the interim.
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The results of this inquiry will, it is believed, give the subcommittee
a solid foundation upon which to judge what further needs to be done
for keeping the Congress informed and keep the subcommittee in a
position to make recommendations for policy if the broad-gaged
objectives of the Employment Act of 1946 are to be met.
Further study of energy resources.—The hearings of our Subcommittee
on Automation and Energy Resources, under the chairmanship of
Representative Wright Patman, studied the possible conflicting
relationship and the question of whether there was lack of integration
of Government policy upon this important element in our economic
health and growth.
While the subcommittee concluded that there was no present
occasion for concern about an early shortage in the energy sources
necessary to sustain growth, testimony convinced the subcommittee
of the desirability of further study. There has been substantial
government intervention at both the State and Federal level . The
variety and extent of government regulation, coupled with a complex
of relationships, needs considerable study. The partial regulation of
jriatural gas prices and transmission, interstate and intrastate; the
insulation of domestic oil prices from foreign competition through
import controls; production controls on oil and gas; the direct and
indirect subsidies being given to atomic commercial energy; and the
division of regulatory responsibility among a number of agencies all
suggest the desirability of further careful scrutiny to make sure that
the Government itself by its policies is not adding unnecessarily to the
economic complexities and uncertainties.
The subcommittee's immediate focus for pursuing the inquiry into
the adequacy of energy resources will accordingly be directed largely
to a consideration of this division of regulative responsibility as a
case study in the relationship of government to the elements involved
in promoting maximum employment, production, and purchasing
power.
SUBCOMMITTEE ON DEFENSE PROCUREMENT
Study of the impact oj defense procurement.—The immediate plans
of the subcommittee call for completion by the staff of their report
vo the subcommittee on the "Impact of Defense Procurement." The
staff will also compile for presentation in the printed hearings, various
tabulations and analyses requested during the hearings.
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S U P P L E M E N T A L VIEWS OF R E P R E S E N T A T I V E
PATMAN
WRIGHT
The committee's report is, on the whole, a good one. Manifestly,
it is an extremely important document, because it points the way to
solutions of some of the gravest problems of our times. Yet there
are several points on which the report leaves me dissatisfied. Be it
said, however, that my dissatisfaction is over matters which have
been omitted, or only incompletely considered, more than with the
findings which have been made and solutions which have been
suggested.
TAXES
The committee's report gives first and foremost attention, as it
properly should, to the central problem of our time. This is to find
a reasonable and promising policy of government to be substituted
for the unsuccessful policy of manipulating credit and interest rates
in an effort to achieve a desirable degree of stability and progress in
the Nation's economic affairs, such as is described in the Employment
Act of 1946. The committee's report does an adequate job of pointing
out the unwisdom of relying upon "monetary policies" for this purpose.
Indeed, the committee's report leaves no question that these policies
have created great injustices and are leading to certain disaster.
As an alternative way of achieving when the tight money and high
interest policy has failed to achieve, the committee recommends the
use of fiscal policies, particularly flexible tax rates. I agree that this is
a most promising suggestion. Yet it is on this subject of taxation that
the committee's considerations seem most incomplete. The committee has not really explored the tax structure.
Furthermore, while it recommends several specific changes in the tax
laws, seemingly of a random sort, it has not suggested any specific way
for achieving the flexibility in tax rates which constitutes its central
program for maintaining economic stability. This omission is unfortunate in all respects. Members of Congress are not given sufficient
specificity by which they may appraise the program being recommended. Furthermore, some specifications are necessary to make
the program politically salable, and this is a matter of no small
importance. Any program the committee recommends, no matter
how manifestly sound it may be, must be sold, politically, in competition with a quite formidable sales effort being made on behalf of the
tight money and high interest policy. The vested interests supporting
this policy have much at stake, and the commercial media of
communications are highly resistant to carrying any word or fact
which tends to discredit the policy. Thus, if the committee's recommendations are to have any practical effect, they must be sufficiently
developed and in a form which the candidates for national office can
take directly to the people in the political campaigns this fail.
I t would seem to me that a practical and understandable program to
accomplish the committee's recommendations must take account of
the following:
51504—60
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First, let us consider the primary emphasis in the committee's
recommended policy, which is on reducing tax rates, temporarily,
when the first signs of recession appear. If tax reductions are to be
effective in combating recessions, such reductions must be made
promptly, which means that decisions must be reached more quickly
than the legislative processes normally permit. This being true, I
would urge that the Congress enact general legislation giving the
President discretionary powers to reduce the tax rates on the incomes
of individuals by a uniform percentage, whenever he finds that
recessionary tendencies are developing.
But what of the opposite problem? What are to be the means of
restaining inflationary pressures in boom periods? The committee's
report has taken the position that substantial reductions should be
made in the public debt at such times, and that such reductions
would provide both effective and just restraints against monetary
inflation. With this I agree. But nothing is said of raising tax rates
beyond present levels in order to accomplish substantial reductions in
the public debt. Clearly, however, such increases would be necessary
for substantial debt reductions in such times as at the present, unless
there are to be reductions either in essential public services or our
defense preparations. The committee does not recommend the latter,
nor would I.
Proposals for increased taxes are, of course, never very popular.
Yet it seems to me that the American people would readily understand the advantages of such a proposal if these facts were made
clear to them:
First, they are already paying an anti-inflationary tax. At least
they are paying what is for all practical purposes a tax—in the form of
high interest rates—on the theory that this helps to check inflation.
The theory has not been able to stand up under examination; but as
to the fact of the "tax," there is no question. At times this "tax"
is half hidden, that is true, but it is reaching very far into the pocketbooks of all except the very wealthy.
Second, the high interest " t a x " which we all pay to combat inflation has very bad effects and it does not accomplish the good
effects which are claimed for it. The bad effects are these:
(a) High interest is a tax not on the fruits of economic activity
but a tax on economic activity itself. As the committee's report
clearly points out, the high interest and tight money policy causes
unemployment, causes nonuse of productive capacity, and retards
the Nation's economic growth. This is bad from the standpoint
of our present and future ranking among the nations of the
world, even if we felt that we are already so comfortably situated
that we do not need to produce more of the material things of
life. The Russian economy has been growing, in recent years,
at a rate almost three times as fast as our growth.
(b) The high interest " t a x " is a regressive tax. The burden of
it falls not on those most able to pay, but upon those least able
to pay. I t thus cuts down on the consumption of the goods and
services which the Nation already has the capacity to produce.
•(c) Finally, the income from the high interest " t a x " is not
., going to pay off any of the Federal debt. I t is only going to
fatten the incomes of the financial corporations and the wealthy
families. Actually, the high interest rates are adding to the
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Federal debt. They are increasing the Treasury's cost of meeting interest charges so greatly that the Treasury is going more
into debt to meet the interest charges.
I t should be clear by now that I am not suggesting that the American
people be offered a proposal that they carry an increased burden.
On the contrary, I am suggesting that they be offered a proposal t h a t
they pay more in taxes in prosperous times, and pay less in direct and
indirect interest charges. These interest charges actually amount to
a great deal more than we would need to pay in taxes in order to make
substantial reductions in the debt and to provide a much better restraint against inflation than the high-interest program provides.
In other words, I am suggesting that the President be given also the
power to raise tax rates on individual incomes, uniformly, and at his
discretion, as a means of combating inflation.
In order to assure that the American people would not be subjected
to both high interest and increased tax rates, however, other legislation
would be necessary to fix the responsibility of the Federal Reserve
System, and I shall discuss this at a later point. So much for my ideas
on a specific program for providing the flexibility in tax rates which the
committee has recommended as an alternative to the high-interest
and tight-money policy.
As to the specific recommendations which the committee report
makes to correct tax inequities, however, I feel that this subject of
tax inequities has not been sufficiently considered. To illustrate, the
committee's report recommends repealing the dividend-received
credit and exclusion provision, but it is silent on the notorious ways
by which corporate executives and employees escape taxes through
stock option schemes. Similarly, the committee's report recommends
reductions in depletion allowances for oil and gas, apparently only for
the reason that large amounts of money are involved, without considering the practical consequences of the depletion allowances on all
the other commodities and resources for which such allowances are
provided.
Finally, in order to recommend a program for correcting t a x
inequalities, I believe that the committee would need to consider first
and foremost the impact of Federal taxes on our business structure.
There is a great deal of evidence which suggests that the giant corporations are in reality bearing little or none of the tax burden, while
the smaller and more competitive business firms are, on the other
hand, being taxed out of existence. If I am right about this, the
Federal tax structure, more than any other factor, is bringing about
the concentration of business which the committee deplores, and
bringing about the breakdown of the competitive price system which
the committee sees as the principal cause of the so-called inflation.
NEED TO PUT THE FEDERAL RESERVE'S HOUSE IN ORDER
The committee's report strongly recommends that the Federal
Reserve adopt a less restrictive credit policy. I t also makes a number of good recommendations for changes in Federal Reserve practices which would also have the effect of reducing interest rates.
These are in addition to its recommendations for "flexible" tax
rates, which, as I have discussed, seems to require an assurance that
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the American people will not be burdened with both high taxes and
high interest rates. Yet there are no recommendations for legislation
which would assure that the Federal Reserve will not go its own
determined way, without respect to what the American people may
wish or the Congress may recommend.
The Federal Reserve authorities have assumed a posture of ''independence" from the rest of the Government. Further, the President
and other administration officials have lent support to the idea that
this agency is beyond the reach of the voice of the people.
Most of the confusion arises from the fact that the member banks
of the Federal Reserve System have invested a relatively small amount
of money in what is called "stock" in the Federal Reserve banks.
This has lead many bankers to believe that they own the Federal
Reserve System. Consequently, it has led the banking community
to urge policies which are based on the premise that the Federal
Reserve System should be operated in ways that produce maximum
profits for its alleged "owners"—the banks.
This has led to confusion all around. The Federal Reserve banks
themselves write letters to the public and distribute expensive booklets
which say in one way or another t h a t the Federal Reserve banks are
not "owned" by the Government, that their employees are not Government employees, and, boastfully, that the Federal Reserve banks
receive no support from the Government.
The Federal Reserve banks are not owned by the private banks.
They are owned by the Government of the United States. The
so-called "stock" in the regional banks is not stock in any normal
sense of the term. As the law makes clear, it cannot be transferred,
sold, traded, purchased voluntarily, or used as collateral. I t does not
represent an equity in undistributed profits, carry voting rights, or
share (beyond a fixed 6 percent) in profits.
The funds which have been invested by the banks in this so-called
"stock" should be repaid, and this so-called "stock" should be canceled. Only approximately $390 million has been invested in this
"stock" and this is a pittance compared to the assets of the Federal
Reserve System. I t has no need whatever for the money. Repaying
it would, therefore, save the U.S. Treasury an unnecessary interest
charge of 6 percent per annum or about $24 million a year. And
most important of all, canceling the "stock" would remove the basis
of confusion concerning the "ownership," and hence clarify the
Federal Reserve's responsibility for determining credit and interest
policies for the whole economy.
I n the interest of further fixing political responsibility for the
Federal Reserve System's political decisions, the Federal Open Market
Committee should be abolished and its duties transferred to a board
or a committee composed entirely of members appointed by the President and confirmed by the Senate.
At present the top policymaking body of the Federal Reserve System
is not the Board of Governors; it is the Federal Open Market Committee. And 5 of the members of this 12-man Committee are
selected by representatives of the private banks. Manifestly, the
private banks should not be permitted to select members of a public
body which is to determine credit and interest-rate policies. The private banks have too much private interest in the policies to be
determined.
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There are several other long overdue reforms in the Federal Reserve
System which, when made, will save unnecessary expenses and reduce
the System's burden on the taxpayers. These require legislation,
either to make the reforms possible or to make them likely. They are
as follows :
(1) The Federal Reserve System should be required to submit to
annual audits and to the normal audit control of the Comptroller General of the United States. The System receives its income—or substantially all of its income—in the form of interest payments from
the U.S. Treasury on the huge amount of U.S. bonds and other obligations which the System is holding. This provides an income vastly
in excess of what the System needs for all purposes. The System pays
its expenses out of this income—most of which are incurred in providing free services to the private banks—and then it returns what
remains to the Treasury. At least the System returns 90 percent of
what remains; it puts the other 10 percent in "surplus" funds.
In the process of meeting expenses, however, the Federal Reserve
banks assume a strange variety of expenses, and, in general, they
spend the taxpayers' money in a generous and freehanded way.
The unusual expenses include such things as providing free office
space for private associations, paying "dues" in private associations,
meeting banquet and entertainment expenses, handing out "gifts" to
nonbank employees, and paying for the college educations of youths
who may or may not become bank employees.
The Federal Reserve authorities have tried to defend such freehanded spending of public funds on the ground that these are customary practices of business firms in the areas where the banks operate.
Yet the Federal Reserve banks have no more right to spend public
funds in these ways than the local post offices have a right to spend
public funds for such purposes. A proper audit by the General
Accounting Office would promptly put a stop to such improper
expenditures. I t would, moreover, provide a check and a safeguard
on the possibility of mishandling of billions of dollars of Government
funds and Government securities.
(2) At least $15 billion of U.S. Government securities which the
Federal Reserve System is holding should be returned to the Treasury
for cancellation. In order to put to rest the argument that such a
transfer of assets from one Government agency to another would put
the Government's "books out of balance" and thus " b a n k r u p t " the
Government, I have proposed that the Secretary of the Treasury issue
to the Federal Reserve, in exchange for these interest-bearing obligations, a non-interest-bearing, nontransferable note payable on demand. This would keep the books in balance.
Cancelling $15 billion of the approximate $27 billion of Government
securities which the Federal Reserve now holds would make it unnecessary for the Treasury to pay interest charges on this amount of
debt in the first place. I t would thus enable the Treasury to operate
on a lower level of debt, which would mean less cost to the taxpayers
in interest charges.
Canceling $15 billion of the Federal Reserve's securities would
serve another good purpose, in that it would safeguard against the
possibility that the Federal Reserve System may transfer a substantial share of its holdings of Government securities, on a cost-free basis,
to the private banks.
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Early in 1957, the American Bankers Association made a "report"
to the Board of Governors of the Federal Reserve System recommending a program whereby the Federal Reserve would transfer to the
private banks approximately $16.8 billion of U.S. Government securities by mid-1961. The proposed transfer was to be made up of $9.8
billion of securities which the Federal Reserve already held at mid1956, plus another $7 billion which it was expected to acquire by
mid-1961, in order to provide for the normal increase in the money
supply, assuming that no part of the American Bankers Association
program was accepted. The proposal, in a nutshell, was that the
Federal Reserve issue regulations reducing reserve requirements of the
member banks, and, simultaneously, "sell" its securities in the amounts
suggested. This would have meant that the Federal Reserve would
"sell" its securities in the open market at the same time it was giving
the member banks the power to create the money needed to "purchase" the securities. The Federal Reserve authorities smiled favorably on this proposal and recommended legislation by which it could
have been carried out—all of which suggests that an additional
safeguard would not be out of order.
(3) Funds being held in the Federal Reserve's surplus account and
in its "other capital account" should be returned to the Treasury, so
that they may be used for debt reduction. The Federal Reserve
System has no more need for carrying surplus funds, either in a surplus account or in an "other capital" account, than does the Post
Office Department—in fact, considerably less so. At the end of 1959,
these items amounted to more than $1.1 billion.
Neither item serves any purpose other than to help preserve the
fiction that the Federal Reserve System is a private business organization and should, therefore, make public reports which show it in a
favorable "surplus" position, such as is expected of successful private
business organizations.
The System's authorities themselves recognize this. Since the end
of 1959 they have "voluntarily" transferred a part—$266 million—of
these unneeded surplus earnings to the Treasury Department.
TAX-EXEMPT STATUS FOR SECURITIES SHOULD BE ELIMINATED
The haven for tax avoidance which tax exempt securities provide
and the consequent loss of revenue to the Federal Government have
been neglected far too long. This committee should undertake on its
own part, or at least encourage and recommend to other committees,
that a study should be made of the alleged savings to State and local
governments from the tax exempt privilege.
I t seems likely that the supposed saving in interest cost to local
governments actually does not compensate, under today's conditions,
for the tax loss suffered by all taxing jurisdictions taken collectively.
Until we have the facts which such a study would bring out, there is
of course a natural reluctance on the part of the local governments to
give up the tax exempt feature.
The immunity of State and municipal securities from Federal
taxation, it will be remembered, is not an express provision of the
Constitution. I t has, indeed, become a serious problem only in comparatively recent times. The large and increasing amount of State
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and municipal bonds outstanding coupled with high Federal tax rates
on corporations and high marginal rates on individual income have
made it an increasingly serious tax loophole.
An example of questionable situations which arise in permitting the
continuance of this tax exempt feature is illustrated by the case of the
commercial banks. They now own approximately $17 billion of taxfree obligations purchased with "money" which the commercial banks
literally created out of nothing, under our fractional reserve banking
system.
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S U P P L E M E N T A L VIEWS O F SENATOR J O S E P H C.
O'MAHONEY
If it be true, as cannot realistically be denied, that the natural
resources of the United States have not been exhausted, and that the
skills of the inhabitants of the country as well as available and potential technological facilities are likewise still at hand, we can promote
economic growth and economic growth is our greatest goal.
Despite all the complacency that is encouraged among our people,
we cannot possibly carry the burdens which world leadership imposes
upon our shoulders unless we immediately make up our minds to
establish a new high record of economic expansion I t will be destructive of all our hopes and of humanity's needs if we allow our eyes to
be blinded and our comprehension to be dulled by the false cry of
"Peace and Prosperity."
We do not enjoy peace and prosperity. Instead of peace we are
preparing for an imminent nuclear war that could mean the suicide of
mankind.
In our foolish and exaggerated estimate of our industrial capabilities, confidently imagining that, having won two world wars, no people
or combination of peoples could come within hailing distance of our
prowess, we have allowed the totalitarian Russians, whom we regarded
as a backward people, to take the lead in the production of missiles
and the exploration of space. Under the leadership of the President,
we seem tempted to brush the missile gap aside and console ourselves
with the thought that Soviet Russia has no intention to use the missiles
it has produced. There can be no safety for our people in building our
policy on anything less than bald facts which cannot be denied.
Among the facts which we know are these:
1. We are living in the 20th century with scientific tools which
were beyond imagination 50 years ago.
2. Ours is a government founded upon what the authors of the
Declaration of Independence called certain inalienable rights of
men which they had received from their Creator.
3. This Government was instituted upon the principle laid
down in the Declaration that governments among men derive
"their just powers from the consent of the governed/'
4. This Government is now not only engaged in an arms race
with Soviet Russia but also in an economic struggle which the
dictator of that nation is now waging against us throughout the
whole world. Witness the travels of Eisenhower, Khrushchev,
and Mikoyan.
5. Our military leaders are in disagreement among themselves
as to whether or not we have allowed ourselves to fall into second
place in the arms race.
6. Economically, we are carrying the greatest public debt in
history, the interest upon which, the President tells us in his
budget message, will in fiscal year 1961 rise $200 million to $9.6
billion, a payment which, he tells us, will "represent 12 percent
of budget expenditures."
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7. In his Economic Report, the President tells us that the average maturity of the public debt had fallen to 4 years and 4 months
a t the end of December 1959 (p. 43) and, in recognition of this fact,
has requested the Congress to remove the ceiling on Federal
securities with maturities longer than 5 years.
8. Facing this fiscal problem, the President has requested
Congress to authorize the expenditure in 1961 of over $4 billiou
for foreign aid, military and economic, on the ground that for our
own security we must provide the weapons of war to peoples who
cannot arm themselves, and to promote the economic status of
underdeveloped peoples who cannot provide for themselves and
who are not receiving economic aid from our Western allies but
some of whom are being offered economic aid by Soviet Russia.
To my mind, this array of facts leaves us with only one conclusion;
namely, that even if Dictator Khrushchev has no intention of using
his capabilities to launch a military attack upon us, it is our primary
duty now to advance our own economic position. The United States
cannot carry the international burden which it has assumed unless it
deliberately and consciously launches a program to promote its
economic status as a nation and the economic status of the people
who constitute the rank and file of our population.
This we cannot do by a policy of drift or by acting as though we
were not living in the middle of the 20th century.
We must recognize that we are living in a new era and that the
Congress must exercise the power vested in it by article I, section 8, of
the Constitution to regulate commerce with foreign nations, and
among the several States. Our commerce is not being regulated
suitably to the new era but according to the habits and forms into
which we fell in years gone by when the bulk of our commerce was
carried on by individuals.
Now individuals exercise little or no power over the commerce on
which our economy is based. Far from that, it is dominated by the
concentrated corporations created by the States from which the
Constitution took the power to regulate interstate and international
commerce.
T h a t this concentration of economic power is the greatest obstacle
to a free government based on the consent of the governed is well
recognized both by the President in his Economic Report and by the
Joint Economic Committee in its report, for both the legislative and
executive branches of the Government recognize that the merger of
gigantic corporations promotes the concentration of economic power
in private hands. In the face of this fact, Congress has not yet passed
the little bill which has been pending before the Senate for three
Congresses, endorsed by President Eisenhower and the Department
of Justice, to require corporations to give premerger notice to the
Government.
I t is folly to think that the Government can solve the economic
problem by which it is confronted so long as it fails to establish national
standards of responsibility and power for the gigantic corporations
which are, in fact, collective economic states and which have taken
over the real regulation of our national commerce.
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MINORITY VIEWS
We regret that again the majority in its choice of language in setting
forth its views on the President's Economic Report for 1960 has made
it impossible for the minority to join in the areas where there is agreement and to point up clearly where there are fundamental disagreements. We believe that one of the purposes of a committee report
should be to bring out fairly where there are honest areas of disagreement and as clearly as possible pinpoint the different assumptions of
fact or argument that bring about this disagreement.
We believe that the programs outlined in the President's Economic
Report, set forth in the appendix to those views, will achieve reason*
ably the objectives of the Employment Act in 1960. On this point
we are in basic disagreement with the majority's views.
THE DEFENSE BUDGET
We believe that decisions about the volume and character of defense
procurement should be made on the basis of judgments about the
Nation's long-term military needs. They should be separated from
shortrun budgetary considerations. On this point we and the
majority are in agreement with the President's view.
We decry the insidious manner in which the majority throughout
its report tries to create the impression that the President has at any
time, and particularly in the 1960 Economic Report, held to a different
viewpoint.
Let the majority disagree, inexpert in this field by their own admission, with the President on whether his judgment is correct about the
adequate provision for the Nation's long-term military needs if they
wish, but there lies the issue, if any, not in the objectives. We
believe that if more needs to be done in defense it can be done without
endangering our economy, if proper policies are followed. On this
point we and the majority are in agreement with the President,
although we believe there is considerable disagreement between the
majority and the minority over what qualify as "proper policies."
ECONOMIC GROWTH
We disagree with the majority's conclusion—which they reached,
it is alleged, as a result of the committee's recent comprehensive investigation of employment, growth, and price levels—that there was
a "slow r a t e " of growth in the economy in " t h e recent past." We
again call attention to the inexcusable juggling of economic figures
on the part of the majority in its recent report to try to picture a slow
Tate of economic growth as measured in G N P during the Eisenhower
administration. Taking the period 1954 projected through 1960,
using the figure of $510 billion G N P for 1960, the growth rate was
3.6 percent per year, substantially above the historic annual average
of 3 percent. This period is at least a little more comparable to the
period 1947-53 which the majority selected arbitrarily to demonstrate
the growth under part of President Truman's years of part-time
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peacetime economy. If the majority insists on continuing its nowdiscredited "numbers game," they should be reminded that from
1945 to 1946, the economy showed a loss in growth of minus 10 percent, and losses in growth for the succeeding 3 years, measured from
1945. Actually, in comparing periods in which the Nation is at peace,
years of war, such as 1945, should be excluded. Similarly, the years
1950-53 should be excluded from any attempts to judge economic
growth, maximum employment, or price stability in a peacetime
economy inasmuch as these are Korean war years.
The majority by its constant disregard of the differences between a
wartime and peacetime economy is certainly courting the charge that
it cannot distinguish between war and peace.
I t is well to remind the majority that the great depression of the
1930's was overcome by the United States becoming the "arsenal of
democracy" and moving into World War I I rather than through any
peacetime economic policies of the New Deal. This should make
them more cautious in trying to apply their depression economics to
the problems of the 1960's.
We agree with the majority that we should strive to better our
rate of growth, but we would warn them and all our citizens to beware
of engaging in a numbers game based upon G N P as an accurate measure of economic growth. Indeed, as our committee studies forcefully
revealed, G N P is a very limited measuring device of sound economic
growth, particularly short-range G N P figures. Such items as research
and development, education, increased consumer choice, and leisure
time from which spring future sound economic growth, do not show
up very strongly in G N P figures while underdeveloped nations concentrating upon increasing their physical capital plant from moderate
beginnings show startling G N P percentage increases during their maturing period.
COSTS OF GROWTH
Furthermore, we point out that rapid technological advancement
(real economic growth) brings in its wake increased frictional unemployment. I t also brings in its wake increased real costs resulting
from obsolescence of human skills and machinery and from the recoupment of the funds invested in the research and development which has
enabled the growth to come about. 1 We have an example in the increased frictional unemployment in our rural areas today which
resulted from the extraordinary technological advancement and economic growth in American agriculture. Do we indeed want to increase the already rapid rate of economic growth in agriculture until
we have been able to cope with the frictional unemployment which
has been created? Do we want to increase the already rapid rate of
technological growth rate in the field of drugs and hospitalization
until we have been able to cope with the cost problems which already
confront our citizens because of the rapid growth?
Furthermore, as we advance further in technological economic
growth the capital investment required to provide jobs for our people
increases rapidly (this is aside from the training costs involved in
preparing the worker for the new job). Testimony before our comi Senator Javits notes as follows: " I do not believe, nor do I think the minority intends to imply, that any
substantial amount of unemployment—frictional or otherwise—is an inevitable concomitant of our economic system. That amount of unemployment which will exist under full employment conditions due to
technological advances must be covered by such provision that the workers concerned will be protected
against being disadvantaged by unemployment over which they have no control. If such unemployment
is a necessary characteristic of our private economy, it must not be at the expense of the worker."
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mittee reveals that today $16,000 of capital investment is required
per new job. One of the basic factors of our recent and present unemployment is the high incidence of unemployment in the unskilled
and semiskilled sector of our work force and the strangely concomitant
labor shortage in many of the skilled areas. Also to be noted is the
increasing switch from blue collar to white collar worker in the manufacturing sector of employment, indicating a demand for new skills
as we move ahead technologically.
MORE RELIANCE ON FISCAL POLICY
We believe that in the interests of a higher rate of growth we must
place greater reliance on fiscal policy. This includes larger budget
surpluses in prosperous periods than we have had and a tax structure
which is more equitable and less a deterrent to growth. We also
believe there is continually room for re-ordering some of the priorities
in Federal expenditures programs to provide the progress which
stimulate growth and to cut back and eliminate those programs or
subsidies which support inefficiency in the economy. On these points
we and the majority agree substantially with the President's report.
However, there are obviously substantial disagreements between the
majority and the minority about what constitutes "equity" in taxation
and in evaluating Federal expenditure programs.
We believe that if we had a more effective fiscal policy along the
lines outlined in the preceding paragraph we could have and should
have a less restrictive monetary policy. We agree that the money
supply should grow in line with real economic growth. On these
points we and the majority are in agreement with the President's
report.
We believe that within this framework interest rates should be
expected to fluctuate in response to various influences, including the
evenness of growth in total demand, changes in financial institutions
and techniques of business and personal financing, and changes in
the composition of demand for both present and future goods a n d
services. Attempts to use public policies to prevent or offset these
fluctuations in interest rates will prevent necessary and desirable
adjustments in the economy.
Moreover, while we agree t h a t the money supply should grow in
line with real economic expansion, we do not agree that an easy money
policy, of itself, will provide the impetus or the means for economic
growth. Economic growth depends on increasing our productive
capacity; that is, using some of today's resources for the purpose of
increasing the amount and productivity of resources which will be
available tomorrow. The necessary corollary of increasing the rate
of economic growth without inflation in a high employment economy
is increasing the rate of real saving. Accelerating the growth of
the money supply cannot substitute for this increase in the Nation's
saving rate.
Certainly the record in the respect of attaining growth without
inflation through proper management of monetary policy made by
the proponents of the majority's theory of growth and inflation when
they had the power to implement their theories from 1930 to 1940
and from 1946 to 1952 is a poor one and should make them question
their own wisdom.
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PRICE STABILITY FOR ECONOMIC GROWTH
In the majority report we find the same blind approach to price
stability that led them to disaster after World War I I . The majority
argues that, because there has been no recent substantial price increase
and there is now reasonable price stability, no need to worry about
inflation exists. B u t wisdom requires foresight. Isn't it time the
majority gave credit where credit is due for this administration's
correctly anticipating and guarding against inflationary forces? The
majority should support the wisdom of the President's 1960 Economic
Report in continuing to analyze and anticipate inflationary pressures
and to take action to neutralize them.
We believe that it is always proper to reevaluate the philosophy
upon which the U.S. central-bank system is based, as interpreted by
the incumbent Federal Reserve Board, The Chairman of the Federal
Reserve Board has clearly and consistently stated his, understanding
of this philosophy to be to preserve the integrity of the dollar as
constituting the greatest contribution the central bank system could
make to promote economic growth and maximum employment. 2
The issue is clear, if the majority wish to dispute it. However, the
majority refuses to draw the issue squarely and by innuendo and
misquotation distorts what it is. Does the majority believe the
Federal Reserve Board should have other basic objectives than to
preserve the integrity of the dollar? If they do, then they should
recommend amending the Federal Reserve Act to make it clear that
there should be a different underlying philosophy of the central bank.
This the majority which controls the Congress has failed to do. Failing honestly to face the issue, the majority should desist from clouding
the issue by the use of innuendo and misrepresentation. The majority
members confuse themselves in the process and to the extent that they
have power to deny the executive department the flexibility it needs
to manage the Federal debt, they damage economic growth, price
stability, and maximum employment.
The keystone to the President's Economic Report for 1960 as far
as fiscal policy is concerned is the prospective budget surplus. We
are pleased t h a t the majority recognizes this, approves it, and believes
t h a t a substantial surplus should be achieved. We are pleased that
the majority agrees with the basic assumption upon which the surplus
is predicated; i.e., a prosperous 1960 with a G N P of about $510 billion.
We do not know the model which the majority uses in stating that
an expectant $510 billion G N P for 1960 would be $20 to $30 billion
below the economy's potential output based upon a 4 percent rate of
unemployment. The majority certainly is not contemplating in this
model an increased amount of time devoted to education, to training,
and to research and development, which the President's report does,
Further, the majority seems to be mesmerized by a peculiar belief
t h a t if the Federal Government does not spend the sums they consider
desirable in a particular area—health, education, research, and development, or whatever—there will be no progress or growth in those
2 Senator Javits notes as follows: " I am deeply disquieted about the apparent inability of our credit supply to keep up with our productivity requirements when the United States is operating in such economic
high gear. There is not such wastefulness in productive practices or undue diversion of production to
luxuries as to cause tight credit conditions, or to justify them. Certainly, for productive purposes like
home building, transportation, communications, education, etc., and for State and municipal government
needs, credit should be available on a reasonable basis. I do not agree with the majority that there is some
willful purpose chargeable to the Federal Reserve Board in keeping interest rates high, but I do believe
that we must find the reasons why our system cannot, consistently with the economic and productive
strength of the American economy, reflect it in more reasonable interest rates."
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areas. 3 I t almost seems that the majority ignores the fact that our
society is based upon the private enterprise system. They fail to
appreciate the constant reference in the President's Economic Report
to what the private, State, and local government sectors of the economy are doing and are being encouraged to do in these areas in addition to Federal expenditures. I t is one thing to disagree with the
President's recommendations as to Federal expenditures and his appraisal of what the private, State, and local governmental sectors of
the economy will do in these areas, but it is blindness or dishonest to
say that nothing is planned and nothing will be forthcoming, in the
fields of health, housing, education, welfare, and research and development.
UNEMPLOYMENT
We agree with the majority in calling attention to the increasing
rate of unemployment which has occurred after each of the two recent
recessions. This is a serious matter and we regret that the President's
report did not give more emphasis to an analysis of it. However, the
majority method of dealing with it is certainly not analytical or objective. If we are to cope with the problem of unemployment we had
best eschew political partisanship until we know what we are talking
about. In our discussion of growth we have suggested that some part
of present-day unemployment is the result of rapid technological
growth. However, this is not a conclusive observation. Nor is
fiictional unemployment the total of our unemployment. The
matter needs as thorough a study as possible. 4 We are convinced that
unemployment in a rapidly growing economy is not solved by mere
increases in yearly G N P . In other words, technological growth does
create jobs but not necessaiily in the geographical areas or for the
skills where the same growth has created the unemployment. Furthermore, mobility of labor is an important factor in any dynamic
economy and many of the programs advocated by the majority seem
to have a disregard for this factor. I t must also be recognized that
any legislation to assist depressed areas must be designed to help
create jobs within such areas and not merely to transfer jobs from
one area to another.
The majority states that with "high unemployment" when production facilities are used at rates which are significantly below their
maximum efficiency (if this were true), there is no—
merit in the contention that we cannot afford the progress
needed to make the United States militarily supreme and to
provide the education, research and development activities,
health standards, elimination of poverty and low productivity
in depressed areas, elimination of city blight, and the many
other advances upon which rising living standards in the
United States depend.
Let's be quite clear no one contends "that we can't afford the
progress." This kind of childish arrogance of suggesting that anyone
3 Senator Javits notes as follows: " I believe that health care, especially for the aged, the unemr by«d, and
the indigent, is urgently in need of support from the Federal Government to make a standard of health care
suitable to our standard of living and our national goals available to these groups. This cannot be dene
without such help. I do not believe that this inevitably leads to 'socialized medicine' or Government domination of the doctor-patient relationship. On the contrary, it can be accomplished through existing
voluntary cooperative health plans, group practice units and health insurance plans, with full accommodation to the private doctor-patient relation."
* Senator Javits notes his comments on this problem in footnote 1, p . 40.
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4 » 6ft- JOINT ECONOMIC REPORT
feels we can't afford progress is dangerous to the solution of the
problems that must be solved if we are to make orderly progress.
THE BUDGET SURPLUS
" We believe that the proposed surplus of $4.2 billion is a low ratio
of surplus to gross national product in 1960. We wish it could be
larger. We question whether the majority are sincere about their
criticism, however. There are two ways to make the surplus larger,
as the majority states: (1) Reordering the priorities in the Federal
expenditure program and (2) undertaking urgent reforms in the
Federal revenue system.
With respect to (1) the expenditure side, the majority throughout
their report advocate more, not less, spending. To pay for these
increases the majority suggest cutting expenditures. But their
proposed cuts are in such general terms as to be completely meaningless and unrealistic. For example, the majority refer to the $2
billion to $3 billion savings that could come from implementing the
Hoover Commission recommendations in military procurement and
supply. Yet powerful leaders of the Democratic P a r t y encourage
the parochial aspirations of the three military services, resisting
unification and acceptance of the Hoover Commission reforms. A
few years ago the Democratic Congress cut the heart out of the
administration program to implement the Hoover Commission recommendations for getting the Military Establishment out of civilian
business-type operations. This was done by requiring approval of
the Armed Services Committee of each House before business-type
installations could be abandoned.
The savings suggested by reduction in business and agricultural
subsidies of $1 billion is unrealistic. The failure to itemize the specific
areas of reduction demonstrates its insincerity.
What is included in the figure of $865 million, labeled "subsidies to
business"? Are the majority afraid to itemize this figure for fear they
will have their own party colleagues jumping on them for suggesting
an elimination of what they regard as worthy projects? Why do they
avoid serious discussion of the biggest of all business subsidies—the
subsidies to commercial farms? Are the subsidies to small business
included in this figure? Undoubtedly so and yet the concluding recommendation of the majority report is this—"special programs to private
small business must be continued and improved." With one hand the
majority takes it away, with the other they give it back.
Closing of most "urgent tax loopholes" to gain $2.5 billion is
unrealistic in the face of the fact that the Democratic-controlled
Congresses for 6 years now haven't adopted even the modest tax
reforms concerning co-ops, savings and loan associations, and mutuals,
and depletion cutoff points suggested by the administration. Furthermore, is it realistic of the majority to suggest that under the present
Senate and House leadership the percentage depletion allowance for
oil is going to be changed?
The Ways and Means Committee, after holding extensive hearings
this fall with the cooperation of the Treasury Department into broad
internal revenue reform, announced through the chairman that nothing
would be done in 1960. What indeed is the majority referring to
when it says "elimination of the numerous preferential provisions
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in the estate and gift taxes"? To be realistic there needs to be some
itemization.
THE INTEREST RATE CEILING
The majority state that they oppose the elimination of the 4%
percent statutory ceiling on the rate which may be offered on Federal
Government debt instruments with a maturity of more than 5 years
until certain "reforms" are effective in fiscal, monetary, and debt
management policies.
Strangely enough the majority have done nothing as a controlling
political party to implement these so-called reforms, except to talk.
Their political party has controlled the last three Congresses and their
political party has made no move to adopt any one of the proposed
Reforms. Yet the majority state that "pending" these reforms they
will not do that which every economist without exception told our
committee should be done; i.e., remove the interest ceiling of 4%
percent. 5 With respect to these "reforms" relating to the Federal
Reserve it must be emphasized that the Federal Reserve is essentially
a creature of the Congress and not of the executive branch of the
Government. Congress should act if the majority in Congress believe
the policies should be changed.
We will now mention the "reforms" recommended to the Treasury
Department. The Treasury has on its own initiative been extending
the auction method to test out its feasibility in other than short-term
bills. The Secretary of the Treasury gave a very detailed account of
the progress of this "reform" to our committee.
A second proposed reform is ironic: "Agree to sell long-term bonds
in the main when interest rates are low." I t is ironic because this is
hardly a "pending reform." Furthermore, the Treasury has pursued
such a policy when it has been possible.
On the "reform" to institute a system of callable bonds, the majority blithely ignores the history of the use of callable bonds and the
problems involved in their use. The Treasury now has the authority
to issue callable bonds and certainly would use this method if the
climate were such that it was feasible. I t is interesting to note t h a t
the majority makes no attempt to demonstrate that the climate is
suited for issuing callables at this time.
The other "reform," i.e., "avoid seeking advice on new issues from
organized groups of their customers who are interested parties,"
shows such ignorance of marketplace buying and selling as to warrant
raising the question whether the majority really believe in the private
enterprise (free market) system of economics.
Any prudent person offering new issues of securities, like any producer of merchandise seeking to sell a new product, would be extremely negligent if he did not sound out his market and appraise it
by discussions with those engaged in it. Under this and previous
administrations, the Treasury has wisely sought the most competent
and responsible advice in connection with its debt management, and
we urge that it continue to do so. Moreover, it is a distortion of fact
to imply that the Treasury seeks advice only from its "customers,"
when it consults many sources in the financial community in seeking
to gage its market.
» Senator Javits notes that he cannot accept the minority's views with respect to this issue, and calls attention to the discussion of this problem of interest rates on long-term Government bonds in his "Additional
Views."
51504—60
4
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I 9 6 0 JOINT ECONOMIC REPOBCT
THE INTEREST RATE CEILING
I t would be well if the majority presented their arguments for what
they are worth honestly instead of trying to win a point through
slanted verbiage. Just what the majority is trying to advise, if
anything, is hard to understand.
Now to the real issues involved in the failure to remove the interest
ceiling on long-term securities.
1. The Federal Government has had to pay unnecessary interest
inasmuch as there is no ceiling on securities under 5 years' maturity
and the Federal Government, unable to sell long-term bonds for less
than 4}i percent coupons, has had to pay higher than 5 percent in the
short-term market.
2. Far from lengthening the maturities of the Federal debt, as all
experts advocate, the debt maturity has been further shortened for
the obvious reason that the long-term debt which matures constantly
is refinanced through the sale of short-term securities.
3. Interest rates which the general public pays have been forced up
beyond what they should have been. The general public, concerned
as it is with consumer credit, farmer and small business borrowing,
money to meet payrolls, etc., goes into the short-term market to meet
these needs. This is the very market into which the majority's
stiff-necked policy has forced the Federal Government. As Secretary
Anderson testified before our committee, the Treasury has been forced
to compete ''primarily in the field where millions of little people
borrow their m o n e y / ' Moreover, as Mr. Anderson further testified,
"home building is hurt badly by the ceiling and will be hurt worse—
because the builders will find it increasingly difficult to obtain construction loans, which are short-term," and the supply of mortgage
money available to home buyers is being depleted because lenders are
finding short-term investments more attractive.
4. Not only have interest rates in the short-term money market
been forced up, even more serious, money in the short-term market
has become "tighter" because there is not enough money to meet
the excessive demand caused by Federal Government borrowings.
Some people are just going without. Nor will printing press money
really solve money "tightness." I t will devalue the money already
in circulation and not give it to those who need it.
5. Long-term Government bonds are presently yielding over 4.25
percent though their coupons may bear only 2}i percent interest.
This is because they are being bought and sold on the market at a
discount. The Government collects taxes only on the interest derived from discount at capital gain rates. If the discounted 2% percent
bonds, purchased for $96.25, are exchanged for bonds with coupons
bearing 4.76 percent coupons, for example (the same security as far
as the holder of the discounted bond is concerned), the Federal
Government would collect taxes on the interest at the full tax rate,
not the capital gains tax rate.
6. Bonds bought at discount even an hour before the death of a
wealthy person can be turned in for face value to pay Federal estate
taxes.
These two tax features are pointed out simply to demonstrate, if
it needs further demonstration, how the rich get richer and the poor
get poorer when Congress forces the Treasury to be fiscally unsound
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in the management of its affairs. When the majority profess to be
holding to their policy of denying the Treasury adequate measures
to manage the public debt in the name of low interest rates and
plentiful money and in the name of the little man they are indeed
being profane.
THE UNITED STATES IN THE WORLD ECONOMY
There should be some reference to the effect of world economics
upon the U.S. economy. There is no realism in trying to maintain
a position of economic isolationism. Yet the majority's monetary
and fiscal policy seems to be based upon just such an unreal concept.
Today the United States is to a large degree the world's banker and
how we run our monetary and fiscal affairs both affects and is affected
by the economies of other nations. Interest rates and the value of
the dollar follow economic laws operating worldwide. The impact
of these economic laws upon our domestic economy can no longer be
disregarded, if it ever could be.
We are convinced that our economic health becomes more closely
related to the economic health of other nations each year. We believe
equitable international trade, utilizing the free marketplace as much
as possible, is the best institution for promoting our own and other
nations' economic welfare. Our foreign economic policy should follow the philosophy of trade, not aid, wherever possible, and when
aid is resorted to, loans not grants, wherever possible. 6 In tariff negotiations, our representatives must place increasing emphasis upon the
principle of reciprocity and the removal of unwarranted discriminations against American goods. We believe the President has followed
this philosophy in a reasonable manner in his programs.
THE ROAD TO ECONOMIC GROWTH
One final point needs to be made. Our private enterprise system
needs to encourage more initiative and more thrift in our citizenry if
we are to have increased economic growth.
The greatest expression of thrift and initiative is gathering together
risk capital and putting it to work. For years now, instead of encouraging risk capital through a differential in our tax system we
have been discouraging it and encouraging other types of financing.
The earnings from risk capital are taxed twice—once when the corporation earns it; then when the corporation pays it to the stockholders, as the stockholder pays a Federal income tax on the same
earning. Earnings from bonds and borrowed money escape the 52
percent corporate tax because interest paid is a deductible item.
Retained corporate earnings, on the other hand, escape the full
impact of the ordinary personal income tax and at most are taxed at
capital gains rates.
The corporate form of doing business if it finances through real
risk capital—that is, new stock issues—has to compete with another
form of doing business—the big cooperative—which pays, if at all,
only one tax. The big co-op is not an example of the use of real risk
capital.
6
Senator Javits notes as follows: " I do not see any reason for reluctance, or 'last resort/ in using aid as an
instrument of foreign economic policy, but consider it rather a basis in many cases for healthy economic
development where a foundation for private economic growth can only be laid by foreign aid."
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I 9 6 0 JOINT ECONOMIC REPOKT
The stock dividend credit which the majority report singles out as
as example of a "loophole" is just the reverse. The real loophole is
the favored treatment given the other forms of investment. The
stock dividend credit is a very incomplete and modest attempt to
equalize the incidence of taxation on risk capital. F a r from being
a break to the investing public, it would cost the investing public
more if their investments were in new capital stocks rather than in
bonds, loans, or capital stock which splits through retained earnings.
F a r from helping the wealthy citizen, the stock dividend credit is the
one small thing in our tax laws that encourages the new small growth
companies to expand.
If the majority mean business about encouraging economic growth
they should support policies that encourage thrift and initiative.
The President's report is replete with recommendations which would
further both thrift and initiative. The majority report, on the other
hand, is replete with proposals that would put further dampers on
these two important human motives.
SENATE
PRESCOTT B U S H ,
J O H N MARSHALL BUTLER,
J A C O B ^ K . JAVITS.
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HOUSE OF REPRESENTATIVES
THOMAS B. CURTIS,
CLARENCE E. K I L B U R N ,
WILLIAM B. WIDNALL.
A P P E N D I X TO MINORITY VIEWS
LEGISLATIVE RECOMMENDATIONS IN THE JANUARY
REPORT OF THE PRESIDENT
1960
ECONOMIC
I. Federarfinances:
(a) Revenues (p. 55):
1. Extend the corporate income tax at the present rate
for another year.
2. Postpone for an additional year the reduction of
excise taxes on alcohol, tobacco, automobiles,
automobile parts, and accessories now scheduled
for June 30, 1960.
3. Postpone for a year the repeal of the tax on local
telephone service and the reduction of the tax on
transportation of persons, scheduled for June 30,
1960.
4. Amend tax laws applicable to cooperatives.
5. Preclude unintended and excessive depletion allowances for mineral products.
6. Tax as ordinary income any gain realized by the sale
of depreciable personal property used in business
to the extent of the depreciation deductions previously taken on the property.
7. Defer the taxation of income earned in less developed countries of the world.
8. Increase the aviation fuel tax to 4}£ cents per gallon
and impose a tax of 4}£ cents per gallon on jet fuel.
9. Increase the highway fuel tax by }{ cent per gallon
and continue the tax at 4% cents per gallon until
June 30, 1964.
10. Provide for an adjustment of postal rates as previously recommended to reduce the deficit on postal
operations by about $550 million.
(6)7Debt management (p. 55):
1. Remove the 4# percent ceiling on the interest rate
which can be paid on U.S. Government securities
with a maturity of more than 5 years.
2. Enact a temporary debt limit somewhat higher than
the present permanent limit of $285 billion.
I I . Competition (p. 56):
(a) Require that antitrust agencies be notified when firms of
significant size engaged in interstate commerce propose
to merge.
(6) ^Authorize the Federal Trade Commission to seek preliminary injunctions in merger cases where a violation
of law is likely.
(c) Strengthen Federal law governing bank mergers accomplished through the acquisition of assets.
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(d) Grant the Attorney General power to issue civil investigative demands.
I I I . Small business (p. 56):
(a) Amend Small Business Investment Act to provide for
needed flexibility as to the type of securities that may
be purchased.
(6) Amend the Securities Act of 1933 to increase from
$300,000 to $500,000 the maximum amount of corporate securit3 r issue for which the privilege of simplified
regulation A filings ma}^ be accorded.
IV. Agriculture (p. 59):
(a) Extend through the 1963 crop year authority, which
expires after the 1960 crop year, to bring additional
land into the conservation reserve.
(b) Expand the program by increasing the basic limitation
on the total payments in any calendar year from $450
million to $600 million.
(c) Authorize the Secretary of Agriculture to give special
attention in allocating conservation reserve funds to
those States and regions in which curtailment of production of wheat and other surplus commodities is
consistent with long-range conservation and production-adjustment goals.
(d) Provide new obligational authority of $10 million for the
Great Plains conservation program.
(e) The Sugar Act, which expires on December 31, I960,
should be extended early in the present session.
(J) Extend limitation on price support for certain crops
grown on newly irrigated or drained land.
(</) Amend the Agricultural Trade Development and Assistance Act of 1954 (Public Law 48) to make more effective the program of surplus disposal abroad.
(h) Place the loan program of the Farmers Home Administration on a revolving-fund basis and make other improvements in the laws affecting this activity.
(i) Provide that the Rural Electrification Administration
borrowings from the Treasury would be at an interest
rate not in excess of the available rate paid by the
Treasury on recently issued long-term marketable
obligations and the REA would charge that rate plus
one-fifth of 1 percent on future electric and telephone
loans.
(j) Place the Rural Electrification Administration operations
on a revolving-fund basis.
V. Natural resources (p. 60):
(a) Enact legislation establishing a consistent basis on which
non-Federal beneficiaries will share the cost of protection against floods.
(b) Strengthen the enforcement provisions of Federal legislation for control of water pollution.
(c) Enact a pending proposal for the preservation of certain
undeveloped shoreline areas for public use.
(d) Enact a long-range program to conserve helium gas.
(e) Authorize contract authority on coal research.
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VI.
VII.
VIII.
IX.
X.
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51
(f) Enact legislation permitting revision of the fee schedule
for noncompetitive oil and gas leases on public lands.
Education and health (p. 63):
(a) Provide a program of vocational rehabilitation for exservicemen having service-connected disabilities.
Personal security (p. 64):
(a) Extend Federal-State unemployment insurance system to
employers of one or more persons, to nonprofit institutions, and to Federal instrumentalities t h a t are not now
covered.
(6) Extend Federal-State system to Puerto Rico.
(c) Bring the provisions of the District of Columbia unemployment insurance system up to the standard recommended for all States.
(d) Take steps to provide additional funds for administration
of the Federal-State employment security system and
rebuild the Federal Unemployment Act.
(e) Allow the Secretary of Labor to make necessary interpretations of law and enforce compliance to remedy
serious defects in the legislation enacted in 1958 to
protect private pension and welfare plans.
(f) Extend the coverage of the Fair Labor Standards Act t a
several million workers not now receiving its protection.
(g) Revise the outmoded provisions of the 8-hour law applying to Federal and certain federally assisted construction projects and to carry out the principle of equal
pay for equal work without discrimination because of
sex.
(h) Establish a statutory commission on equal job opportunities under Government contracts.
Area assistance (p. 66):
(a) Submit and strengthen aid to areas of persistent unemployment by providing Federal participation and loans
to business concerns, financial assistance to State and
local development groups, and for technical assistance
to local groups seeking to strengthen their regional
economies.
Housing and home financing (p. 67):
(a) Make permanent the Federal Housing Administration's
program for insurance of home improvement and
modernization loans which expires October 1, 1960y
unless extended.
(b) Place Veterans' Administration home purchase financing
on the same basis with respect to maximum interest
requirements as F H A programs.
(c) Adjust maximum permissible interest rates on armed
service housing loans insured by F H A to permit such
loans at rates above the present 4Z percent ceiling.
Promoting economic growth with price stability (p. 71):
(a) Amend the Employment Act of 1946 to make reasonable
price stability an explicit goal of national economic
policy.
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A D D I T I O N A L V I E W S OF SENATOR P R E S C O T T BUSH
I share the minority views expressed elsewhere by m y colleagues, b u t
wish to state more bluntly and emphatically m y objections to the
majority report.
The majority have all but destroyed the Joint Economic Committee's usefulness by the extreme partisanship of their reports on the
recent study of "Employment, Growth, and Price Levels'' and on the
President's 1959 and 1960 Economic Reports. At one time reports
of this committee were entitled to serious consideration by the
legislative committees of the Congress, by the Executive, and by
professional economists.
That time has passed. The majority has, during the time of m y
service on this committee, followed the "party line" laid down by the
radical wing of the Democratic Party. Their specific recommendations
in this report, particularly in the fields of taxation and appropriations,
will most likely be ignored by the legislative committees which their
own party controls in this Congress—and has controlled since 1954.
Instead of a useful guide to public policies, they have written a
campaign document for the 1960 elections.
Were it not for the fact that valuable additions to economic knowledge are often made in papers prepared by contributing economists,
by Government witnesses, and by the committee's able staff, I would
recommend that the committee be abolished. I t fails to discharge its
responsibilities under the Employment Act of 1946.
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ADDITIONAL VIEWS OF SENATOR
JOHN MARSHALL BUTLER
I.
INTRODUCTION
In general, I concur with the minority's views which I have signed.
I n order to develop some points of disagreement more fully, I am submitting these additional views.
The Joint Economic Committee is required to study the President's
Economic Report, hold hearings thereon, and present its views to the
Congress by March 1.
On January 20, the President transmitted his report to the Congress,
and the Joint Economic Committee started a series of hearings in
accordance with the Employment Act on February 1. These hearings
lasted for 6 days, and 22 witnesses testified. A list of the witnesses
and the days they testified follows:
Witness
Date of testimony:
February 1: Louis J. Paradiso, Assistant Director and chief statistician,
Office of Business Economics.
Martin R. Gainsbrugh, chief economist, National Industrial
Conference Board.
Dr. George Cline Smith, vice president and chief economist,
F. W. Dodge Corp.
Peter Henle, assistant director of research, AFL-CIO.
George E. Brandow, Pennsylvania State University.
Roy L. Reierson, vice president and chief economist, Bankers
Trust Co.
February 2: William McChesney Martin, Jr., Chairman, Board of Governors of the Federal Reserve System.
Raymond J. Saulnier, Chairman, Council of Economic Advisers.
February 3: Warren L. Smith, University of Michigan.
Richard A. Musgrave, Johns Hopkins University.
February 4: Stanley Ruttenberg, director of research, UAW-AFL-CIO, for
Walter Reuther, president.
Emerson P. Schmidt, Chamber of Commerce of the United
States of America.
February 4: Ralph Robey, economic adviser, National Association of
Manufacturers.
W. E. Hamilton, Farm Bureau Federation.
Angus McDonald, National Farmers Union.
Herschel D. Newsom, master, the National Grange.
A. Arthur Charous, trustee, Federal Statistics Users' Conference.
February 5: Robert A. Gordon, University of California.
Paul Samuelson, MIT.
William F. Butler, Chase National Bank.
B. U. Ratchford, Duke University.
February 16: Hon. Robert B. Anderson, Secretary of the Treasury.
The majority's report does not refer to any of their testimony, nor
does it deal in any substantial way with the material or statistical d a t a
contained in the President's Economic Report. I t is confined to a
recital of the views previously presented in the majority's views in
Senate Eeport No. 1043 on employment, growth, and price levels.
In fact, its report could have been written without waiting for either
55
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the President's Economic Message or the testimony of any of the
numerous witnesses who appeared before the joint committee.
The staff had completed its draft of proposed views dealing with
complex subjects, such as interest rates, before hearing the testimony
of the Secretary of the Treasury, the Honorable Robert B. Anderson,
and his associates who appeared on February 16, the very day when
the first galley proof of the majority's report was being printed for
presentation to members of the joint committee for their consideration.
The late Senator Robert A. Taft, the first chairman of this committee, in opening its initial hearings, said:
I n a broader way our function is to try to develop governmental policies which may prevent the development of any
depression, and consequently at this time we are interested
in hearing from the business, labor, and agricultural interests
of the country as to whether they think there is something
which threatens the present condition of full employment,
and also whether they think there is anything the Government can do about it, and if they do, what they think the
Government should do, what powers might be granted by
Congress, or what general policies might be adopted by the
Executive. 1
No legislation has been enacted to authorize any departure from the
purposes outlined by Senator Taft. Apparently, witnesses believe
t h a t their appearances will contribute to the enlightenment of the
Congress. This is illustrated in some of their statements. For
example, Mr. Martin R. Gainsbrugh, chief economist of the National
Industrial Conference Board, in his opening testimony said:
I am delighted to be back, even though it meant taking a
jet at 3 o'clock this morning from Los Angeles. 2
The first witness was Mr. Louis J. Paradiso, assistant director-chief
statistician, Office of Business Economics. Mr. Paradiso's prepared
statement included two tables, as well as two graphs. These were
not included in the transcript of the hearings. In fact, at the conclusion of the summary of Mr. Paradiso's statement, the chairman
stated: " Your prepared statement will be printed in full in the record."
At the time that the members of the committee were confronted with
the task of examining the report prepared by the staff or the writing
of their individual views, the printed hearings were still not available.
I t is ironic that in spite of these efforts by dedicated citizens who
wish to assist the committee in its work, no consideration has been
accorded to their views.
Public Law 304, 79th Congress, which established this committee
and the Council" of Economic Advisers, stated that:
SEC. 5. (a) • There is hereby established a Joint Committee
on the Economic Report, to be composed of seven Members
of the Senate, to be appointed by the President of the Senate,
and seven Members of the House of Representatives, to be
appointed by the Speaker of the House of Representatives.
The party representation on the joint committee shall as
1
"Current Price Developments and the Problem of Economic Stabilization," hearings before the Join
Committee on the Economic Eeport, Congress of the United States, 80th Cong., 1st sess.lpt. 1, June 24,1947
p. 34.
Hearings before the Joint Economic Committee, Congress of the United States, Feb. 1,1960.
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nearly as may be feasible reflect the relative membership of
the majority and minority parties in the Senate and House of
Representatives.
(b) I t shall be the function of the joint committee—
(1) to make a continuing study of matters relating to
the Economic R e p o r t ; 3
Regardless of any other recommendations contained in the majority's report, it has not devoted its attention to a continuing study of
the matters relating to the President's Economic Report.
In the first report to the President by the Council of Economic
Advisors, dated December 1946, the Council said:
I t is not within the province of this Council to elaborate on
the functions of the other agency set up under the Employment Act, namely, the Congressional Joint Committee on
the Economic Report. I t should be noted, however, that the
act in no way trenches on the primacy of the Congress in the
field of final policymaking. I t simply sharpens that body's
tools for evaluation of proposals made by the President as
well as for the initiation of proposals of its own. Obviously,
the joint committee will have at its disposal the improved
facilities made available under the Congressional Reorganization Act as well as recourse to those contacts with all governmental and nongovernmental sources of facts and ideas which
are the traditional prerogatives of Congress.
In the words of the act:
" I t shall be the function of the joint committee—(1) to
make a continuing study of matters relating to the Economic Report; (2) to study means of coordinating programs in order to further the policy of this Act."
When the President's Economic Report is presented to
the Congress at the opening of its session, it is to be referred
to this joint committee. After study of the proposals embodied in the President's economic program and in the light
of such studies as the committee may already have conducted into the economic problems which it considers pertinent, it will prepare "* * * its findings and recommendations with respect to each of the main recommendations
made by the President in the Economic Report * * *." 4
In the 1960 Economic Report, transmitted to the Congress by
President Eisenhower on January 20, 1960, he said:
The report was prepared with the advice and assistance of
the Council of Economic Advisers and of the heads of the
executive departments and independent agencies directly
concerned with the matters it discusses. I t summarizes the
economic developments of the year and the steps taken in
major areas of economic policy to promote the sound expansion of employment, production, and income. I t also puts
forward a program for the year 1960 which, in the context of
present and prospective economic conditions, would effectively implement the purposes of the Employment Act. 6
3
Op. cit., "Current
4
1st Annual Report
8
Price Developments and the Problem of Economic Stabilization/' p . 3.
to the President by the Council of Economic Advisers, December 1946t p . 7.
Economic Report of the President, transmitted to the Congress, Jan. 20,1960, p. III.
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In a report of the Council of Economic Advisers to the President,
which is found on pages 77 through 80 of the President's Economic
Report, there is the following statement:
For the fiscal year 1960, the Congress appropriated
$395,000 for the Council's activities, the same amount appropriated for the fiscal year 1959.6
I n view of the efforts made by the executive branch, and the cost
involved to the taxpayers, it is very strange that the majority's report
of the joint committee devotes only a few pages of its text to a discussion of the recommendations contained in the President's Economic
Report. Furthermore, it is discouraging to the witnesses from industry, agriculture, and labor, who have devoted their time and
expense to the preparation of statements for the enlightenment of
this committee. They will readily see that their views have been
completely disregarded.
The majority's discussion of the President's Budget and Economic
Reports is confined to a few pages. As in its previous report on
employment, growth, and price levels, it is mainly critical of the fact
t h a t no matter what we have achieved, and we have achieved a great
deal, in the committee's judgment, we should have done far better.
We are living in an era when our way of life is on trial before the
world. Our Government, which includes the Congress as well as the
Executive, is attempting to convince the uncommitted millions of
people t h a t our way of life offers the only solution to the problems of
economic growth and freedom. I t is a great disservice to our foreign
policy to have a congressional committee, for purely partisan reasons,
engage in carping criticism of the administration, which will be used
to our detriment by the Soviets and its satellites in debates throughout
the world, as well as in the various international organizations concerned with economic development.
All of us in Government have a responsibility to abstain from unjustified partisan criticism, which can only lend comfort to those who
wish to establish an entirely different way of life throughout the world.
I I . GENERAL OBSERVATIONS ON THE PRESIDENT'S ECONOMIC REPORT
Inasmuch as the majority's report has neglected to comment on the
many points developed in the President's Economic Report, it is
incumbent upon me to do so.
Apparently, the fact that in 1960 the U.S. economy will, for the
first time, exceed a gross national product of $510 billion is dismissed
lightly. Yet no people in history have ever enjoyed such a level of
well-being. Rather than indulge in the futile and meaningless projections of what might be done without any responsibility for accomplishment, we can take some satisfaction in our achievement.
I t would seem appropriate in terms of supporting our position as a
leader of the free world to comment favorably on the substantial
progress recorded in the statistical tables presented by President
Eisenhower and his Council of Economic Advisers.
The majority's report is devoted to an extended discussion of our
failure to improve health, education, welfare, and the other services
which a free people expect from their Government. If the President's
«Ibid., p . 8(M
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Economic Report had been carefully studied, these statements could
not have been made. Again, in terms of our international position,
they constitute a grave disservice.
President Eisenhower, in discussing education, said:
Notable gains have been made in education and other
cultural areas. School enrollment has risen in the last 12
years from 50 percent to about 65 percent of all persons in
the age group of 5 to 29 years. From 1946 to 1959, the
number of bachelor's and first professional degrees conferred
annually almost trebled, and the number of master's and
second professional degrees showed a still greater relative
increase. To some extent, these advances represent the
resumption of academic wx>rk interrupted by war, but the
large gains made in the past few years indicate a rising
trend that will accelerate in the years ahead. The number
of earned doctorates conferred rose sharply after the war.
reaching in 1954 a new high, which has been maintained for
several years. In the past decade, more than 83,000 doctorates have been conferred, compared with some 27,000
during the 1930's and about 31,000 in the 1940's. Marked
increases are expected also in the next several years. Another
source of satisfaction is the record of scientific achievement.
Since 1946, close to half of the Nobel awards for contributions to medicine, chemistry, and physics have been bestowed
on American citizens. 7
Furthermore, the President's Economic Report for the first time
contains statistical tables relating to the diffusion of well-being. P e r
capita income in constant dollars rose from $2,541 in 1952, the last
year of the previous administration, to $2,706 in 1959, an increase of
1 percent compounded annually. 8 In appraising this figure, it must
be remembered that per capita income includes all of the newborn
children, those in school, as well as the elderly retired. None of
these groups have contributed to the gross national product, b u t they
have still benefited from this increased productivity.
Civilian employment advanced from 61 million in 1952 to 65.6
million in 1959, an all-time high. The American economy has created new jobs as the population and the civilian labor force have
grown. 9
Disposable personal income in 1959 prices, that is, income available
to individuals after the payment of all taxes, was $1,678 in 1952, the
last year of the Truman administration, and in 1959 reached an alltime high of $1,891, an increase of 12.7 percent, which is almost 1%
percent compounded annually. 10 The per capita disposable income
will double at this rate of increase in a period of 40 years, in spite of
population growth.
Furthermore, the share of labor income and transfer payments
compared with all personal income disbursements increased from
73.5 percent in 1952 to 75.8 percent in 1959, an all-time high. 11 None
of these important measures of well-being would be found b y a n y
7 The Economic Report of the President, January, 1960, p. 2.
s Ibid., p. 130.
9 Ibid.
io Ibid., p. 131.
" Ibid., p. 132.
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reader of the majority's report, including unfriendly delegations in
the Economic and Social Council of the United Nations, or similar
bodies.
There are still other statistical measures of personal and individual
satisfactions which are worthy of comment. In spite of the fact that
the impression is often given that our economy is one in which most
families do not enjoy the good things of life, in 1958 only 14 percent
of American families received incomes of less than $2,000 in dollars
of constant purchasing power. 12
In our manufacturing industries, in terms of constant 1959 dollars,
average hourly earnings have increased from $1.83 in the last year of
the former administration to $2.22 in 1959, an all-time high.13 Likewise, in 1959 prices, the average gross weekly earnings of workers in
manufacturing industries have increased from $74.53 in 1952 to
$89.47 in 1959.14
The life insurance per family in 1952 was $5,300, whereas today it
is $9,300.15 The financial assets and net equity of individuals have
also risen from a total of $372.8 billion in 1952 to $956.2 billion in
1959.16
There are many other ways to measure well-being than in monetary
terms. In 1952 our people enjoyed 58.8 million weeks of vacations,
whereas in 1959 this had increased to 77.7 million weeks. In 1959, 74
percent of all families owned automobiles, and 15 percent owned two
or more automobiles. 17 I n 1952, 56 percent of nonfarm occupied
dwelling units were owned by the occupants. In 1959 this had increased to 61 percent. 18
While there has been a tendency in some quarters to disparage those
who have invested their savings in the ownership of American business,
which provides employment for millions of people, it is significant that
in 1952 there were 6,490,000 stockholders, and in 1959 the number
almost doubled to 12,490,000 shareholders. 19
At every level of education, great strides have taken place during
the years of the present administration, which are the subject of
partisan criticism in the majority's report. In 1952 the total kindergarten enrollment was 1,383,000. In 1959 it was 2,032,000. Elementary school enrollment in 1952 was 21,994,000. In 1959 it was
29,382,000. High school enrollment in 1952 was 7,108,000. In 1959
it was 9,616,000. College and professional school enrollment, which
in 1952 totaled 1,980,000, in 1959 has almost doubled to 3,340,000.20
The majority's report is critical of measures taken by the Government to assist older people, the unemployed, and the sick, b u t it has
completely ignored the statistical data which no one has questioned
contained in the President's Economic Report.
In 1952 old-age, survivors, and disability insurance benefits paid
totaled $2,194 million. They were received by 5,026,000 beneficiaries.
In 1959, $10,300 million was paid to more than 13,800,000 beneficiaries.21
12 Ibid., p . 133.
is Op. cit., p. 133.
i* Ibid., p. 134.
is Ibid., p. 139.
16 Ibid., p. 140.
17 Ibid., p. 137.
«Ibid., p . 138.
is Ibid., p. 140.
2° Ibid., p. 141.
2i Ibid., p. 144.
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Unemployment compensation, likewise, has been improved during
these years when, according to the majority's report, there was a
callousness about the needs of our more unfortunate citizens. I n
1952, 76.6 percent of the nonagricultural employed were covered.
This has risen to 82.5 percent in 1959. The average weekly benefits
for total unemployed in 1952 were $22.79 as against $30.37 in 1959.22
Furthermore, in recent years many labor-management contracts provide for supplemental unemployment benefits for workers who are
unemployed.
In 1952, the last year of the previous administration, there were
1,219,000 beds in civilian hospitals. There are now 1,346,000.23
Regardless of the moneys which may be appropriated for health care,
in the last analysis more doctors with adequate training provide the
only real protection for our people. I n 1952 there were 208,000
physicians. This has increased to 235,000 in the short span of 7
years. 24 When it is realized that a doctor must undergo 4 years of
college training, 4 years of medical schooling, and then serve an internship, this is a remarkable gain.
President Eisenhower summarized the progress achieved b y the
American economy since the adoption of the Employment Act of
1946 in his report as follows:
A few facts illustrate the ability of the American economy
to continue raising what has long been the highest living scale
in the world, while carrying a heavy defense burden and
meeting broad international obligations.
In the 14 years since the passage of the Employment Act,
employment has advanced, on the average, by nearly 800,000
a year. I n real terms, the Nation's output of goods and
services, as well as its personal income, has increased by
more than 50 percent, or at a rate of 3.2 percent per year; and
the output of the private sector of the economy has advanced
at a slightly higher rate, 3.5 percent. For industrial production, the rate of increase has been 4.5 percent. The annual
increase of 3.2 percent in total national output, which corresponds to a doubling every 22 years, is roughly equivalent
to the long-term average reached in our previous history.
Thus, the American economy has sustained its long-term record of growth, despite the high level of industrial development
already achieved and despite temporary setbacks.
The increase in national output has made possible very
great gains in the well-being of American families. Evidence
of the advances made in this respect since passage of the
Employment Act is presented in the appendix on "Diffusion
of Weil-Being" included in this report. Real income per
capita has increased by nearly 20 percent since 1946, and
the increase per family has been 16 percent. As incomes
have risen and as paid vacations have become longer and
more common, leisure time has increased and recreational
activities have become more widely enjoyed. The shortage
of housing, so evident immediately after World War I I , has
been virtually eliminated. Since 1946, the housing supply
22 Op. cit., p. 144.
23 Ibid., p. 145.
24 Ibid., p. 146.
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has been increased by the construction of 15 million private
nonfarm dwelling units, and there have been marked improvements in the quality of housing. At the same time,
there has been a general increase in homeownership; some
60 percent of all nonfarm dwelling units are owned by
the occupant families.
Attention to such material advances should not obscure
the accompanying gains made with respect to other components of our well-being, some of which are less tangible.
In health, there has been remarkable progress in the reduction of infant and maternal mortality; in the prevention, mitigation, and treatment of many diseases; in restoring the
physically handicapped; in making available a better balanced diet at lower cost; and in creating other conditions
conducive to longer years of life and greater efficiency.
Health services are more and more widely available, and the
great majority of Americans now have some protection under
voluntary plans of hospital, surgical, and medical insurance. * * *
The economic security of American families has been
advanced significantly in the years since World War I I .
About 58 million persons—87 percent of all those in paid
employment—are now covered by the Federal Government's
old-age, survivors, and disability insurance system and related programs. More than 19 million persons are covered
by privately financed pension plans. The Federal-State
unemployment compensation system, which has proved its
worth as a defense against loss of income during periods of
economic adversity, now provides protection for nearly 85
percent of all persons on nonfarm payrolls.
B u t the progress made under Government programs
should not divert attention from the extensive provisions
made independently by Americans for personal and family
security. The number of life insurance policyholders, for
example, has increased by about 60 percent since 1946;
about 115 million persons were insured through legal reserve
companies in 1959. The volume of time and savings
deposits of individuals has increased by nearly $35 billion, or
more than 50 percent, since 1952. Share accounts in savings
and loan associations have also risen by $35 billion in this
period, by nearly 200 percent.
And it is not too much to say t h a t we have made good
progress in moderating fluctuations in our economy. Although economic recessions, however minor, must remain a
matter of concern to all Americans, the relative mildness
and short duration of the three since the war have to be
reckoned as a major factor in the strengthening of personal
security. 25
Because the majority's report has been singularly silent with respect
to the statements contained in the President's Economic Report, it is
necessary to quote these summaries so that they may be made a part
of the record in this Senate document.
26 Op cit., pp. 1-3.
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The American people have every reason to applaud the efforts of
both public and private groups in furthering our material, social, and
cultural progress. The prophets of gloom and doom who deprecate
all that has been done, because they believe t h a t if their untried
theories had been adopted more might have been accomplished, are
performing no useful function in terms of advancing America's wellbeing while they are giving great comfort to the enemies of all t h a t
we cherish.
The forum on the "Prerequisites for Economic Growth," conducted
by the National Industrial Conference Board, was moderated by Dr.
Solomon Fabricant of the National Bureau of Economic Research.
He is the acknowledged leader in the field of economic growth and
productivity. While no one wants to be complacent about future
progress, it is important that certain basic facts are placed in proper
perspective. Dr. Fabricant said:
There is no question but that the level of real income in
Russia is far below ours. As a guess, I think those who know
would say a third of ours—substantially less than half of
the American level. 26
He also stressed that economic growth cannot be achieved by merely
redistributing existing income. He said:
One reason why the problem of economic growth is so important can be observed in the history of the United States.
Suppose we were to ask by how much the average income
per capita of the poorer persons in the population could have
been increased a hundred years ago by a redistribution, or a
more even distribution, of income? How much would that
have raised income as compared with the sixfold rise that has
actually occurred from the long-term growth of average income per capita?
We don't have the income distribution of a hundred years
ago, nor may we assume that a violent redistribution of income could have avoided chaos. But any calculation of that
sort would indicate very clearly and quickly that the main
source of increase in income per capita (the main way, in other
words, to solve the problem of poverty) is by raising the average level of income per capita—making sure, of course, that
the distribution is made as reasonably equitable as possible. 27
I t is also significant that in this same forum, Dr. Fabricant quoted
from a recent Russian study, which appears in "Problems of Economics/ ' published in the International Arts and Sciences Press.
This study, "The Principle of the Personal Incentive and Certain
Wage Problems in the U.S.S.R.," a paper by a Russian economist
published in Voprosy Ekonomiki in its issue of January 1959, said:
"The many years of experience in the organization of social
labor under socialism have shown that equalitarianism is incompatible with the interests of the development of socialist
production. *. * * The Communist P a r t y of the Soviet
* "Prerequisites for Economic Growth," National Industrial Conference Board, Inc., "Studies in Business Economics, No. 66," Sept. 24, 1959, p. 11.
27 Op. cit., "Prerequisites for Economic Growth," National Industrial Conference Board, p. 13.
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Union has always conducted a consistent struggle against all
efforts to 'replace' distribution in accordance with labor by
petty bourgeois equalitarianism in the payment of labor.
* * * I t is necessary more completely to utilize the * * *
principle of personal material incentive for a further upsurge
of socialist production and the hiring standards of the
people.'' 2 8
These statements were confirmed in the same forum by another
distinguished economist, Prof. Lloyd G. Keynolds, who, since 1951,
has been chairman of the department of economics at Yale University. After a trip to Russia, he summarized the attitude of Russian
industrialists as follows:
I pushed the factory managers quite hard on labor questions. Their setup in this respect is, in a way, very early
capitalistic. To find anything comparable in this country
you would have to go back to 1900, to the early days of scientific management, with not much union organization or
worker control over what the engineers were doing. This
was quite striking.
The position of the Russian factory director also seems to
be quite similar in many respects to that of a capitalist manager. I t seemed to me that those fellows were working for
about the same reasons that an American corporation executive would work. If they do well, they get promoted to a
bigger enterprise, and get a good bonus at the end of the year.
Conversely, if they do not do well, presumably they will be
demoted, have less interesting work, and make less money.
Despite all the talk about working for the joy of socialist
labor, and so on, it seemed to me that these fellows were quite
like American business executives in their outlook on their
job. They are almost all engineers. In fact, they cannot
understand how we allow people to become business executives without engineering training. This they regard as the
standard way of getting into an executive position. Not
only the plant director, but the deputy director and a good
many people lower down are engineers. 29
While we realize the importance of science and engineering for
the physical advancement of our well-being, we are not merely
materialistic, but we have cultural and spiritual values which have
been furthered by the policies adopted during the past 7 years.
OBSERVATIONS
CONCERNING
THE
MAJORITY^
REPORT
The majority's report stresses the fact that unemployment was
at a relatively high level through much of 1959. Yet, at no point
does it adequately deal with the fact that much of this unemployment
was the direct result of the protracted steel strike. There is every
reason to believe t h a t if the unfortunate stoppage of steel production
had not occurred, the forces of recovery, which were progressing
rapidly during the first 6 months of 1959, would have reduced unemployment to a very low level by the end of the year.
28 Ibid., pp. 21, 22.
» I b i d . , p . 37.
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The President, in his Economic Report, reviewed this factor in
great detail, but, once again, his analysis was ignored in the majority's
report. The President said:
* * * However, total unemployment was being reduced
at a rapid rate until the trend was reversed in July by the
beginning of the steel strike.
After some 500,000 employees in the steel industry went
on strike on July 15, nearly 100,000 other persons were soon
laid off in related industries, especially in mining and rail
transportation. Even though substantial inventories of steel
had been accumulated by many firms, stocks were being depleted rapidly by mid-October and serious imbalances were
making themselves felt. As a result, layoffs became increasingly heavy. By the time steel production was resumed on
November 7, under a Federal court injunction, employment
in steel-related industries had declined by more than 500,000
exclusive of the number on strike. I n most other industries,
employment ceased to advance during this period, and in
October the rate of unemployment increased to 6 percent of
the civilian labor force.
The resumption of steel production brought an increase in
employment by the end of the year, and unemployment was
again reduced. Although the replenishment of working
stocks of steel could not be accomplished immediately, total
employment reached 66.2 million (seasonally adjusted) in
December, slightly above the record of 66 million that had
been attained in June. Unemployment in December was 3.6
million (seasonally adjusted), or 5.2 percent of the labor
force.30
No discussion of the employment situation which fails to recognize
the impact of the protracted steel strike has any meaning. The
majority is critical that the President has not fulfilled the requirements of the Employment Act in presenting a detailed blueprint
for the future.
I t is easy to make glib prognostications, b u t the President and
the Council of Economic Advisers have fulfilled the requirements
imposed upon them in the following statements, which appear in
the President's Economic Report:
Although it is always difficult in a dynamic, free economy
such as ours to depict in advance the course likely to be taken
by production, employment, and income, present indications
warrant the expectation that the expansion now in progress
will be extended through 1960. And there are good grounds
for belief that, with appropriate public policies and private
actions, the expansion can continue well beyond the present
year.
Past developments and present conditions clearly suggest
that the demands of business concerns for capital goods and
for inventories will be especially important factors in the
year ahead. Expenditures on capital goods have been rising
for more than a year and should continue upward in 1960.
In part, and especially during the early months, the increase
w The Economic Report of the President, January 1960, pp. 12,14.
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will represent a catching-up on projects delayed or postponed because of shortages attributable to the steel strike.
Chieffy, however, capital investment should rise in response
to favorable underlying factors now discernible and likely to
strengthen as the year progresses. Surveys of businessmen's
intentions, and the increased volume of contract awards and
of new orders for industrial machinery, confirm this outlook.
A good demand from the farm economy for machinery and
equipment may also be anticipated.
Expenditures for residential construction, a second major
category of capital investment, are not likely to be as high as
in 1959. However, the extent of the decline should be limited,
and activity in this sector of the economy should exceed that
of most recent years. Outlays for modernization and alterations should be a steady expansive force in the building industry.
Within the aggregate of Government outlays, Federal
expenditures for goods and services should change little in
the first half of the year; but later, in line with provisions in
the fiscal 1961 budget for the development of water resources
and other public works, and for space and aviation programs, they should increase moderately. The upward trend
of expenditures at the State and local level, which reflects
particularly the provision of services needed by the growing
urban population, may be expected to continue, though
possibly at a slower rate. The construction of schools,
public service enterprises, and community facilities in general
is expected to advance moderately and to outweigh declines
in activity that occur under the Federal-aid highway program as a result of the mandatory reduction in apportionments under the present law.
Changes in investment in business inventories are likely
to be less regular during the year than the changes in final
demands. Restocking needs are clearly apparent, not only
for steel b u t also for many steel-using intermediate and
finished products; and further additions to inventories will
be required throughout the economy as production and final
sales increase. Inventory expenditures and the other outlays noted above should contribute to a strong expansion
in production, employment, and income. The increase in
employment should exceed that of the labor force and,
correspondingly, unemployment may be expected to fall.
Within this context, consumer incomes and expenditures
may be expected to increase substantially during the year.
Also, consumer confidence is favorable to an increasing
volume of purchases of consumer durable goods.
The financing of the investment needs outlined here,
together with a significant volume of consumer credit, will
make strong demands upon the Nation's capital and credit
markets. At high levels of income and savings, a greater
supply of investment funds may be expected. The sizable
Federal budget surplus projected for the fiscal year 1961
would be helpful in relieving pressure on the supply of funds. 31
« Op. cit., pp. 36, 37.
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IV. STATEMENTS IN THE MAJORITY'S REPORT WHICH REFLECT OPINIONS
CONTAINED IN ITS REPORT ON EMPLOYMENT, GROWTH AND PRICE
LEVELS
Although this report was supposedly devoted to a review of the
President's Economic Report and the statements of the witnesses
who testified thereon, it largely reflects the preconceived views which
were developed in connection with the majority's report on employment, growth, and price levels. In order to conserve space, there
are listed below some of the more significant areas which have been
quoted from Senate Report No. 1043 and are found in the majority's
views in this report. I have discussed many of them in m y additional
views in Senate Report No. 1043 on pages 93 through 134. M y
position is stated in that report.
Report of the
Joint Economic
S. Rept. Committee on
1043 (page) the January
1960 Economic
Report of the
President (page)
Reordering priorities
Taxes
Monetary policy and debt management
____
Market structure...
Assistance to depressed areas
.
24
21-24
29-48
49
54
10-13
13-15
15-17
17-19
19
All of these subjects have been discussed without any reference
to the President's Economic Report or the hearings held during the
month of February.
V. DETAILED
DISCUSSION
OF VIEWS CONTAINED
REPORT
IN
THE
MAJORITY'S
A. Prices and market structure
The majority's report stresses the need to change the market
structure of the American economy with particular emphasis on
"more effective application of antitrust legislation to industries in
which a high degree of market power is possessed and exercised b y
large producers, even where no evidence of direct or overt collusion
or conspirary can be shown."
If America is to compete with the Russians, attacks on size per se
are ridiculous and have no justification other than to provide material
for partisan political activity. I t should be emphasized that the
largest employer in this country is the Federal Government. Again
the remarks of Professor Reynolds of Yale University at the Conference
Board Economic Forum are worthy of comment. They are based
on his trip to the Soviet Union, in which he had the opportunity to
travel all the way from Leningrad to central Asia, visiting about 15
factories and talking to upward of 100 economists in research
institutes and universities. Professor Reynolds said:
* * * We saw everything from very large truck factories
and metalworking plants with as many as 40,000 workers
down to consumer goods factories with only 700 or 800
workers. 32
32
Op. cit., "Prerequisites for Economic Growth," p. 34.
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While no Member of the Congress would condone any action
which could impede the performance of our free enterprise economy
in the service of the American consumer, predicated on competition
in free markets, we must be vigilant in revising the antitrust laws
and in perfecting their enforcement not to jeopardize the efficiencies
of size and scale, which have made this country great.
Insofar as market behavior is concerned, the President's Economic
Report contains some illuminating data, which have been completely
ignored in the preparation of the majority's views. Table 2, which
appears on page 23 of the President's Economic Report, shows the
changes in the Consumer Price Index in 1959. The item reflecting
next to the largest percentage change from December 1958 to
November 1959 is used cars, where the price index increased by 6.4
percent. If there is any market in which large firms and market
dominance is absent, the used car market is probably most
representative.
Another important factor revealed in the same table is that, as of
December 1958, services had a relative importance in the Consumer
Price Index of 34.4 percent. I n almost every instance they are supplied
by small firms and not by the larger enterprises. Again, with the
exception of one commodity, namely footwear, which has a weight of
only 1.5 percent, services show the largest percentage change next to
used cars, namely 2.9 percent. With this heavy weight, this increase
accounts for a substantial amount of the rise in the All Items Index.
An examination of table 3, found on page 25 of the President's
Economic Report, shows a decline in most sectors of the Wholesale
Price Index. The All Commodities Index for the year December 1958
to December 1959 declined 0.3 percent. Crude materials for further
processing declined 3.7 percent. Finished goods declined three-tenths
of 1 percent. Steel mill products showed no change at all.
I t is important in fulfilling the responsibilities of the Joint Economic
Committee that facts and figures rather than prejudices and preconceived ideas concerning subjects such as administered prices should
govern the findings and conclusions of this important Joint Economic
Committee. Prof. Stephen K. Bailey, director of the graduate program, School of Public and International Affairs, Princeton University,
at the time of the "Brookings Lectures on Research Frontiers in
Politics and Government," said:
In the kind of world in which modern decisionmakers live,
fraught as it is with bignesses, vastnesses, and statistical
drifts, the postulate of faith that the future is really malleable, t h a t individual choices really count, is of no small consequence. The assumption of classical economists that individual choice could have no effect on the market seems to
have carried over into a great deal of fatalistic, if not nihilistic,
20th century political thinking. The prophetic service of
Toynbee is his pointing out that history has always involved
imperfect competition, and that the moral choices of men
of power influence the market mightily. 33
There has been no evidence presented to the Joint Economic Committee that our antitrust laws, which have been in effect since 1890,
33 "Research Frontiers in Politics and Government, Brookings Lectures," 1955, The Brookings Institu*
tion, Washington, D.C., October 1955, pp. 12-13.
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are ineffective in preventing monopoly, and the performance of the
price indexes over the past year supports this view.
B. Defense
In m y additional views in Senate Report No. 1043, I clearly stated
that I did not believe that the Joint Economic Committee had been
charged by the Congress with the problems of national defense. I
still maintain this view. The majority's report gives the American
people as well as friendly citizens in other countries the erroneous impression that our defenses are dictated by budgetary restrictions. I t
states:
* * * Cutbacks in the real volume of our outlays, while
the Soviets continue to increase the volume of theirs, requires a more convincing explanation than has yet been offered to assure the American public that the proposed defense
program for fiscal 1961 is not to be unnecessarily limited on
the basis of budget-balancing considerations.
Again, a statement of this kind is a distinct disservice to our national
unity, and it demonstrates a lack of understanding of the procedures
in the defense departments. House Report No. 408, 86th Congress,
dealing with defense appropriations for the 1960 fiscal year, on page 21
estimates that unexpended balances at the end of the present fiscal
year will be more than $32 billion. In other words, without appropriating a single penny during the present session of the Congress,
there would still be $32 billion unspent in the hands of the Defense
Department as of June 30 of this year.
Furthermore, on August 4, 1959, the Congress cleared for the
President's signature H.R. 7454, the bill appropriating funds for the
current fiscal year for the Defense Department. I t provided almost
$20 million less than the President requested. This was the considered
judgment of a Congress controlled by the Democratic Party.
This hardly suggests that the administration is planning our military program around the budget. On the contrary, President Eisenhower, a military expert of distinction, and the Joint Chiefs of Staff
are in a better position to evaluate what is needed than this Joint
Committee, which has held no hearings on this subject. I t has been
empowered to review economic problems, but not the size and com^
position of our Armed Forces.
C. Reordering of the priorities in the budget
The majority's report devotes 18 lines of text to a reordering of the
priorities in the budget in the amount of $10 billion in terms of both
expenditures and revenues. The budget document itself is a very
voluminous book. The Appropriations Committees of the Congress
devote weeks to a review of every item therein. The approach
presented in the text of the majority's views is superficial and unworthy
of any serious intellectual attention.
In discussing proposed expenditures, the majority's report provides
a nicely rounded sum of $2 billion for "increase for missiles, space
and combat troops." Without any indication as to how or where
this money should be spent, or how it should be divided among the
various categories included, it pontificates that $2 billion is the proper
additional expenditure to insure our national security.
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Likewise, it again presents a convenient figure of $2 billion for
"increase for schools, depressed areas, and social programs." This
could encompass almost anything, and again there is no attempt at
explaining how this money would be apportioned or for what purpose.
The scholarly acceptance of the studies of this joint committee are
placed in jeopardy when statements are made in this cavalier fashion.
In future years the country will be faced with an ever-mounting burden
of taxes to finance expenditures authorized or proposed by this
Congress. I t is impossible to examine the many measures not included
in the President's budget that would impose additional taxes on the
American people and make the surplus envisaged by the President
impossible, However, a list of only eight measures which have
received some consideration in this Congress shows increased
unbudgeted expenditures in excess of $5.5 billion annually. A list of
these few measures is of interest.
W a t e r pollution control (final) (H.R. 3610, Blatnik)
$90, 000, 000
389, 500, 000
Aid to depressed areas (passed Senate) (S. 722, Douglas et al.) _ _
C o m m u n i t y facilities (introduced) (H.R. 5944, Spence)
1, 000, 000, 000
Federal aid to education (passed Senate) (S. 8, M c N a m a r a )
900, 000, 000
Public H e a l t h Training Act (introduced) ( H . R . 6871, Rhodes,
Pennsylvania)
13,000,000
Hospitalization (introduced) (estimated) (H.R. 4700, Forand)___ 2, 100, 000, 000
Emergency H o m e Ownership Act (introduced) ( H . R . 9371, Rains)
, (estimated)
1, 050,000, 000
Veterans benefits (passed Senate) (S. 1138, Yarborough et al.)___
150, 000, 00ti
.'•'-•
Total
5,692,500,000
D. Debt and fiscal policy
The majority's report is largely devoted to a criticism of the Federal
IJeserve System and the Treasury's operation in funding and refinancing the national debt. I t is noteworthy that similar views are expressed in identical language in this report and Senate Report 1043
on "Employment, Growth, and Price Levels.'' This likeness indicates
a completely closed mind and preconceived views which have not been
influenced by either the President's Economic Report or the testimony
of the witnesses.
Such a fact does not reflect creditably on the procedures of the Joint
Economic Committee. The majority's report proposes a number of
completely unrealistic policies. For example, it suggests that the
Treasury should "agree to sell long-term bonds in the main when
interest rates are low." I t is one thing to suggest how the Treasury
should sell its bonds, and quite another to assure that anyone will
buy them. At a time when interest rates are low, investors are loathe
to acquire long-term obligations with a low yield. This basic tenet is
one which is accepted by those who are familiar with the financial
markets and have dealt in securities.
The majority's report suggests that the Treasury should "institute
a system of callable bonds so that the public is not saddled interminably with high interest rates." Again, this is an intriguing suggestion.
However, it is completely unrealistic and superficial, since investors in
a free economy will not purchase such bonds, as they have alternative
investment opportunities, and the Treasury must compete for the
savings of our people as long as we maintain a free economy.
The majority's report neglects the obvious corollary to its proposal
that, if callable bonds were issued, an even higher interest rate would
be required so as to make them attractive to investors.
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In its entire discussion of monetary policy, the majority's report
fails to indicate any understanding of the basic fact that those who
purchase short-term bonds are usually not the same individuals or
institutions as those who invest in long-term bonds. These two types
of securities are acquired for entirely different purposes, and no
amount of pontification by this joint committee will change the
investment preferences of institutional buyers, savings banks, private
individuals, and others who are purchasers of Government securities.
Throughout the discussion of debt management and monetary
policy, the majority's report attempts to present its readers with the
conclusion t h a t high interest rates will prevent economic growth and
the full use of our resources. I t irnplies that they add unnecessarily
to business costs, that they discriminate unfairly against small business, and that the Federal Reserve System is primarily concerned
with creating artificial and unjustifiable profits for the commercial
banks who are affiliated with it.
Those who have studied America's financial mechanism know that
nothing could be further from the truth. Actually, interest rates for
many years in America have been at an artificially low level. I n
recent months, the recovery in Europe has been proceeding rapidly y
and it is noteworthy that the interest rates prevailing there are considerably higher than those here in the United States. Unless we are
to continue complacently to watch our gold reserves decline, there
has to be some balance between the attractiveness of securities and
investments in this country with those abroad. I t is frequently overlooked that foreign central banks may convert their dollar balances
into gold at will, and they have been doing this at an astonishing rate
for many months.
The majority's report proposes that—
In the area of monetary policy, we offer as a general prescription that the supply of money—i.e., currency held outside the banks and adjusted demand deposits—shduld increase oyer time at about the same rate as gross national
product, allowing for normal velocity. * * *
It is perhaps helpful in placing some of these problems in better
perspective to review what has taken place in other countries. Immediately after World War I I a labor government was responsible
for the destinies of the United Kingdom. Finally, the Conservative
Party came to power. In 1957 that Government appointed a
special committee known as the British Council on Prices, Productivity, and Incomes. Its chairman was Lord Cohen, a judge, who
was also the first chairman of the Royal Commission on the Taxation
of Profits. Its other two members were Sir Harold Hewitt, a past
president of the Institute of Chartered Accountants, and Sir Dennis
Robertson, retired professor of political economy at Cambridge University.
The recommendations of this Council provided the economic planning for the British recovery, and it obviously met with the approval
of the electorate since the Conservative Party, which implemented
this program, was returned to power.
In discussing monetary policy, this commission said:
" T h e dangers of inflation have only been scotched, not
killed, by the slackening of tempo in the last 12 months.
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We must not suppose that we have solved the problem of
getting the growth of incomes into line with that of productivity, merely because in the year 1958 increases in income
look like being distinctly lower than in previous years.
" O u r balance of payments is in a healthy state, and our
foreign exchange reserves have been rising very satisfactorily:
b u t neither of these conditions is bound to last. Past experience suggests that any substantial revival of demand may
well be accompanied by renewed threats to price stability
to the balance of payments and the gold and dollar reserves/ 734
T h e First National City Bank of New York, in its Monthly Letter
for October 1958, in discussing this report made the following observations:
The measures to dampen down demand taken by the
British authorities in September 1957, under the pressure of
a sterling crisis that threatened exhaustion of its international
reserves, included an increase in the official discount rat > to
7 percent—the highest since 1921—the establishment of
ceilings on commercial bank advances, a further tightening
of controls over new capital issues, and cuts in Government
outlays. * * *
Loojdng farther ahead, the Council squarely faces the basic
issue arising "from the conflict of two main objectives of
economic policy—full utilization of the national resources
of labor and capital on the one hand, and stable prices on
the o t h e r s * * *
The Cohen council found that the Government "cannot
afford'' to allow^ the pressure of demand for goods and for
labor to "rise to the peak levels of the past if it wishes to
avert price inflation."
Noting that this advice will remain valid "for as far ahead
as it is useful to look," it went on to observe that if peak
levels of demand are avoided " i t can hardly be expected that
the average level of unemployment over a period of years
will be quite so low as in the last decade."
The problem of local concentrations of unemployment is
likely to become "somewhat more serious"—all the more so
since the direct cause of these pockets is often some-change
in the structure of industry not itself connected with the
level of overall demand. The policy of "bringing work to
the workers" has "definite limits" as long as the Government rules out "extravagantly wasteful methods." 35
In considering the request of the Secretary of the Treasury, to
remove the artificial ceiling of 4% percent on long-term Treasury
bonds, it should be remembered that in Great Britain a 7-percent
discount rate was accepted as the price to avoid inflation and insure
economic recovery.
The editorial page of the New York Times of Saturday, February
20, included an excellent discussion of the economic growth which
has taken place in Western Germany. This editorial clearly shows
3* First National City Bank Monthly Letter, "Business and Economic Conditions, Full Employment
and Stable Money—A British View," October 1958, p. 118.
*« Op. cit., First National City Bank Monthly Letter, p. 118.
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that price inflation and the manipulation of the money supply are
not a necessary prerequisite to growth. I t said:
Is price inflation a necessary prerequisite to, or accompaniment of, a high rate of national economic growth, as one
school of thought holds? Or is it true that, as many are
firmly convinced, the process of currency depreciation,
though it may, under favoring conditions, contribute to
temporary bursts of economic expansion, is fundamentally
inimical, if not potentially fatal, to the achievement of a
state of long-term economic expansion?
Most of the discussion of this question is conducted a t the
purely academic level, or in terms of U.S. historical experience. The introduction of case histories outside this country
is always a refreshing addition to the debate.
The postwar recovery of the West German economy has
been one of the most remarkable achievements of its kind,
whether judged by present standards or those of any other
period or place. Despite heavy wartime destruction and
the burden of partition, plant dismantling and its refugee
problems, Germany had regained prewar production levels
5 years after the war's end and had become a pace setter in
this respect in Western Europe. No less striking, as a study,
which appears in the February issue of the Monthly Review
of the New York Reserve Bank, reminds us, has been the
restoration of the country's position in world trade, which
has resulted in turning the Deutsche mark into one of the
world's hardest currencies.
True, Germany was the beneficiary of massive U.S. aid
in the early postwar years, b u t this aid might have resulted
in something considerably less than a miracle had it not been
accompanied by an early restoration of a free market mechanism. I t was by this mechanism, as the bank points out,
that German efforts and resources were channeled into the
most useful employment. Moreover, it adds, " t h e early
adoption of a vigorous monetary policy, which helped to
contain inflationary pressures at home, insured Germany's
competitive position in world markets and helped provide
the ordinary financial setting necessary for rapid economic
recovery." 36
Its concluding paragraph clearly joins the issue which divides the
majority's views from m y own. I t said:
Dr. Wilhelm Vocke, one of the architects of Germany's
recovery, notes that his country's experience contains " t w o
principal lessons." The first is that currency stability can
be achieved and preserved even under adverse circumstances.
The second lesson—and to him a more significant one—is
that a monetary policy firmly committed to currency stability
not only does not conflict with rapid and sustained economic
growth but indeed is essential to its achievement. 37
s« The New York Times, vol. CIX, No. 37,282, Feb. 20,1960, p. 22.
a? Ibid.
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Because there has been so much confusion with respect to monetary
and fiscal policy, it is necessary to set forth a few of the basic prerequisites for a monetary policy that will provide long-term growth.
Dr. Winfield W. Riefler, assistant to the Chairman, Board of
Governors of the Federal Reserve System, in a paper delivered at the
session of the 18th Stanford Business Conference on July 21, 1959,
said:
What can we say then of the preferred environment for
growth? I do not refer here to the resource factors essential
for growth, such as invention, education, and research but
rather to the more general type of environmental factors
touched upon in this paper.
First, among these I would emphasize the maintenance of
a market-oriented economy, sensitive to competitive forces,
in which costs and prices are flexibly responsible to the interplay of supply and demand. In such an economy, I would
expect to find quick appreciation of the advantages of essentials to growth—specialization, substitution, innovation,
efficiency, and economy.
Second, I would rely primarily upon the flexible adaptation of fiscal and monetary policies to provide both a sustained high level of output and a price behavior that did not
stimulate expectations of inflation, creeping or otherwise
Third, I would hope that the benefits of rising productivity
and growth were broadly distributed in three general directions and not overweighted in any one: (a) in the direction
of wage and income advances to the working force to encourage mobility and the ready availability of needed skills and
talents of points of innovation; (b) in the direction of lower
prices promotive of broader and expended markets for those
end products where productivity has lowered real costs; and
(c) in the direction of sufficient profit-encouragement to
those who innovate successfully to simulate initiative in
management-planning for growth. In other words, I would
favor a situation where the efficiencies of growth were
reflected in falling, not rising, unit costs.
I think it was something like this that provided the environment so favorable to the very rapid growth rates that
prevailed in this country in the last third of the 19th century. I suspect that the lowering of unit costs at that time,
made possible by the application of the new techniques of
the industrial revolution to the untapped resources of the
West, created a situation in which falling prices for final
products still left wide margins to provide higher returns for
manpower as well as investment.
Finally, I would avoid a situation where, despite a high
rate of technical innovation and rising productivity, unit
costs rise to such a degree as to press seriously on profit margins and thus bring pressure for selling prices also to rise.
T h a t path is the path of inflation with all the evils it entails.
I do not disagree with the exponents of the economics of
creeping inflation when they say that if costs rise faster than
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productivity final prices must rise or the economy will grind
to a halt. I disagree with them rather when they say that
such a process is sustainable and constitutes an acceptable
price for growth. M y complaint is that it is both cruel and
dangerous. Far from providing a firm underpinning to
growth, it will, if long continued, engender instability, increase tensions, and impair the very basis of growth. 38
Mr. Woodlief Thomas, economic adviser to the Board of Governors
of the Federal Reserve System, in a paper entitled, "Strategic Factors
in the Current Business Outlook/' presented at the Helen Slade
Memorial Conference of Forecasting sponsored by the New York
Statistical Society, on April 23, 1959, said:
Easy money, i.e., abundant credit availability and low
interest rates, taken alone, cannot assure sustainable growth.
Adequate credit is essential, but excessive credit, though a
temporary stimulant, in the long run will lead to unstabilizing
consequences. Where there are special weak elements in an
otherwise strong economy, easy credit is likely to stimulate
the already exuberant sectors without aiding those that are
depressed.
The role of monetary policy is to assure the maintenance
of an adequate supply of cash balances for the effective operation of the economy. There is no fixed amount relative to
gross national product or any other measure that is appropriate under all conditions. Allowance must be made for
changes in the rate of use of existing money, which may be
influenced by liquid assets other than cash and by anticipations and other attitudes of the business community.
I t is most important that bank credit not be employed as
a substitute for saving at a time when investment demands
exceed the supply of savings available for lending and when
there is relatively full utilization of resources. In a broad
sense, bank credit changes should correspond to changes in
savings that are held in cash form, if economic balance is to
be maintained.
Monetary policies should be conducted so as not to contribute to instability by forcing credit liquidation or stimulating unsustainable credit expansion. Monetary policies,
however, cannot be expected to offset instability arising from
other factors. To attempt to do so would be likely to accentuate rather than prevent instability in prices and employment in the long run. There is no case—at least since the
establishment of the Federal Reserve System—in which a
downturn has been brought on by tight money. Downturns
have usually developed because of pricing policies and income
distortions or unsustainable speculative developments that
were often aided by excessive credit expansion. 39
I t is significant that a person with the broad understanding of
monetary policy and an association with the Federal Reserve System
38
39
Op. cit., "Prerequisites for Economic Growth," National Industrial Conference Board, p. 32.
Op. cit., "Prerequisites for Economic Growth," p. 31.
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extending for a period of 38 years—in fact, for all but 9 years of its
existence—should categorically state t h a t :
* * * There is no case—at least since the establishment of
the Federal Reserve System—in which a downturn has been
brought on by tight money * * *.40
Mr. Thomas was also a participant in the Forum of the National
Industrial Conference Board previously referred to. He discussed
Mr. Riefler's basic economic views and summarized them as follows:
Inflation is the enemy of growth, particularly when there is
public expectation that the purchasing power of money will
continue to decline. Inflation impairs growth:
1. Because it increases instability—high level of activity
cannot be sustained for long when inflation is expected to
prevail;
2. Because it fosters the misallocation of capital and impairs the quality of the managerial and investment decisions
on which gorwth is based;
3. Because it distorts the saving-investment process and
encourages overspeculation; and
4. Because it undermines the country's position in international trade. 41
The recommendations contained in the majority's report would, in
time, jeopardize the entire financial stability of our economy and
result in its virtual collapse. No Member of the Congress can accept
these recommendations without great fear and concern. The Secretary of the Treasury had made a convincing argument in favor of
having the maximum possible freedom in refunding our mounting
Federal debt into obligations which would be attractive to institutional investors. The views of the majority's report not only reject
his request for the elimination of the present 4# percent statutory
ceiling on these bonds, but, furthermore, proposes an additional
deterrent, namely, that "the Federal Reserve should immediately
take the steps necessary to regulate the presently unregulated New
York bond market and to apply margins to its customers." If this
step were taken, it is difficult even to begin to estimate what problems
would be generated in the orderly handling of the Federal debt.
This last suggestion is made without any explanation or supporting
evidence as to its necessity or any evidence of abuses in the New York
bond market which requires this drastic intrusion of a new Federal
regulatory power.
I t is again noteworthy that the committee, in outlining its plans for
the coming year, discusses the tabulation and summary of a questionnaire submitted by 17 security dealers. I t states:
In connection with the committee's hearings conducted as
part of the study of employment, growth, and price levels,, the17 firms dealing in Federal Government securities were asked
to submit detailed information on a number of aspects of their
business over the last 10 years. The assembly and submission of this information is now nearly completed. The designated staff is directed to tabulate and summarize the data
«Ibid.
«Ibid., p. 30.
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from the dealers for committee consideration, in accordance
with committee rule 23, in a manner which will not reveal the
identity of any individual, partnership, corporation, or entity.
I t is difficult to justify a sweeping proposal such as the regulation of
the New York bond market when the committee admits that it has not
.yet tabulated the questionnaires received from dealers in these securities. I n fact, it is appropriate to question whether any worthwhile
result can be achieved by analyzing questionnaires if preconceived
answers have been derived before their study.
I t is remarkable that the majority's report of the Joint Economic
Committee can completely fail to comment on the performance of the
•country's credit machinery during the past year as revealed in the
President's Economic Report. Federal Reserve policy was directed
at maintaining a stable price level. This goal has been achieved with
only a small expansion in total bank assets. Nevertheless, the economy was able to finance a record recovery.
The majority's report states:
* * * We must, however, be concerned about the undue
emphasis on fighting inflation which continued to dominate
the administration's policies and those of the monetary
authorities.
I t seems far wiser to stop inflation before it starts than to clamp
controls on the economy later.
The President's Economic Report shows that the growth in both
consumer and real estate loans exceeded the high rates of 1955. He
-stated that—
Not only was consumer lending by banks at a record rate,
but so was the overall increase in consumer credit outstanding. * * * All major categories of installment credit
other than that extended for the purchase of automobiles
rose more than in 1955. Contrary to the developments in
that earlier year, however, there appears to have been no
appreciable liberalization in 1959 of the maximum terms on
which installment credit was made available to consumers. 42
He also said:
* * * The amount of nonfarm residential mortgage
credit in use increased by a record $15 billion, compared
with an increase of $12 billion in 1958. State and local
security issues exceeded those in any previous year, as new
authorizations of State and local securities continued to
build up a large backlog of issues.
The credit markets were also required to supply funds
associated with an increase of $7.9 billion in U.S. Government debt and to absorb outside of the banking system the
$8 billion reduction, referred to above, in bank holdings of
U.S. securities. Most of the new issues of Federal securities
were obligations of short- and intermediate-term maturity,
because the 4^-percent interest rate limitation effectively
precluded flotations of longer term U.S. Government securities after the early part of the year. Hence, the Federal
Government was forced to do much of its needed financing in
'« Op. cit,, Economic Report of the President, January 1960, p . 19.
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the same maturity range in which commercial banks were
reducing their holdings of Government obligations.
Investment sources outside the commercial banking
system absorbed the new offerings of Federal securities,
as well as bank sales of short- and intermediate-term Federal
obligations, but at a substantial increase in rates. Nonfinancial corporations expanded their holdings by $5 billion
* * * mostly in very short-term securities; foreign and
international accounts, savings and loan associations, and
individuals likewise added to their portfolios. 43
None of these statements indicate that the policies of the Federal
Reserve System have in any way interfered with housing and home
construction, with expansion of consumer credit, or the financing of
State and local bond issues for those projects demanded by the voters
in their respective localities.
I t should be emphasized that an increase in the interest rates does
not necessarily profit large institutional investors or commercial banks
since the value of their present bond portfolio is immediately reduced.
Furthermore, interest received on Federal securities in most cases is
fully taxable, and a large portion of it reverts back to the Treasury.
The majority's report continues to raise an emotional issue rather
than to deal with an economic fact; namely, how the Treasury can
best refund its obligations which are maturing at a rate of about $80
billion annually. As long as a large portion of the national debt
consists of short-term securities, the financial community will be
subject to continuing pressures which impede loans to small business
which is the object of this committee's apparent concern.
If a larger portion of the Government debt were sold to institutional
investors who are necessarily interested in long-term securities at a
competitive yield, the pressure on short-term borrowers and those
concerned with the purchase of homes and consumer goods or requiring funds for financing small business would abate. High interest
rates for these classes of borrowers are the direct responsibility of this
Congress, which has refused to take the action recommended for
their relief.
The majority's report in its discussion of monetary policy expresses
particular concern with the financing of homes. Page 209 of the President's Economic Report, table D-46, shows a continuing growth in
conventional mortgage financing which reached an all-time peak in
1959 of $77 billion, an increaseof $9.4 billion over 1958. On the other
hand, there was a decline in Veterans' Administration mortgages of
$300 million and an increase in Federal Housing Administrationinsured mortgages of only $4.2 billion.
Artificial interest rates do not build homes, and they represent a
disservice to those in the construction industry as well as to those who
are seeking new housing.
These views were reinforced in testimony before the Joint Economic
Committee by Dr. George Cline Smith, vice president and chief
economist of F . W. Dodge Corp., on February 1. He commented on
the role of interest rates as a factor in the growth of conventional
mortgages and Government-underwritten mortgages. Dr. Smith
said—
«Ibid.
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* * •* there are many who believe that housing should be
used as a balance for the rest of the economy, and it is obvious
that it has tended to serve in this capacity. The question has
been raised, however, whether it is (a) fair to those in labor
and management whose incomes are tied to this industry to
make use of it in such a manner, and (b) wise to interrupt the
progress that might otherwise be made in such a social necessity as better housing.
I am firmly convinced t h a t the principal, if not the only
important cause of the cyclical movements of housing in the
postwar period is the interest-rate structure—and only in
the F H A - V A sectors of housing, at that. Demand as such
for new housing has remained steady, year after year, as far
as I can make out. Regardless of interest-rate changes,
conventionally financed housing has not shown any significant cycle. The entire roller coaster in housing starts is
accounted for by the FHA-VA-insured programs.
It is easy to deduce that the solution to the housing cycle
lies either in maintaining steady and relatively low interest
rates or in making the F H A and VA rates flexible enough to
compete in the money markets. The first solution, in m y
opinion, is incompatible with our economic system. The
latter solution has been requested by the President again in
his messages to Congress. 44
VI.
CONCLUSIONS
Public Law 304, 79th Congress, the Employment Act of 1946,
expressly provides that:
'
SEC. 2. The Congress hereby declares that it is the continuing policy and responsibility of the Federal Government
to use all practicable means consistent with its needs and
obligations and other essential consideration of national
policy, with the assistance and cooperation of industry,
agriculture, labor, and State and local governments, to
coordinate and utilize all its plans, functions, and resources
for the purpose of creating and maintaining, in a manner
calculated to foster and promote free competitive enterprise
and the general welfare, conditions under which there will
be afforded useful employment opportunities, including selfemployment, for those able, willing, and seeking to work,
and to promote maximum employment, production, and
purchasing power.45
I t will be noted that all actions recommended by the Congress or
the Executive should foster and promote free competitive enterprise.
There are greater values involved than merely economic questions in
this formulation of basic policy. Our forefathers provided t h a t
American citizens were to be afforded the maximum opportunity to
determine how they shall live their lives under God. They had just
fought a war to be free from the economic decisions imposed by a
" Hearings before the Joint Economic Committee, Congress of the United States, Washington, D.C.,
Feb.
1,1960.
*5 Op. cit., "Current Price Developments and the Problem of Economic Stabilization," hearings before
the Joint Committee on the Economic Keport.
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Parliament who thought that they were more competent to determine
how the settlers on this continent could best fulfill their lives.
Free competitive enterprise embraces a freedom of choice in disposing of one's income and in maximizing one's satisfactions, as long
as it is not done at the expense of others. I t embraces the freedom
to work where one wishes, to purchase what one wants, to speak, think,
and worship as one pleases. These are the basic tenets of the American
way of life.
President Eisenhower in his Economic Report said:
However, we must go further in establishing a broad public understanding of the relationships of productivity and
rewards to costs and prices. I t would be a grave mistake
to believe that we can successfully substitute legislation or
controls for such understanding. Indeed, the complex relationships involved cannot be fixed b y law, and attempts to
determine them b y restrictive governmental action would
jeopardize our freedoms and other conditions essential to
sound economic growth.
Our system of free institutions and shared responsibility
have served us well in achieving economic growth and improvement. From our past experience, we are confident
t h a t our changing and increasing needs in the future can be
m e t within this flexible system, which gains strength from
the incentive it provides for individuals, from the scope it
affords for individual initiative and action, and from the
assurance it gives that Government remains responsive to the
will of the people. 46
The Chairman of the President's Council of Economic Advisers,
Dr. Raymond J. Saulnier, has repeatedly stated that the ultimate
purpose of the American economy is to produce more consumer goods.
H e stated t h a t the objective of everything that we are seeking is to
produce things for consumers. This philosophy is consistent with
the freedoms embodied in our basic history. On the other hand,
there are many individuals who believe that the objectives of our
economy are not merely the production of more consumer goods
which in turn is predicated on free consumer choice, but rather more
facilities provided by Government. These thoughts have appeared
in many books and papers written in recent years, which are predicated on the premise that we have become "an affluent society."
Their concept is based on Government planning rather than consumer
choice in the marketplace.
I reject this philosophy unequivocally. The policies and recommendations embodied in the majority's report, if they are ever enacted
into law, would, in time, result in the elimination of those freedoms
which Americans cherish.
The American economy is based on voluntary decisions rather than
planning by an all-wise bureaucracy. I t is relatively easy to plan
an economy where living standards are low. The only consideration
is to insure that everyone shall have a basic subsistence.
Fortunately, we are living in a country where competition in the
marketplace for the patronage of consumers who are free to buy or
not to buy provides the motivating force, and our living standards
are the highest in the world. If Government spending and taxes
46
Op. cit., "Economic Report of the President," January 1960, p. 8.
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rise to a point where the collective decisions represent too large a,
share of our gross national product, the incentive system which has
made this country great will be destroyed.
This committee is necessarily concerned with maintaining a rate of
growth which will not only advance the well-being of our people,
insure the maximum employment consistent with the maintenance
of free enterprise, but also insure our ability to assist other countries
in the free world to maintain their way of life free from aggression
from any source. Many attempts have been made to justify excessive Government direction of the economy on the basis of Russia's
supposed rise in productivity.
One of the most distinguished economists of this age is Colin C.
Clark, formerly of Australia, and presently director of research for
the Econometric Institute, Inc., who testified before the Joint Economic Committee on September 28, 1959. Mr. Clark, who has
contributed so much to modern economics, dealt with this subject in
his testimony before the committee, but this again w^as never referred
to in the majority's views in Senate Report No. 1043. The following
colloquy between the chairman and Mr. Clark is basic to an understanding of our problem:
The CHAIRMAN. In recent years the rate in Western
Europe has had a higher growth rate than we? Western
Continental Europe?
Mr. CLARK. Yes. But these figures ar3 of their nature
misleading, because you are taking countries which have
been devastated by war, and you are measuring their rate
of recovery. I think it is a fair parallel to take a doctor
who is treating a child recovering from a serious illness,
plotting its weight on a diagram, seeing how rapidly it rises,
and saying that within a year the child will weigh more than
its father. If a doctor did that, we would regard him as
unfit to practice medicine. But economics is still a very
unsophisticated science. And a lot of these claims which
are made about the Russian growth rate are entirely wide
of the mark. The idea seems to have got general acceptance
that the Russian growth rate is two or three times the
American.
I n fact, over the long period—and I submit the detailed
evidence—the Russian growth rate in product per man-hour
is very considerably below the American.
The CHAIRMAN. The Russians are undoubtedly unscrupulous at handling figures. How can you be clever enough
to detect the degree of their unscrupulousness and deflating
figures properly?
Mr. CLARK. I t has taken more than 20 years of continuous
study, Mr. Chairman. I first published a book on this subject in 1939, and I have relied a good deal on other critical
work, particularly by Jasny, Nove, and Chapman. I should
also add that the work done by Professor Nutter in the
National Bureau of Economic Research comes to exactly the
same conclusion using an entirely different method, because
I have worked using figures of actual consumption and investment. He has worked by using manpower productivity in >
sectors of manufacture. And he has come to just the same
conclusion.
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You can understand the zeal with which Soviet and fellowtraveling propagandists tried to make their case, because the
Russian philosophy is a materialist one. The Russian
people have been called upon to sacrifice their property and
their freedom and their family life and their religious beliefs
and everything else for the sake of productivity, and it is a
bit hard to find, as they are finding, that all they have is a
very second-class improvement in productivity in return for
sacrificing everything else.
Coming back to American prospects, I should say there is
no serious prospect of the 2.3 perannum productivity growth
being increased. Or, if it is to be changed, it will only be
: changed very slowly. These productivity changes in nearly
every country take place continuously and slowly.47
To preserve the freedoms that we cherish, Government expenditures
and taxation must be curbed. This philosophy is contrary to the
entire thesis of the majority's report. I t is unfortunate that Mr.
Clark's earlier testimony was not reflected in the preparation of the
majority's views. Mr. Clark testified:
You may remember, Mr. Chairman, in 1952 you presided
over a radio debate between myself and Professor Heller, who
took the view that high levels of taxation did no economic
harm. That is the view held, I am afraid, by the majority
of economists. And when we concluded the debate, we left
the matter undecided, and I said,-"Well, if I come back after
a few 3^ears, I am afraid I shall find American prices very
much higher than they are now in 1952." And I am afraid
t h a t has been the case. The rise has been persistent, even
though we have had two quite sharp business recessions during the intervening years.
I first reached this conclusion about 25 percent of the
national income's being the safe limit for taxation in an article
published in the Economic Journal in 1945. And it is an
interesting point that the editor of the Economic Journal
who published the article was Lord Keynes, and in addition
he wrote me a personal letter in 1944 in which he said that
he agreed with my conclusions. In fact, during the last
years of his life Keynes went out of his way to say that he
himself was not a Keynesian, and he did not agree with the
ideas which were being advocated in his name. 48
In spite of the fact that no one has refuted Mr. Clark's conclusion
that 25 percent of the national income is a safe limit for taxation, in
1958, the last year for which total figures are available, Federal, State,
and local taxes combined to consume more than 30 percent of our
national income. Furthermore, the Federal Government was operating with a deficit of $13.3 billion.49
Unfortunately, these same ideas are now being advanced by individuals far less able than Keynes to understand their full implications
to our way of life.
*7 "Employment, Growth, and Price Levels," hearings before the Joint Economic Committee, Congress
of the United States, 86th Cong,, 1st sess., pursuant to S. Con. Res. la, Sept. 28,1959, pp. 2456-2457.
«49I b i d , p. 2459.
Op. cit., "Economic Report of the President," January 1960, pp. 166, 218, 219.
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A D D I T I O N A L VIEWS OF SENATOR JACOB K. JAVITS
Government is the servant of the people, not their master. I t exists
to serve their requirements, to create the climate and the security
within which they can pursue the means to achieve a high standard of
living and a creditable national destiny. Hence Government spending—additions to the gross national product by Government itself—
is not the optimum way in which to achieve the highest aggregate
well-being or to increase most effectively the Nation's resources or
its productivity.
I t is vital to recognize two factors:
First, our efforts in respect of slum clearance and urban renewal,
resources development, schools, aid to depressed areas in the United
States, health and medical research, and similar programs must be
directed toward facilitating and improving the people's opportunity
and capability to produce and to enjoy, rather than being considered
to constitute production in and of themselves. Second, increase of
production and growth of productivity is not in itself an absolute
objective in a private economy; such growth must be selective in
order to have the greatest and most meaningful impact on the welfare
of the people and the interests of the Nation. For example, increases
in housing, modernization of our railroads, and slum clearance and
urban renewal are far more important for meaningful growth in the
economic system than is the production of ever more expensive, complex, and extravagant luxuries. While luxuries may make our lives
more enjoyable—and we certainly value them as an essential part of
the American way of life—there must be a certain balance between
the extent of such production and other uses of our productive resources within the totality of the national balance sheet.
I t is these two major points which are basic to m y disagreement
with the majority, which it seems to me does not give them the weight
they deserve, in their discussion of growth and the utilization of our
national resources. I t is for that reason that I feel impelled to state
my views separately. I also wish to note that I feel it is the duty of
the Joint Economic Committee, in reviewing and reporting on economic conditions to the Congress and the Nation, to narrow and point
up the divergences in our different points of view, while indicating the
wide areas where agreement exists, rather than to widen divergences
of view, which has been, I regret to state, the effect of recent reports.
Whatever else might have developed since the time of the President's
1959 Economic Report, one thing is now clear: There appears to be
general agreement that while the danger of a hot war in the struggle
between freedom and communism has diminished lately, the reality
of the economic and social struggle has grown more real and urgent.
I t has also become clear that in this economic and social struggle the
final decision is going to be won "at home," considering the whole free
world as home. For the battleground of decision is seen with constantly greater clarity to be the less developed and relatively uncommitted nations and areas of the free world in south and southeast
Asia, Asia Minor, Africa, and Central and South America.
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In this struggle two questions will decide: First, can the free world!
help the people of the less developed areas attain an adequate rate of
development, leading them as quickly as they have a reasonable right
to expect toward more tolerable living conditions, and second, will theCommunists be able to persuade the peoples of these less developed
areas that the way to attain their social and economic objectives is by
accepting at one and the same time the tyranny, suppression of human
dignity, and iron discipline of communism? Upon these two questions hinges the fate of the free world, and therefore of mankind.
I n the Economic Report of the President, taken together with the
President's message on foreign economic assistance which was sent to
the Congress on February 16, 1960, we are beginning to spell out
these issues and questions, and the ways to answer them.
The challenge of the free world is its own economic and social
integration. I t is now clear that whatever the Communists may do,
the effective combination of free men can frustrate and defeat them,
and win the epic struggle of our times for freedom.
Basic to the economy of the free world, especially of the newly
developing areas to which an active foreign trade in the primary
commodities is indispensable, is a liberal U.S. trade policy. Such a
trade policy is required in fairness to consumers in the United States
and calls, also, for the increased competitive sharpness of our domestic
production system. I t calls for increased exports, particularly in the
face of our substantial balance of payments deficit, exports which are
in themselves a test of our productive capacity and competitiveness
in the struggle between free institutions and communism. I t requires
that the other industrialized nations of the free world must join in
the work of economic development of the less developed areas. The
potential for this cooperation exists, the will is there, and a start has
been made at the recent Paris conference of January 1960, with the
proposals of Under Secretary of State Douglas Dillon, aimed at the
establishment of a 20-nation organization of Atlantic economic cooperation which can pursue coordinated economic policies.
In these endeavors we must also keep very much in the mind the
possibility of economic dislocation in certain segments of the economy,
which can result from increased imports—while we recognize that
exports employ eight or more times as many Americans as are adversely affected by such imports. We know we cannot sell (export)
if we do not buy (import), but we must establish machinery to assist
those economic areas which are adversely affected by the overall U.S.
foreign trade policy by making available to such industries and employees low interest loans, reconversion and retraining assistance, and,
where necessary, aid in relocation. We must never forget the impact
at home of our national policies, nor must we place ourselves in the
situation where our failure to meet these domestic needs will adversely
affect our long-range national economic policy requirements, which
have their impact on the economy as a whole.
Of great importance to the outcome of the economic struggle will
be the degree to which U.S. civilians enlist directly in the effort to
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promote peace and prosperity in the free world by working overseas
for businesses and voluntary organizations, as well as for the Government. A national drive should be launched to usher in a new era in
1960, an era of thousands of well-trained, dedicated, versatile young
Americans abroad, as businessmen, students, workers, teachers, missionaries, technicians, and doctors, together with their families, ready
and willing to teach or to train as well as to listen and learn.
Person-to-person diplomacy by 500,000 American civilians working
overseas compared to the 100,000 working overseas now is a realistic
short-range goal, if U.S. public and private overseas assistance continues to expand and grow as it should in less developed areas and
as U.S. colleges and universities equip themselves to train thousands
for overseas assignments. The great majority of these Americans
working abroad are destined to be stationed in the front lines of the
new economic struggle, for the less developed areas are the favorite
target for the Communist bloc's economic penetration.
I t seems clear that an increase in productivity is essential not only
to enable us to meet the needs of our growing population, but to
improve as well our overseas position in terms of our balance of payments and to enable us to carry the leadership of the free world for
peace.
A conscious effort to increase our productivity may well be made
with help from our wartime experience, during which 5,000 labormanagement productivity councils were registered with the Federal
Government. The Department of Labor in cooperation with the
Department of Commerce and other appropriate agencies should
begin to lay plans for the development of local and regional labormanagement productivity councils. Such councils should have
representatives of the trade unions, management, and possibily local
government. They could at this time plan for improving labormanagement relations, the transition to automation, improving plant
efficiency and safety, improving job training and apprenticeship
programs, reducing avoidable absenteeism, and establishing better
mutual understanding between industry and the community. I am
planning to introduce legislation in the near future which would
promote the establishment of such councils.
I fully recognize the validity of the President's position with
respect to the Federal Government's fiscal policy, requesting favorable
action by the Congress on his recommendations for appropriations
and revenue measures contained in the 1961 budget; the use of an
expected $4.2 billion surplus for debt retirement; and action by the
Congress with respect to the. interest ceiling on issues of long-term
Federal bonds. But, I must point out that none of these points are
immutable or inflexible in their specific implementation.
The financial viability of this Nation is a major element in national
security, growth and high production, employment and income, and
therefore we cannot lay aside budgetary considerations; at the same
time, it would be folly to permit them to become the primary determinants of our national policy. We must achieve the ability to
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meet the domestic and international economic challenges which
confront us, without making a budget surplus our sole aim—yet with
the intent to balance the budget and to achieve a meaningful surplus
for the reduction of the national debt wherever possible, by a careful,
hardheaded regard for budget and fiscal necessities. The budget may
well have to yield to such exigencies as adequate aid to education and
still could show a substantial surplus—while in return, the results of
sufficient Federal assistance in this area today will result in substantially greater benefits to the national strength, income and
revenues.
A little loosening of the budget could be joined with tax revision
and tax reform. I recognize the obligation to support an adequate tax
structure, both in terms of continuing for the present the existing scale
of most excise taxes and in terms of closing tax loopholes which
presently permit large segments of the economy to escape their
responsible share of the burden of Government. That is why I favor
a reasonable reduction in the 27}£-percent oil depletion allowance, in
excessive mineral depletion allowances, and in other special tax
privileges. Also consideration needs to be given to the encouragement of foreign private investment, the retirement needs of middleincome earners, and small business.
The current red-hot debate over the existence of a U.S. "missile
g a p " and the adequacy of our defenses, and the implications of these
factors for the destiny of the United States as the leading free world
power, have projected into even greater prominence the status of our
higher education system and our dependence on its capability in the
years ahead to train and develop the talent essential to free world
leadership in the space age—scientifically, technologically, and
culturally.
With respect to the importance of debt management policy to price
stability, budgetary control and the strength of the economy, there
can be little doubt. But even here there can be flexibility in meeting
the requirements of the Economic Report. For example, the President's recommendation with respect to interest rates on long-term
bonds—those with maturities over 5 years—could be met by granting
this request with respect to bonds issued during a term of years—
perhaps the next three—thus retaining residual congressional control,
with provision for a review of the operations of the Treasury while
freed from the ceiling during the intervening years. In addition, I
continue to urge that the Treasury meet at least part of its need for
long-term funds through fuller utilization of the special role of savings
bonds. The particular anti-inflationary character of these issues,
their substantially lower interest costs to the Government, and the
leeway which now exists with respect to their interest rates, set at
3.75 percent by the Treasury, but subject to a ceiling of 4.25 percent,
calls for a vast increase in their sales. Right now they are at a new
low ebb as a means of Federal Government finance with redemptions
rising and sales falling.
Irrespective of congressional action on long-term marketable bond
interest rates, I urge that there be a drive to sell to the public what we
now call savings bonds, but what should be renamed "peace bonds"—
this drive to feature a special $25 billion issue which would seek to
attract millions of new investors in a significant shift of the national
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debt into these securities. These should carry an interest rate higher
than the present 3.75 percent if that is necessary to achieve the desired
amount of sales. M y colleague, Senator Williams of Delaware, has
suggested a most commendable plan for such savings bonds which
would call for an immediate rise in their interest rates to 4.25 percent.
I t should be clear that to meet our economic and production needs,
reliance cannot be on monetary and fiscal policy primarily. These
are tools and catalysts; they do not create and produce goods in themselves. I t is the potentials of labor and capital, of inventiveness and
managerial skills which produce and which increase productivity. The
potentials of the United States with respect to such real productivity
increases are great and they must be achieved to make our economic
position secure. The real problems here require us to come abreast of
such specific national needs as an adequate transportation system, as
reflected in the problems of the railroads in terms of modernization,
research and development of new techniques. In this specific area,
I have just introduced legislation to establish a National Advisory
Committee on Rail Transportation, with the specific duty of undertaking and guiding research and development programs to enable this
vital industry to modernize its facilities and upgrade its operational
efficiency and services in the discharge of its present and future
responsibilities. This committee would function along the lines of the
National Advisory Committee on Aeronautics, which led in the technological development breakthrough of the aviation industry to the
healthy giant it is today.
We must not ignore the ancient maxim that man does not live by
bread alone, nor forget that a healthy and strong economy must find
a proper place for the democratic aspirations and the cultural needs
of its citizens. Purely in terms of economic welfare and strength,
these factors are vital, for the human resources of all our peoples,
regardless of race, color, religion or national origin must be equally
available to strengthen and contribute to the economic requirements
of the country. When prejudice and discrimination deprive us of the
services of one person, or deprive one person of the opportunity to
achieve, through adequate education, the ability to serve to the best
of his potential, every American suffers the consequences. Discrimination is a luxury we cannot afford; in addition, it is a drain on the
body politic which weakens it far beyond the loss to any individual
worker. A free economy depends on a free society—one in which
the opportunity of economic choice and the opportunity of political
and social choice go hand in hand.
Similarly, the morality of the Nation, as reflected in its attitude
toward minorities and in its support of cultural activities, goes not
only toward strengthening it in its productive powers, but also continues to assure that what we are fighting for in the struggle of economic and social systems between freedom and communism will be
attained at home.
In all these considerations, I think that the greatest importance
should be placed on finding the methods which will maximize the
use of the private sector of the economy to meet the needs of our people
and our Nation, both a t home and abroad. We must find the areas
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in which, without sacrificing the basic economic precepts of free enterprise and individual choice, we can expand our wealth, production,
and employment while, at the, same, time, protecting our standard of
living, our fiscal stability, and the value of the dollar. Our task is to
balance our needs, not with the thought that one goal must be sacrificed to achieve another, but with the full realization that we may be
able to achieve most or all of them through a judicious use of our
resources.
Survival is not a noble end in itself. I t is meaningful only if what
survives in our Nation is our freedom, our cultural heritage, and our*
standards of values and morality for which our peoples have strivem
so heroically in the past, and will always strive.
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PUBLICATIONS OF THE J O I N T ECONOMIC C O M M I T T E E 1
January 1947-February 1960
*Declaring a National Policy on Employment, Production, and Purchasing Power (Report of the Joint Committee on the Economic
Report), Senate Report No. 11: January 1947.
Food Prices, Production, and Consumption (Report of the Joint Committee on the Economic Report), Senate Document 113: April 1957.
*Hearings on Current Price Developments and the Problem of Economic Stabilization (June 24, 25, 26, July 2, 8, 9, 10, 14, 15, 16,
and 17, 1947): July 1947.
^Interim Report on the President's Program To Deal With the Problems
oj Inflation (Report of the Joint Committee on the Economic
Report), Senate Report 809: December 1947.
*Hearings on Anti-inflation Program as Recommended in the President's Message of November 17, 1947 (November 21, 24, 25, 26,
28, December 2, 3, 4, 5, and 10, 1947): December 1947.
*Allocation and Inventory Control of Grain for the Production of Ethyl
Alcohol (Report of the Joint Committee on the Economic Report),
Senate Report 888: February 1948.
*Hearings on Allocation of Grain for Production of Ethyl Alcohol
(February 5 and 6, 1948): February 1948.
*High Prices of Consumer Goods (Report of the Joint Committee on
the Economic Report), Senate Report 1565: June 1948.
Hearings on Increases in Steel Prices (March 2, 1948).
* Joint Economic Report (Report of the Joint Committee on the
Economic Report on the January 1948 Economic Report of the
President), Senate Report 1358: May 1948.
^Hearings on Credit Policies (April 13 and 16, M a y 12, 13, 27, 1948):
July 1948.
* Statistical Gaps, Current Gaps in Our Statistical Knowledge (materials
assembled by the staff of the Joint Committee on the Economic
Report), committee print: July 1948.
Consumers1 Price Index (materials assembled by the staff of the Joint
Committee on the Economic Report), committee print: December
1948.
*Hearings on Profits (December 6, 7, 8, 9, 10, 15, 16, 17, 20, 21, 1948):
December 1948.
Profits (Report of a Subcommittee of the Joint Committee on the
Economic Report on Profits Hearings), committee print: February
1949.
Hearings, January 1949 Economic Report of the President (February
8, 9, 10, 11, 14, 15, 16, 17, 18, 1949): March 1949.
Joint Economic Report (Report of the Joint Committee on the Economic Report on the January 1949 Economic Report of the President), Senate Report 88: March 1949.
1
Single copies of the publications listed may be obtained from the Joint Economic Committee except as
otherwise noted. A dditional copies of committee publications may be purchased from the Superintendent
of Documents, Washington 25, D.C., at the price given. The prices shown are for single copies. There
is a discount for quantity orders. Out-of-print publications are denoted by an asterisk. Publications
available only from Superintendent of Documents are denoted by a dagger (f).
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Joint Economic Report (minority views of the Joint Committee on the
Economic Report on the January 1949 Economic Report of the
President), part I I of Report &&: April 1949.
^Employment and Unemployment (initial report of the Subcommittee
on Unemployment), committee print: July 1949.
^Economy of the South (the impact of Federal policies on the economy
of the South), committee print: July 1949.
Factors Affecting the Volume and Stability of Private Investment (materials on the investment problem assembled by the staff of the Subcommittee on Investment), Senate Document 232: September 1950;
reprinted from committee print of October 1949.
*Hearings, Subcommittee on Monetary, Credit, and Fiscal Policies,
Federal Expenditure and Revenue Policies, September 23, 1949
(containing National Planning Association reports prepared by
Conference of University Economists): October 1949.
^Selected Government Programs Which Aid the Unemployed and LowIncome Families (materials assembled by the staffs of the Subcommittee on Unemployment and the Subcommittee on Low-Income
Families), committee print: November 1949.
Low-Income Families and Economic Stability (materials on the problem
of low-income families assembled by the staff of the Subcommittee
on Low-Income Families), Senate Document 231: September 1950;
reprinted from committee print of November 1949.
Compendium of Materials on Monetary, Credit, and Fiscal Policies (a
collection of statements submitted to the Subcommittee on Monetary, Credit, and Fiscal Policies by Government officials, bankers,
economists, and others), Senate Document 132: January 1950;
reprinted from committee print of November 1949.
Hearings, Subcommittee on Investment, Volume and Stability of
Private Investment, Part 1 (September 27, 28, 29,1949): November
1949.
Basic Data Relating to Steel Prices (materials assembled by the staff
of the Joint Committee on the Economic Report for use in steel
hearings), committee print: January 1950.
Highways and the Nation's Economy (materials assembled by the staff
of the Joint Committee on the Economic Report), Senate Document
145: January 1950.
*Hearings, Subcommittee on Monetary, Credit, and Fiscal Policies,
Monetary, Credit, and Fiscal Policies (September 23, November 16,
17, 18, 22, 23, and December 1, 2, 3, 5, 7, 1949): January 1950.
* Monetary, Credit, and Fiscal Policies (Report of the Subcommittee on
Monetary, Credit, and Fiscal Policies), Senate Document 129:
January 1950.
Employment and Unemployment (Report of the Subcommittee on
Unemployment), Senate Document 140: February 1950.
*Hearings, Subcommittee on Investment, Volume and Stability of
Private Investment, Part 2 (December 6, 7, 8, 9, 12, 13, 14, 15, 17,
1949): February 1950.
Hearings, Subcommittee on Low-Income Families, Low-Income Families (December 12, 13, 14, 15, 16, 17, 19, 20, 21, 22): March 1950.
*Hearings, January 1950 Economic Report of the President (January
17, 18, 19, 20): February 1950.
Hearings, December 1949 Steel Price Increases (January 24, 25, 26,
27): March 1950.
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^Low-Income Families and Economic Stability (final report of the Subcommittee on Low-Income Families), Senate Document 146:
March 1950.
Volume and Stability of Private Investment (final report of the Subcommittee on Investment), Senate Document 149: March 1950.
December 1949 Steel Price Increases (Report of the Joint Committee
on the Economic Report), Senate Report 1373: March 1950.
^Handbook of Regional Statistics (material assembled by the staff of
the Joint Committee on the Economic Report), committee print:
April 1950.
Joint Economic Report (Report of the Joint Committee on the Economic Report on the January 1950 Economic Report of the President), Senate Report 1843: June 1950.
*General Credit Control, Debt Management, and Economic Mobilization
(materials prepared by the staff of the Joint Committee on the
Economic Report), committee print: January 1951.
Underemployment of Rural Families (materials prepared by the staff
of the Joint Committee on the Economic Report), committee
print: February 1951.
*The Economic and Political Hazards of an Inflationary Defense Economy (materials prepared by the staff of the Joint Committee on
the Economic Report), committee print: February 1951.
Hearings, January 1951 Economic Report of the President (January
22, 24, 25, 26, 29, 31, February 2): March 1951.
Joint Economic Report (Report of the Joint Committee on the Economic Report on the January 1951 Economic Report of the President), Senate Report 210: April 2, 1951.
Making Ends Meet on Less than $2,000 a Year, Case Studies of 1004
Low-Income Families (communication to the Joint Committee on
the Economic Report from the Conference Group of Nine National
Voluntary Organizations Convened by the National Social Welfare
Assembly), committee print: July 1951.
Prevalence of Price Cutting of Merchandise Marketed Under PriceMaintenance Agreements, May 28 through June 25, 1951 (study prepared for the Joint Committee on the Economic Report and the
Select Committee on Small Business), committee print: July 1951.
The Need for Industrial Dispersal (materials prepared for the Joint
Committee on the Economic Report by the committee staff), Senate
Document 55: August 1951.
^National Defense and the Economic Outlook (materials prepared for the
Joint Committee on the Economic Report by the committee staff),
committee print: August 1951.
Inflation Still a Danger (report of the Joint Committee on the Economic Report together with materials on national defense and the
economic outlook included in committee print mentioned above),
Senate Report 644: August 1951.
^Questions on General Credit Control and Debt Management (prepared by
staff of the Subcommittee on General Credit Control and Debt
Management of the Joint Committee on the Economic Report),
committee print: October 1951.
Monetary Policy and the Management of the Public Debt. Their Role
in Achieving Price Stability and High-Level Employment (replies
to questions and other material for the use of the Subcommittee on
General Credit Control and Debt Management): February 1952.
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Hearings, January 1952 Economic Report of the President (January
23, 24, 25, 26, 28, 30, 31, February 1): February 1952.
Constitutional Limitation on Federal Income, Estate, and Gift Tax Rates
(materials assembled for the Joint Committee on the Economic
Report and the Select Committee on Small Business of the House
of Representatives), committee print (sale price 15 cents): February
1952.
Joint Economic Report (Report of the Joint Committee on the Economic Report on the January 1952 Economic Report of the President together with National Defense and the Economic Outlook for
the Fiscal Tear 1953, material prepared for the Joint Committee on
the Economic Report by the committee staff), Senate Report No.
1295: March 1952.
The Taxation of Corporate Surplus Accumulations, The Application
and Effect, Real and Feared, of Section 102 of the Internal Revenue
Code dealing with Unreasonable Accumulation of Corporate Profits
(study prepared for the Joint Committee on the Economic Report
by Dr. J. K. Hall), committee print: M a y 1952.
*Hearings, Subcommittee on General Credit Control and Debt Management, Monetary Policy and the Management of the Public
Debt (March 10, 11, 12, 13, 14, 17, 18, 19, 20, 21, 24, 25, 26, 27, 28,
and 31, 1952): M a y 1952.
Monetary Policy and the Management of the Public Debt (Report of the
Subcommittee on General Credit Control and Debt Management)
Senate Document No. 163: July 1952.
Federal Tax Changes and Estimated Revenue Losses under Present Law
(Materials prepared for the Joint Committee on the Economic
Report by the committee staff), committee print: November 1952.
Sustaining Economic Forces Ahead (Materials prepared for the Joint
Committee on the Economic Report by the committee staff), committee print: December 1952.
^Pensions in the bnited States (A study prepared for the Joint Committee on the Economic Report by the National Planning Association), committee print (sale price 30 cents): December 1952.
Index of Joint Economic Publications: January 1947 through December 1952. Committee print: January 1953.
^Historical and Descriptive Supplement to Economic Indicators: December 1953.
*Hearings, January 1954 Economic Report of the President (February
1, 2, 3, 4, 5, 8, 9, 10, 11, 15, 16, 17, 18): March 1954.
*Joint Economic Report (Report of the Joint Committee on the
Economic Report on the 1954 Economic Report of the President),
House Report No. 1256 (sale price 30 cents): February 1954.
Hearings, Subcommittee on Economic Statistics, Economic Statistics
(July 12 and 13, 1954): August 1954.
Economic Statistics (Progress Report prepared by the Subcommittee
on Economic Statistics). House Report No. 2628: August 1954.
Congressional Action on Major Economic Recommendations of the President, 1954 (Materials prepared by the Joint Committee on the
Economic Report by the Committee Staff), committee print:
September 1954.
^Potential Economic Growth of the United States During the Next Decade
(Materials prepared for the Joint Committee on the Economic
Report by the Committee Staff), committee print (sale price 15
cents): October 1954.
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*Hearings, Subcommittee on Economic Stabilization, United States
Monetary Policy: Recent Thinking and Experience (December 6
and 7, 1954): December 1954.
t Trends in Economic Growth, A Comparison of the Western Powers and
the Soviet Bloc (Materials prepared for the Joint Committee on the
Economic Report by the Legislative Reference Service of the Library
of Congress), committee print (sale price $1): January 1955.
fHearings, January 1955 Economic Report of the President (January
24, 26, 27, 28, 31, February 1, 2, 3, 8, 9, 10, and 16, 1955) (sale price
$3.50): February 1955.
Joint Economic Report (Report of the Joint Committee on the Economic Report on the 1955 Economic Report of the President),
Senate Report No. 60 (sale price 30 cents): March 1955.
Historical and Descriptive Supplement to Economic Indicators: November 1955.
*Hearings, Subcommittee on Economic Stabilization, Automation
and Technological Change (October 14, 15, 17, 18, 24, 25, 26, 27,
and 28, 1955) (sale price $2.00): November 1955. (Reprinted September 1959.)
Automation and Technological Change (Report of the Subcommittee
on Economic Stabilization) committee print, November 1955 (sale
price 10 cents): became Senate Report No. 1308, January 1956.
Hearings, Subcommittee on Economic Statistics Reports of Federal
Reserve Consultant Committees on Economic Statistics (July 19
and 26, October 4 and 5, 1955) (sale price $2.25): November 1955.
Hearings, Subcommittee on Economic Statistics, Employment and
Unemployment Statistics (November 7 and 8, 1955) (sale price 45
cents): November 1955.
1955 Report on Economic Statistics (Report of the Subcommittee on
Economic Statistics) committee print, November 1955: became
Senate Report No. 1309, January 1956.
^Federal Tax Policy for Economic Growth and Stability (Papers submitted by panelists appearing before the Subcommittee on Tax
Policy), committee print (sale price $2.50): November 1955.
(Reprinted September 1959.)
fHearings, Subcommittee on Tax Policy, Federal Tax Policy for
Economic Growth and Stability (December 5, 6, 7, 8, 9, 12, 13, 14,
15, and 16, 1955) (sale price $2.00): January 1956.
Federal Tax Policy for Economic Growth and Stability (Report of the
Subcommittee on Tax Policy) committee print, December 1955
(sale price 10 cents): became Senate Report No. 1310, January
1956.
\The Federal Revenue System: Facts and Problems (Materials assembled for the Subcommittee on Tax Policy by the committee staff),
committee print (sale price 55 cents): (Reprinted M a y 1959)
January 1956.
^Characteristics of the Low-Income Population and Related Programs
(Materials prepared by the staff of the Subcommittee on LowIncome Families), committee print (sale price 60 cents): October
1955.
Hearings, Subcommittee on Low-Income Families, Low-Income F a m ilies (November 18, 19, 21, 22, and 23, 1955) (sale price $2.00):
December 1955.
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A Program for the Low-Income Population at Substandard Levels of
Living (Report of the Subcommittee on Low-Income Families),
committee print, December 1955 (sale price 10 cents): became
Senate Report No. 1311, January 1956.
Hearings, Subcommittee on Foreign Economic Policy, Foreign Economic Policy (November 9, 10, 14, 15, 16, 17, 1955) (sale price
$1.75): December 1955.
Foreign Economic Policy (Report of the Subcommittee on Foreign
Economic Policy), committee print, December 1955 (sale price
15 cents): became Senate Report No. 1312, January 1956.
Hearings, January 1956 Economic Report of the President (January
31, February 1, 2, 3, 6, 7, 8, 9, 14, 15, 17, and 28, 1956): March 1956.
t Joint Economic Report (Report of the Joint Committee on the Economic Report on the 1956 Economic Report of the President):
Senate Report No. 1606 (sale price 35 cents): March 1956.
^Hearings, Subcommittee on Economic Stabilization, Conflicting
Official Views on Monetary Policy: April 1956 (June 12, 1956)
(sale price 20 cents): June 1956.
Hearings, Subcommittee on Foreign Economic Policy, Defense
Essentiality and Foreign Economic Policy (June 4, 5, 6, and 7,
1956) (sale price $1.50): July 1956.
Defense Essentiality and Foreign Economic Policy, Case Study: Watch
Industry and Precision Skills (Report of the Subcommittee on
Foreign Economic Policy), Senate Report No. 2629, Parts I and I I
(sale price 15 cents with Part I I ) : July 1956.
Hearings, Subcommittee on Economic Stabilization, Monetary Policy:
1955-56 (December 10 and 11, 1956) (sale price 45 cents): January
1957.
Hearings, Subcommittee on Foreign Economic Policy, World Economic Growth and Competition (December 10, 12, and 13, 1956)
(sale price 45 cents): February 1957.
•(•Hearings, Subcommittee on Economic Stabilization, Instrumentation
and Automation (December 12, 13, and 14, 1956) (sale price 75
cents): February 1957.
*Employment Act of 194.6, as Amended, and Related Laws, and Rules
of the Joint Economic Committee (prepared by staff of the Joint
Economic Committee) committee print: January 1957.
•(Hearings, January 1957 Economic Report of the President (January
28, 29, 30, 31, February 1,4, 5, 6) (sales price $2.25): February 1957.
* Joint Economic Report (Report of the Joint Economic Committee
on the 1957 Economic Report of the President): House Report
No. 175: February 1957.
Fiscal Policy Implications of the Economic Outlook and Budget Developments (Report of the Subcommittee on Fiscal Policy), House Report
No. 647 (sale price 10 cents): June 1957.
Hearings, Subcommittee on Fiscal Policy, Fiscal Policy Implications
of the Economic Outlook (June 3, 4, 5, 6, 7, 13, and 14, 1957) (sale
price $1.00): June 1957.
^Productivity', Prices, and Incomes (Materials prepared for the Joint
Economic Committee by the committee staff), committee print
(sale price 70 cents): June 1957.
Soviet Economic Growth: A Comparison with the United States (A study
prepared for the Subcommittee on Foreign Economic Policy of the
Joint Economic Committee by the Legislative Reference Service of
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1960
J O I N ? ECONOMIC
REPORT
95
the Library of Congress), committee print (sale price 40 cents):
September 1957.
1957 Historical and Descriptive Supplement to Economic Indicators
(Prepared for the Joint Economic Committee by the Committee
Staff and the Office of Statistical Standards, Bureau of the Budget),
committee print (sale price 40 cents): September 1957. (New
edition late 1960.)
tFederal Expenditure Policy for Economic Growth and Stability (Papers
submitted by panelists appearing before the Subcommittee on Fiscal
Policy), committee print (sale price $3.25): November 1957.
Hearings, Subcommittee on Fiscal Policy, Federal Expenditure Policy
for Economic Growth and Stability (November 18-27, 1957) (sale
price $2.00): J a n u a r y 1958.
Federal Expenditure Policies for Economic Growth and Stability (Report
of the Subcommittee on Fiscal Policy), committee print (sale price
10 cents): January 1958.
tPolicy for Commercial Agriculture: Its Relation to Economic Growth
and Stability (Papers submitted by panelists appearing before the
Subcommittee fon Agricultural Policy), committee print (sale price
$2.25): November 1957.
Hearings, Subcommittee on Agricultural Policy, Policy for Commercial Agriculture: Its Relation to Economic Growth and Stability
(December 16-20, 1957) (sale price $1.00): January 1958.
Policy for Commercial Agriculture: Its Relation to Economic Growth
and Stability (Report of the Subcommittee on Agricultural Policy),
committee print (sale price 15 cents): February 1958.
fHearings, Subcommittee on Economic Statistics, The National Economic Accounts of the United States (October 29 and 30, 1957)
(sale price 75 cents): December 1957.
Hearings, Subcommittee on Economic Stabilization, Automation and
Recent Trends (November 14 and 15, 1957) (sale price 30 cents):
December 1957.
Automation and Technological Change (Reprint of S. Rept. 1308 of the
Joint Committee on the Economic Report, January 1956) (sale price
10 cents): January 1958.
International Economic Statistics (A Memorandum prepared for the
Subcommittee on Economic Statistics of the Joint Economic Committee by the Office of Statistical Standards of the Bureau of the
Budget), committee print (sale price 25 cents): February 1958.
Hearings, January 1958 Economic Report of the President (January
27, 28, 29, 30, February 3, 4, 5, 6, 7, and 10) (sale price $1.50):
February 1958.
Joint Economic Report (Report of the Joint Economic Committee on
the 1958 Report of the President): House Report No. 1409 (sale
price 20 cents): February 1958.
t The Relationship of Prices to Economic Stability and Growth (Papers
submitted by panelists appearing before the Joint Economic Committee), committee print (sale price $2.00): March 1958.
Hearings, Relationship of Prices to Economic Stability and Growth
(May 12, 13, 14, 15, 16, 19, 20, 21, and 22, 1958) (sale price $1.25):
July 1958.
The Relationship of Prices to Economic Stability and Growth (Commentaries submitted by economists from labor and industry appearing before the Joint Economic Committee), committee print (sale
price 65 cents): November 1958.
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Hearings, Relationship of Prices to Economic Stability and Growth
(December 15-18, 1958) (sale price $1.25): February 1959.
Hearings, Subcommittee on Fiscal Policy, Fiscal Policy Implications
of the Current Economic Outlook (April 28, 29, 30, and May 1,
1958) (sale price 55 cents): July 1958.
Frequency of Change in Wholesale Prices: A Study of Price Flexibility
(A study prepared for the Joint Economic Committee by the U.S.
Department of Labor, Bureau of Labor Statistics), committee print
(sale price 30 cents): January 1959.
Economic Policy Questionnaire (Tabulation of replies submitted to the
Subcommittee on Economic Stabilization of the Joint Economic
Committee), committee print (sale price 15 cents): February 1959.
*Hearings, January 1959 Economic Report of the President (January
27, 28, 29, 30, February 2, 3, 4, 5, 6, 9, 10, 1959): March 1959.
Joint Economic Report (Report of the Joint Economic Committee on
the 1959 Report of the President): Senate Report No. 98 (sale
price 25 cents): March 1959.
^Economic Policy in Western Europe (Report based on conferences on
economic policy matters held in seven countries of Western Europe
late in 1958 together with selected materials assembled by the
committee staff), committee print (sale price, $1.25): July 1959.
Comparison of the United States and Soviet Economies (Papers submitted by panelists appearing before the Subcommittee on Economic Statistics), committee prints.
t P a r t I (sale price, $1.00): October 1959.
fPart I I (sale price, 45 cents): November 1959.
t P a r t I I I (sale price, 25 cents): November 1959.
Hearings, Comparison of the United States and Soviet Economies,
hearings before Subcommittee on Economic Statistics, November 13, 16, 17, 18, 19, and 20 (sale price $1.25): November 1959.
fHearings, Automation and Energy Resources, hearings before the
Subcommittee on Automation and Energy Resources, October 12,
13, 14, 15, 16 (sale price, $1.25): November 1959.
Employment Act of 1946, as Amended, and Related Laws, and Rules
of the Joint Economic Committee (prepared by staff of the Joint
Economic Committee), committee print: November 1959.
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REPORTS, HEARINGS, AND STUDY PAPERS FROM THE STUDY OF
EMPLOYMENT, GROWTH, AND PRICE LEVELS
^Siajff Report on Employment, Growth, and Price Levels (committee
print) (sale price $1.50): December 1959.
^Employment, Growth, and Price Levels (Report of the Joint Economic
Committee, pursuant to Senate Concurrent Resolution 13, 86th
Congress, 1st session): Senate Report No. 1043 (sale price 50 cents):
January 1960.
fPart 1. The American Economy: Problems and Prospects, March 20,
23, 24, 25, 1959 (sale price 60 cents): April 1959.
fPart 2. Historical and Comparative Rates oj Production,
Productivity,
and Prices, April 7-10. 1959 (sale price $1.00): M a y 1959.
fPart 3. Historical and Comparative Rates oj Labor Force, Employment,
and Unemployment, April 25, 27, and 28, 1959 (sale price 35 cents):
June 1959.
| P a r t 4. Influence on Prices oj Changes in the Effective Supply oj Money,
May 25, 26, 27, 28, 1959 (sale price 75 cents): July 1959.
fPart 5. International Influences on the American Economy, June 29,
30, July 1, 2, 1959 (sale price 50 cents): September 1959.
t P a r t 6A. Government's Management oj its Monetary, Fiscal, and Debt
Operations, July 24, 27, 28, 29, 1959 (sale price $1.25): September
1959.
fPart 6B. Government's Management oj its Monetary, Fiscal, and Debt
Operations, August 5, 6, 7, 1959 (sale price 75 cents): November
1959.
| P a r t 6C. Government's Management oj its Monetary, Fiscal, and Debt
Operations, Replies to Questions on Monetary Policy, and other
materials (sale price 65 cents): November 1959.
t P a r t 7. The Effect oj Monopolistic and Quasi-Monopolistic
Practices
Upon Prices, Profits, Production, and Employment, September 22,
23, 24, and 25 (sale price $1.25): November 1959.
fPart 8. The Ejffect oj Increases in Wages, Salaries, and the Prices oj
Personal Services, Together With Union and Professional Practices
Upon Prices, Profits, Production, and Employment, September 28,
29, 30, October 1 and 2 (sale price 75 cents): November 1959.
t P a r t 9A. Constructive Suggestions jor Reconciling and Simultaneously
Obtaining the Three Objectives oj Maximum Employment, an Adequate
Rate o1 Growth, and Substantial Stability oj the Price Level, October
26, 27, 28, 29, 30, November 2, 3, 4, 5, and 6 (sale price 70 cents):
December 1959.
fPart 9B. Same title as 9A. (Materials submitted by 12 organizations at the invitation of the Joint Economic Committee) (sale
price 45 cents): December 1959.
fPart 10. Additional Materials Submitted jor the Record (sale price 60
cents): January 1960.
t N o . 1 Recent Inflation in the United States by Charles L. Schultze
(sale price 40 cents): September 1959.
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98
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JOINT ECONOMIC REPORT
Nos. 2 and 3 Steel and the Postwar Inflation by Otto Eckstein and Gary
Fromm; An Analysis of the Inflation in Machinery Prices by Thomas
A. Wilson (sale price 25 cents): November 1959.
Nos. 4 and 5 Analysis of the Rising Costs of Public Education by
Werner Z. Hirsch; Trends in the Supply and Demand of Medical
Care by Markley Roberts (sale price 30 cents): November 1959.
No. 6 The Extent and Nature of Frictional Unemployment by the Bureau
of Labor Statistics (sale price 25 cents): November 1959.
fNos. 7, 8, and 9 The Incidence of Inflation: Or Who Gets Hurts by
Seymour E . Harris; Protection Against Inflation by H. S. Houthakker; The Share of Wages and Salaries in Manufacturing
Incomes,
19Jf7-56 by Alfred H. Conrad (sale price 45 cents): November 1959.
Nos. 10 and 11 Potential Public Policies to Deal With Inflation Caused
by Market Power by Emmette S. Redford; A Brief Interpretive Survey of Wage-Price Problems in Europe by Mark W. Leiserson (sale
price 25 cents): December 1959.
Nos. 12 and 13 The Low Income Population and Economic Growth by
Robert J. Lampman; The Adequacy of Resources for Economic
Growth in the United States by Joseph L. Fisher and Edward Boorstein (sale price 25 cents): December 1959.
Nos. 14 and 15 Financial Aspects of Postwar Economic Developments
in the United States by John Gurley; Profits, Profit Markups, and
Productivity: An Examination of Corporate Behavior Since 1947, by
Edwin Kuh (sale price 35 cents): December 1959.
No. 16 International Eflects of U.S. Economic Policy, by Edward M f
Bernstein (sale price 30 cents): January 1960.
No. 17 Prices and Costs in Manufacturing Industries, by Charles L.
Schultz and Joseph L. Tryon (sale price 20 cents): January 1960.
No. 18 National Security and the American Economy in the 1960's
by Henry Rowen (sale price 25 cents): January 1960.
No. 19 Debt Management in the United States by Warren L. Smith
(sale price 40 cents): January 1960.
No. 20 The Potential Economic Growth of the United States by James
W. Knowles (sale price 20 cents): January 1960.
No. 21 Postwar Inflation by Harold M. Levinson (sale price —- cents) :
January 1960.
No. 22 An Evaluation of Anti-Trust Policy: Its Relation to Economic
Growth, Full Employment, and Prices by Theodore J. Kreps (sale
price 20 : cents): January 1960.
No. 23 The Structure of Unemployment in Areas of Substantial Labor
Surplus by the Bureau of Labor Statistics (sale price 15 cents):
January 1960.
ECONOMIC INDICATORS
Economic Indicators (a monthly publication of the Congress under
Public Law 120, 81st Cong., 1st sess.) (sale price 20 cents a copy,
$2.00 a year): Issued monthly.
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o
TREASURY DEPARTMENT
Washington
STATEMENT BY TREASURY SECRETARY ROBERT B. ANDERSON
ORE THE JOINT ECONOMIC COMMITTEE, TUESDAY,
RUARY 16, I960, 10:00 A.M., EST.
Experience in the 1950!s demonstrated the immense resiliency,
strength, and adaptability of our free enterprise economy. As we
enter the decade of the 1960!s, the economic outlook is indeed
encouraging. ' But we should not permit a favorable outlook to lull
us into unwarranted complacency. The challenge that confronts
us — not solely in Government, but every individual, group, and
institution In this country as well — is to conduct our affairs
in such manner as to prolong the prosperity that we are now enjoying.
Our budget projection of the economy for 1960 reflects this
favorable outlook. It is always difficult, of course, to make
specific assumptions covering a budget which extends over the next
18 months. Our best judgment is, however, that a gross national
product of $510 billion can be reasonably projected for the calendar
year I960, compared with a $479 billion total for the calendar year
1959• Our projection of personal income for this calendar year is
$402 billion, as compared with $380 billion in 1959. Our projection1
of corporate profits of $51 billion in this year compares with a
$48 billion figure for the calendar year which has Just been
completed. All of these estimates are stated in terms of present price
levels. We believe these estimates represent a realistic appraisal
of the current outlook and fully support our projection of $84
billion of Federal Government revenue for the fiscal year 1961.
We must make certain that the growth we experience this year —
and in the decade as a whole — is growth at a sustainable pace,
unwarped by the distortions, imbalances, and excesses that, if
allowed to emerge, inevitably sow the seeds of reaction and
recession. This need for balanced growth emphasizes the necessity for
combatting any Incipient build-up of inflationary pressures.
Inflation •— either in the form of a gradual, insidious rise
in the price level, or as a rapid increase of costs and prices —
is in fact the enemy of sustainable growth. Inflation breeds the
very recessions and unemployment that stand as a barrier to sustained
growth. And either the fear or the fact of inflation, by impairing
the will to save in traditional, fixed-dollar forms, will in the
long run lead to a shortage of savings to finance the real Investment in plant and equipment that is so essential to the growth process.
A-765
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- 2 The fact that inflation, if allowed to occur, can be expected
to stunt our rate of growth in the future provides sufficient reason for
determined efforts to prevent further erosion in the purchasing power
of the dollar. We must also be continuously mindful of the impact of
inflation on various groups in the economy, particularly those people
whose incomes are relatively fixed, who live on the proceeds of
pensions, annuities, social security, and similar types of savings.
Beyond these considerations is the important fact that further
inflation can only impede our efforts to reduce the deficit in our
international balance of payments — a deficit which threatens to
hamper our efforts to contribute as we should to the military
security and economic strength of the free world. Our attack on
this problem will continue to be consistent with our vital goal of
promoting multilateral world trade. It will, in short, be directed —
not toward protectionism and restriction — but toward liberalization
and expansion of world commerce. We shall continue to search out
appropriate ways of encouraging American exports of goods and
services; to press for removal of discriminatory restrictions on
dollar imports abroad; and to encourage other industrial countries
to participate more adequately in the provision of capital to underdeveloped countries.
It would be an empty achievement, indeed, if we were apparently
successful in these efforts, only to find that internal inflation in
this country had impaired our competitiveness in foreign markets.
Thus, International developments provide still another important
reason for maintaining stability in the price level as we pursue
our goals relating to growth and employment.
Inflation was held largely in check in 1959. Although consumer
prices -- reflecting a continued uptrend in prices of all major groups
except food -- rose by a small amount during the year, the wholesale
price index actually declined slightly. While this performance was
good, and is a cause for satisfaction, it is no cause for relaxation
of our efforts to protect the purchasing power of the doUlar.
In an economy so large and highly diversified, the causes of
Inflation are bound to be complex, and it follows that there is no
single, simple cure. We know, for example, that inflationary
pressures are fostered by waste and inefficiency, whether these
occur with respect to business management, labor practices,
individual actions, or the activities of government. A rise in
certain types of costs of production faster than increases in
productivity can also contribute to inflationary pressures. In
addition, undue concentration of market power may permit certain
Industries to raise prices in the face of declining demands, and
shifts of demand from one type of goods and services to another may
also exert a net inflationary Impact. The nature of some of these
forces is not yet fully understood; further study and evaluation are
necessary before policies to deal with them can be formulated.
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Federal Reserve Bank of St. Louis
- 3But of one thing we can be certain: the over-all relationship
between the demand for and supply of total output is still basic
to any meaningful attempt at inflation control. Consequently,
unless we are especially diligent in our efforts to prevent
an unsustainable upsurge in economic activity during a period of
expansion, we almost surely must resign ourselves to the price
increases that result from such excesses. Moreover, as pointed out
earlier, unsustainable upsurges tend to be followed by corrective
recessions and consequent unemployment of labor and other resources.
Federal financial policies — Including Government actions with
respect to the budget, monetary management, and public debt
operations — are generally recognized as having a significant impact
on total demand for goods and services in the economy. As a result,
the constructive use of these policies must stand in the forefront of
our efforts to fight inflation, as well as our efforts to combat
recessionary tendencies. We must recognize that, while such
policies alone cannot assure success in our efforts to attain
sustainable economic growth, their utilization in a prudent and
responsible manner is essential.
Opinions differ as to how these three policies should be used,
and this is especially true with respect to budget policy. According
to one view, a period of actual or threatening inflation, reflecting
at least in part the pressures of demand, would call for a large
surplus in the Federal budget. This would be achieved by an increase
in tax rates, a cut in expenditures, or some combination of the two.
Such a surplus, it is argued, would help dampen total demand inasmuch
as Government spending would fall short of revenues.
This program would, according to this view, be consciously and
actively reversed during a recession. Reductions in tax rates and
increases in expenditures would contribute to a large deficit in
the budget; such a deficit would stimulate total demand, inasmuch
as Government spending would exceed revenues.
t
This approach has some serious shortcomings in practice. For
one thing, decisions as to taxes and spending programs often
reflect many factors other than broad economic considerations.
Moreover, the timely use of budget policy as a conscious countercyclical weapon is hampered by the fact that authority over taxation
and spending is the joint responsibility of the Executive and the
Congress and is not centered in one branch of the Government.
In addition, experience since the end of the Second World War
indicates that it is much easier to achieve a budget deficit in a
recession than a surplus in a period of economic expansion. Sizable
deficits in recessions — only partially offset by modest surpluses
in periods of expansion — tend to complicate the task of achieving;
sustainable growth in at least two ways. The net deficit over a
period of years probably adds to Inflationary pressures and secondly,
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Federal Reserve Bank of St. Louis
-ligrowth in the public debt that is implied by such deficits, along
with the difficulties encountered in managing a growing debt, is
likely to complicate the flexible and timely administration of
monetary policy.
Moreover, recent experience supports the view that conscious
and active attempts to vary tax rates and spending to help avoid
Inflation and combat recession may well have perverse effects.
Changes in tax rates and spending may sometimes take so long to plan,
legislate, and put into effect that many months may pass from the
time the need for a change in budget position becomes clear until
the change actually affects total spending in the economy. By the
time the actions become effective, the economy may have changed
radically. As a consequence, large deficits may have their major
impact during periods of rising business activity; surpluses may in
fact be encountered during a business slump. Any proposals for an
arrangement that would permit some sort of administrative variation
in tax rates to counter cyclical trends, such as vesting additional
authority in the Executive Branch, do not seem to be consistent with
the system of checks and balances that is so important in our form
of government.
Are we thus left only with the alternative of striving for a
rigorous balance in the budget, year in and year out? I do not think
that we are. The goal of a net surplus in the budget — not only in
prosperous periods but, on the average, over a longer period of time
also — is highly desirable. Furthermore, budget deficits of
moderate size are probably unavoidable — and indeed, desirable —
during periods of economic recession.
We should, in my opinion, follow some variation of the stabilizing
budget proposal, in which budget policy, year in and year out, would
be geared to the attainment of a surplus under conditions of strong
economic activity and relatively complete use of labor and other
resources. On this basis, the automatic decline in revenues and
increase in expenditures during a recession — reflecting in part
the operation of the so-called "built-in stabilizers" —Tv/ould
generate a moderate budget deficit. In prosperous period's, tax
receipts would automatically rise and certain types of spending
would contract, producing a budget surplus.
Over a period of a complete business cycle, a surplus for
debt retirement would be achieved, but without the disrupting
effects of necessarily attempting to balance the budget in recession.
While intentional variations in tax rates and spending for cyclical
purposes would thus be kept to a minimum, conditions might well
arise in which such variations would be desirable.
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Federal Reserve Bank of St. Louis
The budget submitted by the President for fiscal year 1961 is
fully consistent with this approach; about 5 percent of Federal
revenues are earmarked as a surplus for debt retirement. If
economic conditions were to change drastically and recession were
to set in — a contingency which does not seem likely but is of
course possible — the surplus would automatically be converted into
a moderate deficit as tax revenues decreased and certain types of
expenditures rose.
With the economy operating at high and rising levels of activity,
the achievement of a $4.2 billion surplus in the Federal budget will
help reduce the burden on monetary policy and will also facilitate
debt management. In my judgment, the lack of adequate surpluses in
the prosperous years following the Second World War -- which has
resulted in a more than $30 billion increase in the public debt since
the end of 19^6 -- has meant that monetary policy has been
called upon to bear more than its proper share of the burden in
promoting sustainable economic growth. This unavoidably heavy
reliance on monetary policy may have contributed to wider swings in
Interest rates and capital values than would have been necessary if
budgetary surpluses had been adequate. But it seems incorrect to
argue that monetary policy has tried to assume too large a role; the
conclusion is rather that the degree of monetary restraint has had
to be greater than would have been the case if budgetary surpluses
had been adequate.
To some observers, Treasury debt management — the third Federal
financial policy — affords a highly useful technique for promoting
sustainable economic growth. Although the Treasury attempts to manage
the public debt in a manner consistent with the attainment of our
basic economic goals and, insofar as possible, tries actively to
promote these objectives, the vigorous use of debt management in this
fashion is sometimes impeded by important practical considerations.
Inasmuch as these difficulties have been described in detail in the
material supplied by the Treasury to this Committee In connection
with Its recently completed study of employment, growth/, and price
levels, I shall not discuss them at this time.
During a period of strong business activity, however, the
Treasury should at least possess sufficient flexibility in debt
management to be able to avoid debt operations that actively promote
inflationary pressures. oTEerwise, the beneficial effects of
prudent budget and monetary policies may In part be offset. In
particular, reliance on inflationary short-term financing should
be minimized, and a reasonable amount of long-term securities should
be marketed, either through cash Issues or In advance refunding of
outstanding securities.
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Federal Reserve Bank of St. Louis
- 6Under today's market conditions, however, the 4-I/*1 percent
interest rate ceiling on new issues of Treasury bonds effectively
prevents the Treasury from issuing any significant
amount of new
marketable securities of more than five years1 maturity, either for
cash or in exchange for securities at maturity or in advance of
maturity. The Treasury is thus prevented from achieving any meaningful
amount of debt lengthening — or even of holding the average maturity
of the debt close to its present length of only 4 years and 3 months.
The interest rate ceiling is therefore forcing the Treasury to pursue
inflationary debt management policies.
To the extent the Treasury concentrates its new issues in the
four to five year maturity range, the decrease in the average maturity
of the debt can be slowed, but there is a limit to the amount of
securities of this maturity that can be sold without driving interest
rates in this sector of the market to very high levels. Moreover,
experience has indicated that undue concentration of new cash issues
in the four to five year range, at the rates the Treasury would have
to pay, might have a strong impact on the capital market — and
particularly the mortgage market — as individuals withdraw funds
from savings institutions to purchase the Treasury issues.
The restriction on interest rates that the Treasury can
pay on new marketable bonds is in effect preventing the effective
and proper use of Federal financial policies to promote sustainable
economic growth. It would be regrettable indeed, if the salutary
effects of prudent budget and monetary policies were permitted to be
offset in part by so artificial a restriction. The President has once
again urged removal of this harmful restriction, and it is to be hoped
that early action in this respect will be taken, so that debt
management can also bear its proper share of the burden in our efforts
to achieve our vital economic goals.
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Federal Reserve Bank of St. Louis
\
oOo
March 3,
Dear Tom;
Many thanks for putting my statement
^
la the Congressional Record. ( &
I have appreciated very much your
constructive and helpful attitude and certainly
wish you well in all that you do.
Cordially yours,
Wm. McC. Martin, Jr.
The Honorable Thomas B. Curtis,
House of Representatives,
Washington 2S» B.C.
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Federal Reserve Bank of St. Louis
Dear Bill:
It is a pleasure to take the time to
acknowledge such a alee note, i am glad you
thought the statement was understandable and
to the point.
With all good wishes,
Sincerely yours,
. McC. Martin, Jr.
Mr. William 3. Korsvik,
Assistant Vice President,
The First national Bank of Chicago*
Chicago*
Illinois.
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Federal Reserve Bank of St. Louis
THE FIRST NATIONAL BANK OF CHICAGO
CHICAGO, ILLINOIS
February 26, I960
Mr. William McC. Martin, Chairman
Board of Governors of the
Federal Reserve System
Washington 25, D. C.
Dear Chairman Martin:
Tour statement before the Joint
Economic Committee on February 2, which appeared
in the Bulletin which arrived today, was
excellent. Your discussion of the saving investment process and the role of the rate of interest
was particularly clear and lucid. It is to be
hoped that the statement will be carefully read
by many persons.
/
Please do not take the time to
acknowledge this note.
.
Best regards.
Sincerely yours,
J. Korsvik
Assistant
fst,
Vice President
W«JK:nl
Dear Norris:
II 10 nice to hear from you and 1 am
pleased to send yaii a copy ol nay testimony
on February 2 and hope you will approve of It.
Witfe all good wisaes,
Sincerely yours,
. McG. Martia, Jr
Mr, Norris O. Johnson,
53 Walt Street
Hew fork 15,
Hew fork.
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NORRIS O. JoH^rsoisr
55 WALL STREKT
XKAV YORK 15, X. ~Y.
February 11, i960
Mr. William McChesney Martin, Jr.
Chairman
Board of Governors
Federal Reserve System
Washington 25, B.C.
Dear Bill:
If you could send me a copy of your testimony
before the Joint Economic Committee I would be grateful.
With warmest regards,
Sincerely yours,
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Airmail
February 8,
Dear Kim:
I thought you might be interested in
my testimony last week.
With alt good wishes,
Cordially yours,
Win. McC. Martia, Jr.
Enclosure
The Honorable Cameron F. Cob bold,
Governor.
The Bank of England,
London,
England.
,
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February d. If40.
Dear Stanley:
I thought you might be interested
in reading this a* it gives a little summary
of Ike way in which the Treasury deficit
was financed.
Cordially yours,
Wm. McC. Martin, Jr.
Enclosure
Mr. Stanley E. Jacobs,
120 Broadway,
Hew York, New York.
Airmail
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Dear Jim:
I thought you might be i&terested in
my testimony last week.
With all good wishes,
Cordially yours*
Enclosure
The Honorable J. £. Coyne,
Governor,
Bank of Canada,
Ottawa, Ontario, Canada.
COPY
By Wright Patman, M. C«
THE FEDERAL RESERVE HAS CONFIRMED MY STATEMENT
CONCERNING THE MISUSE OF PUBLIC FUNDS.
Chairman Martin, it was more than seven months ago, on June 26 last
year, that I released a statement setting out many, many examples of
misuse, improper use -- and, I think, illegal use - - o f public funds by
various Federal Reserve banks.
Your public relations team, it seemed
to me, went to work immediately because there promptly appeared
editorials in the financial journals and in many of the newspapers of the
country to the effect that I had unfairly accused you and had misrepresented
the facts.
These editorials seemed all cut of the same cloth.
Now, seven months later, on February 1, 1960, you have transmitted
your formal comments on my statement. It appears that you have had a
team of writers writing for the full seven mbnths because your document
runs to 107 legal-size pages of single-space type. It is what I believe is
called these days a "snow job"«
You have surrounded the facts I set out
with thousands of words of explanation. Yet, when I plow through all of
this lengthy explanation, I do not find any item where you have pointed out
that my statement of seven months ago is incorrect in any particular. In
point of fact, anyone who has the time to read all this will find that you have
made a complete admission to everything I charged. You have just
surrounded your confessions with a lot of verbiage and a lot of irrelevancies.
To illustrate let us begin with the first item on the first page of your comments,
You began first by repeating my statement and then proceeded to answer
my statement.
My statement was as follows:
"The most glaring example of a continuation of an expenditure commented upon in previous reports by the examiners
was with respect to Christmas remembrances given by the^ Chicago
Bank. In the 1956 report, the examiners questioned a chaVge of
$l s 909,00 on December 23, 1955, covering expenses of Christmas
remembrances to persons other than bank's own employees who
rendered valuable service to the bank during 1955. In the 1957
report, the examiners called attention to the propriety and compliance with the rules and regulations of the Reserve Bank and the
Board of Governors. Again in December 1956, Christmas
remembrances involving an expenditure of $1,842.40 were
commented upon . . . "
Then this is your answer:
"The recipients of such gifts have been municipal and private
police, delivery men, equipment servicemen, hotel and
transportation reservation clerks, and janitors and elevator
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Federal Reserve Bank of St. Louis
2
- operators serving quarters the Bank occupies as tenant. It is
an established custom in Chicago for business organizations to
remember at Christmas time with gifts of cash and merchandise
any employees of other organizations who, in the performance of
their regular duties, render service to them in a capacity where
the quality^a of the service could depend to some extent on the
personal inclinations of such individuals.
"Most cash gifts are $10 a person and the top limit has been
$25 for exceptional cases. All cash payments are made by
check.
The 1955 remembrances, totaling $1,909. 94 for cash
and merchandise, went to 593 people.
The 1956 list had
already been prepared at the time of the examination. As this
involved in some instances the submission of names of their
employees by the service organizations, the Reserve Bank stated
that it was not possible to remove many names already on the
list; however, individual amounts were reduced in a number of
instances.
"As aresult, the expense for that year was $1,867.40 for
gifts to 629 individuals.
In 1957, however, the list was reduced
to 127 individuals and the total cost was $758. 69»
From a careful analysis of this list, it is the Bank's belief that the result
represents the minimum conformance to local custom which
will assure it of services reasonably comparable with those
received by the rest of the business community."
Now, I think we can make these observations:
First, you do not deny that the money was given away or spent for
Christmas remembrances.
Second, you do not claim that this use of public funds is proper. You
simply claim that since this practice was first questioned the Chicago
bank has cut down on the total amount of the gift-giving and kas also
spread the gift-giving around to a larger number of people.
Third, you do give information concerning the recipients of these
gifts which was not available before.
You claim they were for municipal police, private police, delivery men, equipment servicemen, hotel
and transportation reservation clerks, janitors, and elevator operators.
In other w o r d s , the picture pointed here is that the Federal Reserve bank
is distributing its largesse to plain people and people, for the most part,
in rather lowly jobs.
Christmas time and all that, though you do not say
anything about the poor little old lady who stands in the rain and snow
selling violets and bringing a word of cheer and comfort to everybody.
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Federal Reserve Bank of St. Louis
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3 -
Finally, you do suggest -- though you do not claim it -- that the level
to which you have now reduced this gift-giving -- only $758 0 69 in 1957 as
compared to $1,867,40 in the previous year - - i s proper.
Thus you say
that the 1957 gift-giving is believed to represent "the minimum conformance
to local custom,, "
I am happy, of course, that this particular item of
expense has gone in gifts to financially small and worthy people such as the
Chicago police.
In total, the expense is very small as compared with the
more than $120-million a year the Reserve banks spend in providing free
services of all kinds for the private commercial banks.
Even so, these
facts do not come to grips with the issue 0
The issue is whether the Federal
Reserve banks have any right to spend or give away public funds for such
purposes,, I think you have no right and I think it is illegal.
This is the question I kave posed, and it has not been answered yet,
and I would like an answer. If the Federal Reserve Banrk in Chicago
or any other city can give away public funds -- funds which would otherwise
go back into the U 0 S 0 Treasury -- for gifts for the local policemen,
reservation clerks, elevator operators, and so on, why should not the local
post offices and the local tax collection offices and all other Federal agencies
in the locality do the same thing ?
Now, I have one more question: In view of the 107-pages of very
serious indictments -- extremely serious instances of misue, abuse, and
loose handling of public funds -- contained in this document, and in view
of the fact that most of these same practices have been pointed out before
and are still not cleaned up, why wouldn't the public agency under
responsible direction and leadership welcome an investigation?
Certainly
the Federal Reserve's opposition to an investigation leads to no conclusion
except it is still trying to hide and cover up matters that should be
exposed to the public view.
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This article is protected by copyright and has been removed.
Author:
Leslie Gould
Article Title:
Martin and Groundhog-Both Confused on the Weather Ahead
Journal Title:
New York Journal-American
Date:
February 4, 1960
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This article is protected by copyright and has been removed.
Author:
Bernard D. Nossiter
Article Title:
Federal Reserve's Head Rejects Plea for More Money, Rate Cuts
Journal Title:
Washington Post
Date:
February 3, 1960
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This article is protected by copyright and has been removed.
Author:
Bernard D. Nossiter
Article Title:
Federal Reserve's Head Rejects Plea for More Money, Rate Cuts
Journal Title:
Washington Times Herald
Date:
February 3, 1960
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This article is protected by copyright and has been removed.
Article Title:
Stable Dollar Primary Need, Martin States: Testifies Before JEC
Journal Title:
American Banker
Date:
February 3, I960
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This article is protected by copyright and has been removed.
Article Title:
Economic: Six Economists Pointed Out Today Some Economic
Weak Spots and Deflationary Forces They Said Will Bear
Watching in 1960 Despite the Nation's Robust General Health
Journal Title:
Associated Press News Wires
Date:
February 3, I960
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BOARD
OF G O V E R N O R S
OF THE
. EDERAL
R E S E R V E SYSTEM
\
Note:
These charts NOT INCLUDED IN FINAL
DRAFT OF TESTIMONY (prepared for
use in considering earlier drafts)
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Federal Reserve Bank of St. Louis
CHART 1
60
CREDIT ADVANCED, BY SECTOR
(BILLIONS OF DOLLARS)
TOTAL
50
30
FINANCIAL
INTERMEDIARIES
CONSUMER AND BUSINESS
20
(
10
COMMERCIAL BANKING
-10
1954
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Federal Reserve Bank of St. Louis
1955
1956
1957
1958
1959
I960
CHART 2
MAJOR FINANCIAL DIVESTMENTS BY
CONSUMERS AND BQSINESS
(BILLIONS>OF DOLLARS)
MARKETABLE
SECURITIES
AND LOANS
20
16
12
1954
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Federal Reserve Bank of St. Louis
SAVINGS ACCOUNTS
AND SAVINGS BONDS
DEMAND DEPOSITS
I
1955
1956
1957
1958
1959
I960
Chart 3
INDUSTRIAL PRODUCTION AND POPULATION
Seasonally adjusted, ratio scale
Millions
of
Persons
1957 - 100
(
90
-
80
-
70
—
60
-
50
1947
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1948
1949
1950
1951
1952
1953
J954
1955
1956
1957
1958
195?
Chart U
CONSUMER GOODS AND,INDUSTRIAL PRODUCTION
1957 * 100, seasonally ad
1947
(948
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Ratio
Scale
' INDUSTRIAL PRODUCTION
70
60
1949
1950
1951
1952
)953
1954
1955
1956
1957
1958
1959
Chart 5
MARKET GROUPINGS, INDUSTRIAL PRODUCTION
1947-49-100, seasonally a d j u s t e d
EQUIPMENT
incl. defense
•'
~ 120
CONSUMER
GOODS
-
100
80
1947
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Federal Reserve Bank of St. Louis
1949
1951
1953
1955
1957
1959
FOR
IMMEDIATE RELEASE
Lehman - 5171
CONGRESS OF THE UNITED STATES
JOINT ECONOMIC COMMITTEE
Senator Douglas Announces
Re-Scheduling of Secretary Anderson
Before the Joint Economic Committee
Senator Paul H. Douglas [D., 111.] announced today that Secretary
of the Treasury, Robert B. Anderson, whose earlier appearance had to be
postponed because of illness would be heard in open hearing before the Joint
Economic Committee on Tuesday, February 16, at 10:00 A.M. in the Auditorium
of the New Senate Office Building, Room G-308.
Secretary Anderson will be the last of the witnesses to be heard
on the I960 Economic Report of the President.
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Statement to be presented to the JointJ^conc^c Cam^otee
Februai'y j> ^ ^1960, by Paul A. Sarauelson,
Massachusetts Institute of J£echnolq|£
In deciding *$iat policy recommendations I as en economist ought to
make, I mustytirst judge ^hat the bottisig oddo ar® for the trend of business
activity in 1$?60. On the information now available, I believe the prudent
men must agree that the Mainistrs&ion' s estimate of a I960 Gross National
Product averaging'about 5>10 billion dollars is an acceptable one.
This also means that the tax receipts estimated in the Budget are
reasonable — on tho assuaxption of cotzro® -fchat Congi'ess follows all 'the
President's recoicaended tax prograrao. Hot-ssver, few W«ssh5jigton observers
are rash enough to predict that T»dll hoppenj and perhaps fewer still expect
Congreas to ensct tha postal rate increases and other expenditure programs
in quite the form called for in the Budget. Moreover, the predicted cost
of our agricultural program under present legislation seems to me to be
understated in the Budget estimates.
For the above reasons I find it more relevant to drop the official
figure of a Iu2 billion dollar ourplus in the Administrative Budget. For
policy discussion UQ might more realistically think in tenas of a budget
•
*
surplus of 2 to 3 billion dollars. /«nd -what does this imply for the economically more importent concept of the cash budgetary surplus? After we
cut through all the bookkosping datailo and eh ma 4 we find a likely surplus
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of what the government actually takes f ran the ccsramnity in rece5.pts ovor
it pcys out to the coaEsunity of something over h billion dollars —«•-
A
as against tho corresponding official Cash Etadgot of almost 6 billions,
II
Evidently there are some important public misunderstandings about the
economic i&eaniag of the expected budget surplus* First , iaany Wall Street
traders have bean saying that such a surplus is deflationary sad hava bs<sn
attributing much of tho sharp but orderly January dsoline in caramon stock
prices to the prospect of a budget surplus. Second* there is the widelyexpressed belief that a budget curpliis ia of itself a powerful force rasking
for easier money. Both views are,, to ssgr the least , misleading.
Two other current fallacies sre worth Eientloaing* Often «3 hear that
selling governtont securities to the banks is inflationary. This is certainly ifrongly stated: selling then to the F<sdei*al Reserve Banks and thereby expanding messber bsnlc reserves would be inflaticnfiryj but, with the sane
Reserve Bank Credit, lodging bonds firaly isi the banking syste.1 would help
to cut doua on' their expending loans snd x-jould if erjjfthing d&irp doi-3n on
inflation. Purchases of bonds by tho non-'bsnlcs
have not been bQcauss people
sad bitsinQsees have been cutting do«m on tlieij1 normal consumption snd in»
vestment spending; so such a shift in debt holding from the banking system
to the public has served to step up the velocity of circulation of money*
•MMBMMMMMM
Mother fallacy is involved in the belief by the ass.0 man that (l)
the Treasury sells short-term debt,, that ±s peculiarly inflattionnryj but
(2) %hen the Federal Reserve ^ undor the "Bills Oiily" doctrine- that 1 ehall
discuss later, sells short-tena rather than long-torm bonds to the bsnking
system via its ordinary open-siarket operations, that is the optiiaal way to
fight inflation*
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Remember that the budget surplus -will not be the result of new tax
increases or expenditure reductions* The surplus will coae solely from
«•"•"
the built-in flexibility of our fiscal system: if the surplus cornea at all
it will come as the rasnlt of eKpsasionary strength in ovGr°"ell dcraand; and
this means that the creation of a surplus wiH serve ^o moderate the strength
of the expansion rather than reverse the tids snd create contraction.
I ought
to mention in this connection that the envisaged surplus is not of an unusual
magnitude:
it will be less 'than one per cent of GHP, which is a l<raer ratio
than prevailed in the expansion folio-wing the 19£3"5U Recession.
By the sssae tctkezij the expansionary conditions i&ich sre a prerequisite
to the surplus -will 'bend to put upward pressures on our already tigfct money
market, VJhen the economy peys taxes in excess of its receipts^ businessmen
end consumers must scramble for enough liquidity to meet their tax obligations^
so even if the government were to retire public debt without any delay, there
isould b® no net improvement in the over-all liquidity of the economy sad. henco
no reason to espoct lo¥er interest rates and greater availability of credit.
(What is true is this: in the long run5 as surpluses are used over a period
of time to reduce the snouxit of outstanding federal bonds that have to be
held* the yields on governments should fall relatively to yields on corporate
and municipal bonds; end to tho degree that our economy attains the sa<e nearness to full employment by levying higher rather than loner tax rates, the
Federal Reserve can afford to create that much earner credit end lower interest rates — with the result that the eoznraunity consumes less and invests
more for growth.)
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Ill
"What general policy implications follow from -foe above reinerks?
^-*
First, the fact that we hanre a surplus is not TO ..in^jj^atiga_to__cjat
taxes. Modern economists of diverse schools and philosophies preach in
season and out of season that if you are bound to cut tax rates, th© time
to cut them is ia recession, not in boom. Otherwise you are vitiating tho
important built-in stabilizing effect of fiscal policy. (Thus, If I uere
a Senator -Kho believed that first-class postal rates should be raised so
as to malt© t&is service holp cover other costa., I!d think I960 a good year
to raise those rates. And I certainly approve at any time tho Administration's recommendation that the capital ga,ins loopholo be denied assets
•tdiich have been granted pact depreciation tax allowances.)
Second9 and for exactly the above reasons, ^^Jg£^2^j£®Li252-^:&SE3
a lK>rd^_^15^ gpyerme^
low. This qreates the paradoxical but economically valid statement that,
other things being equal, we can ^ford rsore sjgpendi'toe .ffien we are already
running a deficit than when we-are rumiing_jaL substantial surplus* I wish
the President and his Secretaries of Treasury would learn both halves of
this whole-truth.
I?
In a bomplicated subject like economics you'va learned from bitter
experience not to ebtpect ever to get simple, unhedged edvica. So I must
hasten to make too qualifications.
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1. If there are vital public expenditure progrcsa that you think
the well -being of the economy makes mandatory — such as an enhanced apace,
*r~*
missile, and aid spending -- you must not let the fact that resources are
in generally brisk dsinsnd stop you. Increase such programs, knowing that
it is sound economic doctrine that our nation can afford the public activities it XMJQ&3U This, however, is not an invitation to extravagance; for the
same sound economic doctrines would call for increasing taseo by as much. or
more than such expsinditiires if they threaten to bring you to over«full esiploy«
AfJ
msnt end scorning general prices. America is far from reaching •£& eecncmic
limit of taxation and. getting farther below it with each passing year of productivity advance.
2, My remark* about encouraging a surplus under present conditions
are, among other things, premised upon tho correctness of the view expressed
in the Economic Report of the President:
"As we look ehead, there are good grounds for confidence that this econosaie edvence can be extended
through I960* . „ . f^iseAj cen carry well beyond
the present year" (p*'~iiij"my italics).
Somo econonaists* perhaps a minority, expect there to be a business
domturn within the second half of I960 itself. More economists expect that
there -will be a sloxdng doim of the rat© of expansion in the last half of
I960 t'jith a downturn to follow so&etimQ in 1961.
So it may be tho majority
view of the experts that the Report's v;orda "wall beyond the present y@ar°
are a mite overoptimistic or at least euphemistic.
Inesrauch as you are now plsaning for a period i-shich will not be over
until July 19 196l? soaio seventoen months froia now3 the possibility of a
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recession beginning in 1961 must be given some weight in your thinking.
In
view of the notorious difficulty in forecasting very far ahead, I would not
<•'•"*'
urge too much consideration to this issue wsro it not for another fact care_fully avoided in this year's Economic Report.
The Council of Economic Advisers cannot bo accused of having mads a
pcssiisiatic forecast for I960, Yet surely they know that a QNP of 510 billions
must necessarily imply em unemployment rate of appreciably raore than U per cent
of the labor forca* Why was this fact deliberately soft-pedalled in tho Economic Report? I can only guess, but it seems a reasonable hypothesis that they
also know the American people do not share their complacency about the 5 1/2 per
cent &neoploymeat rate that has prevailed on the average during the expansion
and contraction periods that have occurred tahile the present Council has been
in office.
Certainly few legislators, on the floor of Congress 02* back home,
ttould stand by the first part of the Report's assertion:
"In general, unemployment rates in the United
States have not been high for fin economy Hhicli
allots and experiences considerable labor mobility 2ndn Job change, but they can &zd should
be lower«
Scholars isho have studied job mobility here end abroad, in this docede and in
earlier times, know vsry well that UMHployiattnt rates of hy $9 find 6 per cent
ere not attributable to ordinary job turnover.
VJhsb is the bearing of this on policy? If xrnsasplcyraent were the only
considerationj the desirability of preserving a sizeable budget surplus in
fiscal 1961 icould b© very much less thsn I indicated in lay reworks* It is
to the degree 13iat you deliberately hope to rely on a sizeable level of excess
unemployment in the economy to counteract inflationary pressures and our "unfavorable balance" of inter national payments that you will be eager to push
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toward surpluses as higfr as or higher then -those recGtisiianded by the President for a I960 CMP of $£LO billion.
In conclusion I ought to s©y a few words about monetary policy, especially since the present Adrainistration considers this outsida its oun
province, being instead the responsibility of the Federal Reserve and the
Congress to t&ich the Federal Reserve is in turn responsible.
Time requires me to be brief, but I shall be glsd to enlarge on my
in our later discussion.
1. Our gold position is not no^ acute. And for precisely that reason
this is th e time, while we ar© in strength, to take those desirable actions
i&ich it would be more ©absrrassing to take in tho zaidst of an emergency.
I strongly recossiend that Congress sggedilff remoff-o the 2$ par cent
gold requirement y^iich the Federal Reserve Banks ^areROi-y^required ^to^hold
against theix' notes aid deposit s.
Such ressrvo requirements have no technical economic foundation. They
are archaic end do not serve a useful purpose in controlling inflation, toy
psychological effects abroad of such a move uould st this tiae be temper ary
and will in the longer run be favorable. Reputable financial experts lilra
Roy Reierson, vice-president of the Bankers Trust Company, and Sir Oliver
Franks, president of Lloyd's Bank of London, have already rec emended legislation to remove this gold requirement. I hesrtily concur.
2, Last year,, before this had beccaio a national issue, I told this
Corasaittee that the tise might soon coao idien you -sjould ^aat to repeal the
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-8-
archaic U 3./U per cent intergst coiling on govgrm^eiit bonds of over five
Drears1 maturity* Except as a symbol of dissatisfaction with a policy cf
tight money to fight inflation, such a ceiling eccoraplishos no useful ^-*
purpose and does Unit the efficiency of tho Reserve Authorities and
Tre&sury. Similarly9 the public debt ceiling is not a desirable economic
E£ii2Z'
Having said thiss md established ray credentials so to speak, I ou$it
to point out that 'tlie interest ceiling is not the vital issue -that Wall Street
J0U«tM*»-iST5
. purport^ to believe.
3. Since 1953 the Federal Reserve Board has by its o«n volition been
confining its ordinary open-^narket operations to short-tsna government securities* This "Bills Only" doctrine uss hotly contested at the time "fay the
NSH Iforfc Federal Reserve Bank, and Here it not for fesr of the Washington
euthcritieo, there would have besn evon greater opposition from other Regional RessrvQ Districts.
1 recall thst out of twenty supposed expert econciJiists gathered in
Washington for sn infon&al policy iseoting only threa wore in favor of "Bills
Oily," xrith aiother few mlling to reserve judgment until exporiertae had
accusriulated. The remaining majority of two-thirds thought tho doctrine wuld,
if anything, t-jeakcsn orliiodox central b&nkiag and thus undermine booh stabilization and tJie degree of freedom froiii more direct controls that our enterprise economy can enjoy.
Events of the last six years do not seem to have borne out the claims
of the "Bills Only" (or "Bills Usually") doctrinsu Bond markets have not
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been noticeably more orderly. To got the eerae e^cpsasionary effects in the
19£3-5U Recession, the Fed had to croato that cinch more bank reserves than
«^*'
would have been necessary with orthodox opsn-siarket purchase of long-terai
governments. To bo sure, by openHBttrktt operations in bills alone, one cen
also affect long«tera rates and long°term investment spending. But the
process becomes unnecessarily indirect} and the burden of dabt management
is not thereby avoided, but instead is needlessly thrown completely on 'the
shoulders of the Treasury rather 'than being hsndled in a coordinated manner.
(Coordination does not isiosn keeping money cheep for th© Treasury but rather
has the goal of cptita&L monetary policy for reasonably high growth, employment, and price stability.)
Although it is not Chsirracsi Hartia*s intention, adherence to "Rills
Only" night, ironically, increase the likelihood under present institutions
that the debt ^ould coaie to consist primarily only of short-term securities.
Bills only leading to only bills is ea eventuality no one really ueats.
In the present sitaefeloa, isithout "Bills Only" the Federal Reserve
could right now be oporating in the open market by selling long«t©na bonds
if inflationary dangers called for pushing more long-term debt on the public
and banking system. And when interest rates later ease, the Fed could buy
back such bonds or help the government lengthen out its debt structure —
thereby achieving the claimed interest economies aid other advantages of en
extended debt, and enabling all this to happen without jecpardizing the stl»
wulus to long-term investment sb that tiis.9 so desirable.
Mor© then ever the "Bills Only" doctrine is ea albatross around our
necks. As Professor Koreken of Minnesota has rightly pointed out, the state
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Federal Reserve Bank of St. Louis
of our balsue© of p£2rra©nts a?ay in the years dieed put constraints on our
pursuing a short-tom interest rate policy most conducive to stabilisation,
All economists fear this. V5iy, then? should the Federal Reserve be stuck
C^SA-OKC;
with & policy that prevents it £ma using to th© national advantage differential movsments in yields on loag»term govorasaent socm-ities?
Foz* thoso reasons, I tfould ^{?e raa^bers of both politicel parties 5j
S£ffiff?:ffift ...,S,9,..'!!^Pfe..^,^,..,l^ll!?,;v ,^jr, ..S^^.^X^...^^'^....^,,,, fSf^, .ffffifefc.. JfeS.^ «£$Sft9£$$$,
to|rosk@lmoija| ^by ^Qg^tt^gn^^cgl.^l^gSggJign;or_ iQgislatlon the prndsir^ dsiaii
ability of reaioving the hobbles to centi^al^bgnk^igoaAc^r^yepresented by the
"Bills Only" doctriyig*
Finally, let SIQ mention in connection ^dth Eionotaiy policy that the
interest cost of the debt has been rising in recent yesrs. I aa not one of
those unduly aLsraed by this fact or apprehensive that the resulting increase
in disposable income will result in a net inflationary impact. But there are
people who so worry. May I suggest^n Ifliii w tfcfrt there ia an alternative to
meeting this problem other than that of enginsering cheaper money* Instead,
the Federal Reserve could (l) raise legal reserve raquireaeata of the member
•CMrocuK**
cossaercial baaks i&iil© (2) at tho saao tizas carrying out sny needed offsetting
open-iaarkBt purchases of goverssmeat securities. This could give us (a) a reduction in net interest outlay by the gorrerns&nt (since* enhanced Federal
Reserve earnings are returned to th© government^ aid (b) at tho SSKQ tisi©
we can continue to heye cs restrictive a credit policy as the esonoiaie situation really calls for.
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FORft^ci. RELEASE
Thursday, January 21, I960
Lehman — 5171
CONGRESS OF THE UNITED STATES
JOINT ECONOMIC COMMITTEE
Chairman Douglas Announces
Hearings
on the President1s Economic Report
Senator Paul H. Douglas (D., Illinois), chairman of the Joint
Economic Committee, has announced plans of the Joint Committee to hold
hearings, beginning February 1, on the President's Economic Report which
was transmitted to Congress yesterday.
Under the Employment Act of 194-6, the President's Economic
Report is referred to the Joint Economic Committee, which is to review
it and "... file a report with the Senate and the House of Representatives
containing its findings and recommendations vdth respect to each of the
main recommendations made by the President in the Economic Report ..."
The Committee has approved a plan for hearings as set forth
in the attached schedule of witnesses and subjects.
Joint Economic Committee
Paul H. Douglas, Senator, Illinois, Chairman
Wright Patman, Representative, Texas, Vice Chairman
Senate
House of Representatives
John Sparkman, Alabama
J. W. Fulbright, Arkansas
Joseph C. O'Mahoney, Wyoming
John F. Kennedy, Massachusetts
Prescott Bush, Connecticut
John Marshall Butler, Maryland
Jacob K. Javits, New York
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Federal Reserve Bank of St. Louis
Richard Boiling, Missouri
Hale Boggs, Louisiana
Henry S. Reuss, Wisconsin
Frank M. Coffin, Maine
Thomas B. Curtis, Missouri
Clarence E. Kilburn, New York
William B. Widnall, New Jersey
John W. Lehman, Clerk and
Acting Executive Director
2.
SCHEDULE 05' HEARINGS ON THK
I960 ECONOMIC REPORT OF THE PRESIDENT
Monday, February 1, 10:00 A.M.—Old Supreme Court Chamber, Senate wing, Capitol
The Economic Outlook for I960 — Panel Discussion
Outlook for federal, state, and local government expenditures
LOUIS PARADISO, Office of Business Economics
U.S. Department of Commerce
Outlook for inventories, plant, and eqiiipment
MARTIN GAIN3BRUGH, Nations! Industrial Conference Board
Outlook for housing construction and consumer expenditures
GEORGE CLINS SMITH, F. W. Dodge Corporation
Outlook for labor force and employment
PETER HENLE, AFL-CIO
Outlook for demand and supply of funds and interest rates
ROY REIERSON, Bankers Trust Company
Outlook for agriculture
GEORGE BRANDOW, Pennsylvania State University
Monday, February 1, 2:00 P.M.—Old Supreme Court Chamber, Senate wing, Capitol
ROBERT B. ANDERSON, Secretary of the Treasury
Tuesday, February 2, 10:00 A.M.—Old Supreme Court Chamber, Senate wing, Capitol
(Executive Session)
RAYMOND J. SAULNIER, Chairman, Council of Economic Advisers
Tuesday, February 2, 2:00 P.M.—Old Supreme Court Chamber, Senate wing, Capitol
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Federal Reserve Bank of St. Louis
WILLIAM McCHESNEY MARTIN, Chairman, Board of Governors,
Federal Reserve System
Wednesday, February 3, 10:00 A.M.—Old Supreme Court Chamber, Senate wing, Capitol
«--*"
Current Fiscal and Monetary Policy and Recommendations — Panel Discussion
Monetary Policy
WARREN SMITH, University of Michigan
Fiscal Policy
RICHARD MUSGRAVE, Johns Hopkins University
Thursday, February 4, 10:00 A.M.—Old Supreme Court Chamber, Senate wing, Capitol
Labor and Management Comments on the Economic Report
Labor Comments
10:00 A.M.
Management Comments
11:00 A.M.
11:30 A.M.
AFL-CIO
Chamber of Commerce of the United
States of America
National Association of Manufacturers
Additional Comments by Other Group Representatives
2:00 P.M.
Farm Bureau Federation, National Farmers
Union, and National Grange.
(Panel Discussion)
3:30 P.M.
Committee for Economic Development
4:00 P.M.
Federal Statistics Users Conference
Friday. February 5, 10:00 A.M.—Old Supreme Court Chamber, Senate wing, Capitol
Policy Recommendations — Panel Discussion
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Federal Reserve Bank of St. Louis
ROBERT A. GORDON, University of California
PAUL SAMUELSON, Massachusetts Institute of Technology
WILLIAM F. BUTLER, The Chase Manhattan Bank
B. U. RATCHFORD, Duke University
This article is protected by copyright and has been removed.
Article Title:
Senator Kerr said today he would support a temporary removal of
the 4 1 / 4 per cent ceiling on interest rates on long term
Government bonds "if the Treasury makes a case for it."
Journal Title:
Associated Press Ticker
Date:
January 20th, 1960
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Federal Reserve Bank of St. Louis
~
CONFIDENTIAL
PRELIMINARY SCHEDULE OF HEARINGS
ON THE I960 ECONOMIC REPORT
OF THE PRESIDENT
(All hearings will be held in the Old Supreme Court Chamber,
Senate wing, U. S. Capitol)
^
Monday, February 1, 10:00 A.M.
The Economic Outlook for I960 — Panel Discussion
Outlook for federal, state, and local government expenditures
LOUIS PARADISO, Office of Business Economics
U. S. Department of Commerce
Outlook for inventories, plant, and equipment
MARTIN GAINSBRUGH, National Industrial Conference Board
Outlook for housing construction and consumer expenditures
GEORGE CLINE SMITH, F. W. Dodge Corporation
Outlook for labor force and employment
PETER HENLE, AFL-CIO
Outlook for demand and supply of funds and interest rates
ROY REIERSON, Bankers Trust Company
Outlook for agriculture
GEORGE BRANDOW, Pennsylvania State University
Monday, February 1, 2:00 P.M.
ROBERT B. ANDERSON, Secretary of the Treasury
Tuesday, February 2, 10:00 A.M. (Executive Session)
RAYMOND J. SAULNIER, Chairman, Council of Economic Advisers
Tuesday, February 2, 2:00 P.M.
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Federal Reserve Bank of St. Louis
WILLIAM McCHESNEY MARTIN, Chairman, Board of Governors
Federal Reserve System
Wednesday, February 3, 10:00 A.M.
Fiscal and Monetary Policy and Recommendations — Panel Discussion
Monetary Policy
WARREN SMITH, University of Michigan
Fiscal Policy
RICHARD MUSGRAVE, Johns Hopkins University
Thursday, February k, 10:00 A.M.
Labor and Management Comments on the Economic Report
Labor comments
10:00 A.M.
Representative of AFL-CIO
Management comments
11:00 A.M.
Representative of U, S. Chamber of Commerce
11:30 A.M.
Representative of National Association of
Manufacturers
Additional comments by Group Representatives
Farm group comments
2:00 P.M.
Representatives of Farm Bureau Federation,
National Farmers Union, and National Grange
(To be heard individually).
3:30 P.M.
Representatives of other groups will be invited
— Committee for Economic Development, and
Federal Statistics Users Conference
(To be heard individually).
Friday, February $, 10:00 A.M.
Policy Recommendations -- Panel Discussion
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Federal Reserve Bank of St. Louis
ROBERT A. GORDON, University of California
PAUL SAMUELSON, Massachusetts Institute of Technology
WILLIAM F. BUTLER, The Chase Manhattan Bank
B. U. RATCHFORD, Duke University
C
0
P
I
CONGRESS OF THE UNITED STATES
Joint Economic Committee
January 12, I960
Mr. William McC. Martin
Chairman, Board of Governors,
Federal Reserve System
Washington, D. C.
Dear Mr. Martin:
This will confirm our invitation and the arrangements
which the staff has made with your office for you to appear
as a witness before the Joint Economic Committee at hearings
on the I960 Economic Report of the President. Your appearance
is scheduled for Tuesday afternoon, February 2, at 2 o'clock
in the Old Supreme Court Chamber, Senate wing, U. S. Capitol.
The discussion will, of course, deal primarily with monetary
policy for the coming year.
I hope it will be possible for you to confine your
introductory remarks to 30 minutes or less so that substantial
time will be available for discussion and questioning.
It would aid the Committee and the press if we could
have 75 to 100 copies of your opening statement, preferably
by Monday morning, February 1. Copies sent by mail should
be addressed to John W. Lehman, Senate Post Office, Washington 25, D. C. If the copies are being delivered by special
messenger they should go to Room G-133* New Senate Office
Building.
Attached is a preliminary schedule of the hearings.
A final schedule and accompanying press release will be sent
to you when issued.
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Federal Reserve Bank of St. Louis
Faithfully yours,
(Sgd.) Paul H. Douglas
Paul H. Douglas
Chairman
CONFIDENTIAL
PRELIMINARY SCHEDULE OF HEARINGS
ON THE I960 ECONOMIC REPORT
OF THE PRESIDENT
(All hearings will be held in the Old Supreme Court Chamber,
Senate wing, U. S. Capitol)
^*
Monday, February 1, 10:00 A.M.
The Economic Outlook for I960 — Panel Discussion
Outlook for federal, state, and local government expenditures
LOUIS PARADISO, Office of Business Economics
U. S. Department of Commerce
Outlook for inventories, plant, and equipment
MARTIN GAINSBRUGH, National Industrial Conference Board
Outlook for housing construction and consume! expenditures
GEORGE CLINE SMITH, F. ¥. Dodge Corporation
Outlook for labor force and employment
PETER HENLE, AFL-CIO
Outlook for demand and supply of funds and interest, rates
ROY REIERSON, Bankers Trust Company
Outlook for agriculture
GEORGE BRANDOW, Pennsylvania State University
Monday, February 1, 2:00 P.M.
ROBERT B. ANDERSON, Secretary of the Treasury
Tuesday, February 2, 10:00 A.M. (Executive Session)
RAYMOND J. SAULNIER, Chairman, Council of Economic Advisers
Tuesday, February 2, 2:00 P.M.
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Federal Reserve Bank of St. Louis
WILLIAM McCHESNEY MARTIN, Chairman, Board of Governors
Federal Reserve System
Wednesday, February 3, 10:00 A.M.
Fiscal and Monetary Policy and Recommendations — Panel Discussion
.*
Monetary Policy
WARREN SMITH, University of Michigan
Fiscal Policy
RICHARD MUSGRAVE, Johns Hopkins University
Thursday, February 1±, 10:00 A.M.
Labor and Management Comments on the Economic Report
Labor comments
10:00 A.M.
Representative of AFL-CIO
Management comments
11:00 A.M.
Representative of U. S. Chamber of Commerce
11:30 A.M.
Representative of National Association of
Manufacturers
Additional comments by Group Representatives
Farm group comments
2:00 P.M.
Representatives of Farm Bureau Federation,
National Farmers Union, and National Grange
(To be heard individually).
3:30 P.M.
Representatives of other groups will be invited
— Committee for Economic Development, and
Federal Statistics Users Conference
(To be heard individually).
Friday., February 5, 10:00 A.M.
Policy Recommendations —. Panel Discussion
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Federal Reserve Bank of St. Louis
ROBERT A. GORDON, University of California
PAUL SAMUELSON, Massachusetts Institute of Technology
WILLIAM F. BUTLER, The Chase Manhattan Bank
B. U. RATCHFORD, Duke University
January 5, I960
•*•-
Mr. Shay informed mnm, and Mr. Martin on 1/6, of his "call" to testify
before the Joint Economic Committee on the President's economic report
the afternoon of Tuesday, February 2.
The report is due on January 20;
Saulnier will testify on Monday, 3,/lj Secy Anderson the morning of 2/2.
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Federal Reserve Bank of St. Louis
Subcommittee No. 2
House Banking and Currency Committee
Paul Brown (ga.) Chairman
Abraham J. Multer ( N . Y . )
William A. Barrett (Penn.)
Charles A. Vanik (Ohio)
Joseph W. Barr (Ind.)
William S. Moorhead (Penn.)
Edgar W. Hiestand (Calif.)
Paul A. Fino ( N . Y . )
Edward J. Derwinski (111.)
Brent Spence, Chairman of the Full Committee, is ex officio
member of all subcommittees.
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Federal Reserve Bank of St. Louis
STATEMENT BI CHAIRMAN MARTIN OF THE
BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
BEFORE THE HOUSE BANKING AND CURRENCY COMMITTEE
ON FEBRUARY 16, I960
Hrc Chairman and Members of the Committee:
In recent years a substantial number of banks have been
absorbed by other banks. In an average year of the past decade, about
a hundred and fifty banks have ceased to exist as separate institutions,
To put it another way, in the ten years 195>0 through 1959, over fifteen
hundred banks—more than ten per cent of all banks in the country—have
been absorbed by others. Most of the banks thus taken over have been
relatively small institutions, but some large banks, also, have merged
with other already large institutions.
Under provisions of the Federal Deposit Insurance Act and
the statutes governing national banks, many amalgamations of banks
require the approval of either the Comptroller of the Currency, the
Federal Deposit Insurance Corporation, or the Board of Governors of
the Federal Reserve System.
A substantial number, however, may and do
take place without being subject to any requirement of approval by
Federal supervisory agencies, including both absorptions effected
through exchange of stock and absorptions through purchase of assets
and assumption of liabilities.
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Federal Reserve Bank of St. Louis
—
_
-2-
The main objective of the bill S. 1062 is to provide that
no bank subject to Federal Government supervision (which comprises over
*•*
ninety-five per cent of all banks in the 'country) may be taken over by
another unless the transaction has first been approved by the Comptroller
of the Currency, if the absorbing bank is a national bank, by the Board
of Governors, if the absorbing bank is a State member bank, and by the
Federal Deposit Insurance Corporation, if the absorbing bank is a
iionmember insured bank.
Before approving or disapproving a proposed
merger, the supervisory authority would be required to consider the
banks' financial history, condition, and prospectsj.the character of
their management; the convenience and needs of the communities involved;
and whether the effect of the merger "may be to lessen competition unduly
or to tend unduly to create a monopoly".
The Board believes that the number of bank mergers in recent
years has been sufficiently great to give cause for concern, and that
there is a clear need for legislation to prevent bank mergers that would
so lessen competition as to be incompatible with the public interest.
On the basis of its study, over the years, of many suggested approaches
to this problem, the Board has concluded that the procedure prescribed
by S. 1062 would be a sound and effective procedure, and accordingly
the Board endorses this bill.
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Federal Reserve Bank of St. Louis
^
x_
-3-
In a few relatively minor respects, which do not affect the
main purpose and benefits of the measure, the Board believes that
«
S. 1062 might be amended to advantage. In the first place, in its
present form the bill would permit the supervisory agency, in emergency
cases, to act on proposed mergers without obtaining the views of the
Attorney General or—in less pressing emergencies—to obtain his views
upon quite short notice. The Board recommends that the bill be amended
to include similar provisions with respect to obtaining the views of
the other supervisory agencies in emergency situations.
The bill would require each of the supervisory agencies to
submit to Congress special semiannual reports with respect to mergers
approved by it during the preceding six months.
It does not appear
that special reports on this subject at such frequent intervals are
necessary to apprise Congress adequately of developments in this field.
Accordingly, it is recommended that, in lieu of the provision mentioned,
the supervisory agencies be instructed to include, in their Annual
Reports tom Congress,
information with respect to bank mergers approved
'" ""••™^"—*^^^
*•*•
^
during the preceding year.
The last clause of the bill would require each of the bank
supervisory agencies to include in its Reports to Congress "a summary
of the substance of the report made by the Attorney General" to the
agency with respect to each proposed merger which it thereafter approved. The Board questions the advisability of having the views of
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Federal Reserve Bank of St. Louis
v_
-llone agency on such involved matters summarised by a different agency;
it would seem preferable to require the supervisory agencies to include
in their Annual Reports either fia summary by the Attorney General of
the substance of his report" or the entire report of the Attorney
General on each case.
In closing, I should like to emphasize again that the Board
is strongly in accord with the aims of S. 1062, and the general approach
of that bill to the bank merger problem.
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Federal Reserve Bank of St. Louis
This article is protected by copyright and has been removed.
Article Title:
Notice in Advance on Rulings Debated Before House Unit
Journal Title:
American Banker
Date:
Feb. 18, 1960
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Federal Reserve Bank of St. Louis
This article is protected by copyright and has been removed.
Article Title:
Gidney and Martin Split On Merger Bill Versions: Justice Control
an Issue; Both Hit Report Feature
Journal Title:
American Banker
Date:
February 17, 1960
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Federal Reserve Bank of St. Louis
JUDICIAL REVIEW
No provision for judicial review of agency decisions as to
bank mergers is necessary. Under present law, a person aggrieved by
the agency's decision could seek judicial review of the agency*s action,
either through a suit for a declaratory judgment or an injunction, or
a combination of the two, wherein a court of law could determine
whether the agency!s decision was capricious or arbitrary or in excess
of its statutory authority.
'
HHH:jc
2-12-6C
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Federal Reserve Bank of St. Louis
86th Congress, 2d Session
-
-
-
-
-
House Report No. 1416
REGULATION OF BANK MERGERS
REPORT
OF THE
COMMITTEE ON BANKING AND CURRENCY
HOUSE OF REPRESENTATIVES
EIGHTY-SIXTH CONGRESS
SECOND SESSION
ON
S. 1062
MARCH 23, 1960.—Committed to the Committee of the Whole House
on the State of the Union and ordered to be printed
UNITED STATES
GOVERNMENT P R I N T I N G O F F I C E
63084
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W A S H I N G T O N : 1960
COMMITTEE ON BANKINCx AND CURRENCY
B R E N T S P E N C E , Kentucky, Chairman
C L A R E N C E E. KILBURN, New York
PAUL BROWN, Georgia
GORDON L. McDONOUGH, California
W R I G H T P A T M A N , Texas
WILLIAM B. WIDNALL, New Jersey
A L B E R T RAINS, Alabama
EDGAR W. H I E S T A N D , California
ABRAHAM J. M U L T E R , New York
P E R K I N S BASS, New Hampshire
H U G H J. ADDONIZIO, New Jersey
E U G E N E SILER, Kentucky
WILLIAM A. B A R R E T T , Pennsylvania
PAUL A. FINO, New York
LEONOR K. SULLIVAN, Missouri
F L O R E N C E P . D W Y E R , New Jersey
H E N R Y S. REUSS, Wisconsin
E D W A R D J. D E R W I N S K I , Illinois
M A R T H A W. G R I F F I T H S , Michigan
SEYMOUR H A L P E R N , New York
THOMAS L. ASHLEY, Ohio
WILLIAM H . M I L L I K E N , J R . , Pennsylvania
CHARLES A. VANIK, Ohio
J. T. R U T H E R F O R D , Texas
J O S E P H W. BARR, Indiana
JAMES A. B U R K E , Massachusetts
WILLIAM S. M O O R H E A D , Pennsylvania
C L E M M I L L E R , California
BYRON L. JOHNSON, Colorado
D A N I E L K. I N O U Y E , Hawaii
ROBERT L. CARDON, Clerk and General Counsel
JOHN E. BARRIERE, Majority Staff Member
ORMAN S. FINK, Minority Staff Member
ROBERT R. POSTON, Counsel
SUBCOMMITTEE N O . 2
PAUL BROWN, Georgia, Chairman
ABRAHAM J. M U L T E R , New York
WILLIAM A. B A R R E T T , Pennsylvania
CHARLES A. VANIK, Ohio
J O S E P H W. BARR, Indiana
W r ILLIAM S. M O O R H E A D , Pennsylvania
II
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Federal Reserve Bank of St. Louis
EDGAR W. H I E S T A N D , California
PAUL A. FINO, New York
E D W A R D J. D E R W I N S K I , Illinois
CONTENTS
Page
What the bill would do
The committee amendment
Need for improved controls over bank mergers
Mergers covered by the bill
Present Federal banking laws on bank mergers
National banks
Federal Reserve member banks
Insured State nonmember banks
Summary
Control over bank mergers under antitrust laws
.Special standards needed to control bank mergers
The competitive factor
Reports from the other banking agencies
Reports from the Attorney General
Reports to the Congress
Publication of notice of proposed mergers
Compliance with State law
Changes in existing law
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Federal Reserve Bank of St. Louis
2
3
3
5
6
6
7
7
7
9
9
10
12
13
14
14
15
15
nx
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Federal Reserve Bank of St. Louis
8 6 T H CONGRESS )
2d Session
HOUSE OF EEPEESENTATIVES
J
(
(
KEPORT
No. 1416
REGULATION OF BANK M E R G E R S
MARCH 23, 1960.—Committed to the Committee of the Whole House on the
State of the Union and ordered to be printed
Mr. SPENCE, from the Committee on Banking and Currency, submitted the following
REPORT
[To accompany S. 1062]
The Committee on Banking and Currency, to whom was referred
the bill (S. 1062) to amend the Federal Deposit Insurance Act to
provide safeguards against mergers and consolidations of banks which
might lessen competition unduly or tend unduly to create a monopoly
in the field of banking, having considered the same, report favorably
thereon with an amendment and recommend t h a t the bill as amended
do pass.
The amendment is as follows:
Strike out all after the enacting clause and insert in lieu thereof the
following:
That subsection (c) of section 18 of the Federal Deposit Insurance Act is amended
by striking out the third sentence and inserting in lieu thereof the following: "No
insured bank shall merge or consolidate with any other insured bank or, either
directly or indirectly, acquire the assets of, or assume liability to pay any deposits
made in, any other insured bank without the prior written consent (i) of the
Comptroller of the Currency if the acquiring, assuming, or resulting bank is to
-be a national bank or a District bank, or (ii) of the Board of Governors of the
Federal Reserve System if the acquiring, assuming, or resulting bank is to be a
State member bank (except a District bank), or (iii) of the Corporation if the
acquiring, assuming, or resulting bank is to be a nonmember insured bank (except
a District bank). Notice of any proposed merger, consolidation, acquisition of
assets, or assumption of liabilities, in a form approved by the Comptroller, the
Board, or the Corporation, as the case may be, shall (except in a case where the
.* furnishing of reports under the seventh sentence of this subsection is not required)
be published, at appropriate intervals during a period (prior to the approval or
disapproval of the transaction) at least as long as the period allowed under such
sentence for furnishing such reports, in a newspaper of general circulation in the
community or communities where the main offices of the banks involved are
located (or, if there is no such newspaper in any such community, then in the
newspaper of general circulation published nearest thereto). In granting or
withholding consent under this subsection, the Comptroller, the Board, or the
Corporation, as the case may be, shall consider the financial history and condition
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Federal Reserve Bank of St. Louis
1
2
REGULATION OF BANK MERGERS
of each of the banks involved, the adequacy of its capital structure, its future
earnings prospects, the general character of its management, the convenience and
needs of the community to be served, and whether or not its corporate powers
are consistent with the purposes of this Act. In the case of a merger, consolidation, acquisition of assets, or assumption of liabilities, the appropriate agency
shall also take into consideration the effect of the transaction on competition
(including any tendency toward monopoly), and shall not approve the transaction unless, after considering all of such factors, it finds the transaction to be
in the public interest. In the interests of uniform standards, before acting on a
merger, consolidation, acquisition of assets, or assumption of liabilities under
this subsection, the agency (unless it finds that it must act immediately in order
to prevent the probable failure of one of the banks involved) shall request a report
on the competitive factors involved from the Attorney General and the other
two banking agencies referred to in this subsection (which report shall be furnished
within thirty calendar days of the date on which it is requested, or within ten
calendar days of such date if the requesting agency advises the Attorney General
land the other two banking agencies that an emergency exists requiring expeditious
action). The Comptroller, the Board, and the Corporation shall each include in
its annual report to the Congress a description of each merger, consolidation,
acquisition of assets, or assumption of liabilities approved by it during the period
covered by the report, along with the following information: the name and total
resources of each bank involved; whether a report has been submitted by the
Attorney General hereunder, and, if so, a summary by the Attorney General of
the substance of such report; and a statement by the Comptroller, the Board, or
the Corporation, as the case m.ay be, of the basis for its approval."
Amend the title so as to read: "An Act to amend the Federal Deposit Insurance
Act to require Federal approval for mergers and consolidations of insured banks."
WHAT
THE
BILL
WOULD
DO
The bill as reported by your committee prohibits mergers 1 of
federally insured banks without the approval of the appropriate
Federal bank supervisory agency. If the merger is to result 2 in a
national bank or a District of Columbia bank, approval must be
obtained from the Comptroller of the Currency; if it is to result in a
State bank that is a member of the Federal Reserve System, approval
must be obtained from the Federal Reserve Board; if it is to result
in an insured nonmember State bank, approval must be obtained
from the Federal Deposit Insurance Corporation. In acting on a
merger application, the agency having jurisdiction over the transaction will consider the following factors: The financial history and
condition of each of the banks involved, the adequacy of its capital
structure, its future earnings prospects, the general character of its
management, the convenience and needs of the community to
be served, whether the bank's corporate powers are consistent with
the purposes of the Federal Deposit Insurance Act, and the effect of the
transaction on competition (including any tendency toward monopoly).
Approval will not be given unless, after considering all such factors,
the agency finds the transaction to be in the public interest. Except
where immediate action is needed to save a failing bank, the agency
having jurisdiction over the transaction wil] request a report on the
competitive factors involved from the other two banking agencies
and from the Attorney General.
i For ease of reading this report ignores the technical distinctions between a true merger and other
. transactions by which two banks may end up as one through consolidation, acquisition of assets, or assumption of liabilities. The bill, however, covers all such cases.
2 As indicated in footnote 1, this report ignores certain technical distinctions. The report uses "resulting
bank" to include what is more accurately described in the bill as the "acquiring, assuming, or resulting
bank."
£
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Federal Reserve Bank of St. Louis
REGULATION OF BANK MERGERS
3
THE COMMITTEE AMENDMENT
Your committee has agreed upon an amendment to the bill, striking out all after the enacting clause and inserting substitute provisions
worked out by Subcommittee No. 2 of this committee, under the able
chairmanship of Hon. Paul Brown. The principal effect of the substitute amendment relates to the standard used in acting on mergers.
Both the Senate bill and the committee substitute require the appropriate banking agency to consider the six banking factors listed first
in the preceding paragraph. The Senate bill added a seventh factor
to be considered: whether the transaction would "unduly lessen competition or tend unduly to create a monopoly/' The committee substitute requires consideration of the six banking factors plus "the effect
of the transaction on competition (including any tendency toward
monopoly)"; it also bars approval unless, after weighing all these
factors, the agency finds the transaction to be in the public interest.
The committee substitute also makes certain changes in the procedures for obtaining reports from the other banking agencies and the
Attorney General, and for reporting actions on bank mergers to Congress. These changes are explained more fully in the discussion of
the reporting provisions of the bill (beginning p. 12).
The committee substitute also provides for notice of proposed mergers to be published in newspapers. This provision is explained on
page 14.
NEED FOR IMPROVED CONTROLS OVER BANK MERGERS
Vigorous competition between strong, aggressive, and sound banks
is highly desirable. Competition in banking takes many forms—competition for deposits by individuals and corporations and by personal
and business depositors; competition for individual, business, and
governmental loans; competition for services of various sorts. Competition for deposits increases the amounts available for loans for the
development and growth of the Nation's industry and commerce.
Competition for loans gives the borrowers better terms and better
service and furthers the development of industry and commerce.
Vigorous competition in banking stimulates competition in the entire
economy, in industry, commerce, and trade. There is no question
that competition is desirable in banking, and that competitive factors
should be considered in all aspects of the supervision and regulation
of banks.
The number of commercial banks in the United States has been
slowly but steadily declining in the past 10 years. On January 1,
1950, there were 14,174 commercial banks in the country, but on
December 31, 1959, the number had dropped to 13,460, a loss of 714
banks for the period. This occurred in spite of a tremendous increase
in the country's need for banking services, and despite the fact that
887 new banks were chartered during the period. The net loss resulted from a strong trend toward mergers; on the average, 150 banks
per year ceased to exist as separate institutions during this period.
The 1,503 banks which disappeared represent more than 10 percent
of all the banks in the country.
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Federal Reserve Bank of St. Louis
4
REGULATION OF BANK MERGERS
Annual figures for this period, as furnished by the Comptroller of
the Currency during the hearings on this bill, are as follows:
All commercial
banks,
1950-59
Jan. 1,1950:
Total number of commercial banks
Less:
New banks chartered during 1950
Banks absorbed by merger during 1950
Other banks discontinuing business during 1950
14,174
91
13
j.
Total commercial banks, Dec. 31, 1950
_
Jan. 1,1951:
Total number of commercial banks
New banks chartered during 1951
Less:
Banks absorbed by merger during 1951
Other banks discontinuing business during 1951
84
10
Total commercial banks, Dec. 31, 1951
_
__
_.
Total commercial banks, Dec. 31,1952
_
99
12
_
__„_.
94
71
Ill
__
_
115
7
65
122
72
216
6
Total commercial banks, Dec. 31, 1954
14,067
-57
222
14,010
-150
_ 13,860
Jan. 1,1955:
Total number of commercial banks
New banks chartered during 1955
Less:
Banks absorbed by merger during 1955
O ther banks discontinuing business during 1956
--- 13,860
115
225
13
238
Total commercial banks, Dec. 31,1955
-123
13,737
Jan. 1,1956:
Total number of commercial banks
New banks chartered during 1956
_
Less:
Banks absorbed by merger during 1956
Other banks discontinuing business during 1956
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Federal Reserve Bank of St. Louis
-40
—_ 14,010
Jan. 1,1954:
Total number of commercial banks
New banks chartered during 1954
Less:
Banks absorbed by merger during 1954
Other banks discontinuing business during 1954
Total commercial banks Dec. 31, 1957
14,107
14,067
Total commercial banks, Dec. 31,1953
Jan. 1,1957:
Total number of commercial banks
New banks chartered during 1957
Less:
Banks absorbed by merger during 1957
Other banks discontinuing business during 1957
-30
__ 14,107
._.
Jan. 1,1953:
Total number of commercial banks
New banks chartered during 1953
Less:
Banks absorbed by merger during 1953
Other banks discontinuing business during 1953
Total commercial banks Dec. 31, 1956
-37
__ 14,137
64
i
_
104
._ 14,137
;
Jan. 1,1952:
Total number of commercial banks
New banks chartered during 1952
___
Less:
Banks absorbed by merger during 1952
O ther banks discontinuing business during 1952
67
-
—
__
-
186
13
-- 13,737
122
199
_
_
-77
13*660
-_
165
3
88
168
13,660
-80
13,580
REGULATION OF BANK MERGERS
All commercial banks,
5
1950-59—Continued
Jan. 1, 1958:
Total number of commercial banks
New banks chartered during 1958
Less:
Banks absorbed by merger during 1958
_
Other banks discontinuing business during 1958
100
151
15
166
Total commercial banks Dec. 31, 1958
13,580
-66
13,514
Jan. 1, 1959:
Total number of commercial banks
New banks chartered during 1959
_
Less:
Banks absorbed by merger during 1959
Other banks discontinuing business during 1959
_
123
171
6
177
Total commercial banks Dec. 31, 1959
13,514
-54
13,460
SUMMARY
Total number of commercial banks Jan. 1 1950
_
New banks chartered during period 1950-59
_
Less:
Banks absorbed by merger during period 1950-59
Other banks discontinuing business during period 1950-59
Total commercial banks Dec. 31, 1959
14,174
887
1,503
98
1,601
_
-714
13,460
The large numbers of mergers in recent years, the vast resources
involved in these mergers, and the increases in the size of the largest
banks, particularly those which have grown through mergers, all give
rise to concern for the maintenance of vigorous competition in the
banking system and in the industry and commerce served by the banking system. The reduction in the number of banks and the loss of
competition between merged banks also give rise to concern. There
are differing views about the effect and the significance of the mergers
which have taken place. But there is general agreement that legislation providing for uniform and effective regulation of mergers is required for the future.
Controls over bank mergers are incomplete and confusing, particularly with respect to the competitive factors involved. There are
gaps in the controls exercised by the Federal banking agencies under
banking statutes, and even where Federal approval is required before
a merger may be completed, the standards are not clearly spelled out.
Only two State statutes regulating bank mergers specifically authorize
consideration of competition as a factor in approving or disapproving
a merger, although in other States this factor is undoubtedly considered
under some other standards. The Federal antitrust laws are also
inadequate to the task of regulating bank mergers; while the Attorney
General may move against bank mergers to a limited extent under the
Sherman Act, the Clayton Act offers little help.
MERGERS COVERED BY THE BILL
S. 1062 would apply to all bank mergers involving a bank insured by
FDIC—National banks, State member banks, and insured nonmember
banks. This would cover the vast majority of American banks.
Approximately 95 percent of the banks in the United States are
insured, and the insured banks hold over 97 percent of the total assets
of all banks in the United States. The coverage of the bill can be
judged by the following chart, showing a breakdown of bank mergers
H. Kept. 1416,8G-2
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Federal Reserve Bank of St. Louis
2
6
REGULATION OF BANK MERGERS
for the past 3 years as to type of bank, which was furnished by the
Federal Deposit Insurance Corporation:
Distribution of absorbed commercial banks by class and size of bank;
absorptions,
consolidations, and mergers in the United States (continental United States and
other areas), 1957-59
N U M B E R OF ABSORBED C O M M E R C I A L BANKS i
Insured
Classification
Total
National
All a b s o r b e d commercial b a n k s , 1957-59- __
I n c l u d e d a t b e g i n n i n g of y e a r of a b sorption among the—
100 largest c o m m e r c i a l b a n k s
2d 100 largest commercial b a n k s
3d 100 largest commercial b a n k s
W i t h assets over $10,000,000, b u t n o t
a m o n g 300 largest b a n k s 3 _. _
W i t h assets of $10,000,000 or less
State,
members
Federal
Reserve
System
472
188
92
4
3
3
2
1
4
1
2
138
324
71
114
41
44
Not
members
Federal
Reserve
System
Noninsured 2
176
16
26
150
16
ASSETS (IN THOUSANDS) OF ABSORBED C O M M E R C I A L BANKS *
$2, 720, 491
$3, 997,298
2, 498, 468
504, 959
313,158
354, 731
122, 304
2, 498, 468
150,228
190,854
3, 299, 556
1,221, 628
1, 742, 981
500, 475
973, 571
184,177
All a b s o r b e d commercial b a n k s , 1957-59- _ . $7, 837. 769
I n c l u d e d at b e g i n n i n g of y e a r of a b sorption among the—
100 largest c o m m e r c i a l b a n k s
2d 100 largest c o m m e r c i a l b a n k s _ 3d 100 largest commercial b a n k s
W i t h assets over $10,000,000, b u t n o t
a m o n g 300 largest b a n k s 3__ __
W i t h assets of $10,000,000 or less _
$1,094, 544
$25,436
583,004
511, 540
25, 436
F l For 1957 and 1958 from table 101, Annual Report of the Federal Deposit Insurance Corporation for the
indicated year; for 1959 from tabulations to be included in the annual report for 1959.
2
Includes banks of deposit and trust companies not regularly engaged in deposit banking.
| T h e largest 300 banks included those with assets of more than $86,000,000 in 1957; $89,000,000 in 1958;
and $95,000,000 in 1959 (at beginning of year).
* From "Polk's Bank Directory"; data as of nearest available midyear or yearend date prior to absorption.
PRESENT FEDERAL BANKING LAWS ON BANK MERGERS
National banks
Where a proposed merger will result in a national bank, it can
normally be completed only if the Comptroller of the Currency approves. But the statute governing such mergers sets forth no standards for the Comptroller to follow in acting on such proposals. In
addition, there are special cases where, due to the form the transaction
takes, approval is not directly required. That is, if the transaction
is not a merger or consolidation in the technical sense, but takes the
form of a national bank purchasing the assets and assuming the
liabilities of another bank, the Comptroller's approval is not directly
required unless the capital stock or surplus of the assuming bank will
be less than the aggregate capital or surplus of the combining banks.
Where there is no such diminution, the Comptroller can exercise
indirect control through his power to approve the necessary increase
in the capital of the assuming bank, and if one of the banks is to be
continued as a branch, his approval is also required. The bill, however, would remove any confusion or doubt about the Comptroller's
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Federal Reserve Bank of St. Louis
REGULATION OOP BANK > MERGERS
7
power to act directly in these cases, and would s^t forth the standards
on which he is to act, including the competitive factor specifically.
Federal Reserve member banks
The only direct authority the Federal Reserve Board has over
mergers of member banks derives from section 18(c) of the Federal
Deposit Insurance Act, which requires advance approval of the Board
before a merger may take place which will result in a member bank
witli a smaller capital or surplus than the combined capital or surplus
of the banks involved in the transaction. In most cases the resulting
bank can be provided with capital and surplus as high as those of the
merging banks. This means that usually the absorbing bank has it
in its own power to prevent the Board from reviewing the merger
directly.
The Board exercises an indirect control over mergers where one of
the banks involved will continue as a branch of the resulting member
bank, since the Board's approval is required before such a branch
may be established. I n such a case, the Board considers what effect
the branch will have on competition, but the Board's authority to do
so has been challenged in recent litigation; it was upheld in the trial
court but appeal has been taken. 3
In 1959, out of 42 mergers resulting in member banks, 19 mergers,
involving total resources of almost $2 billion, did not require direct
approval of the Board.
Insured State nonmember banks
The Federal Deposit Insurance Corporation's approval is required
before any bank whose deposits it insures may merge with any noninsured bank. I t also has, with respect to insured nonmember banks,
the same power the Federal Reserve Board has with respect to member banks, in merger cases involving diminution of capital or surplus.
Its power to exercise indirect control by approving or disapproving
establishment of branches is also comparable to that of the Federal
Reserve Board.
In the past 5 years there have been 162 mergers resulting in a
State nonmember bank; in 66 of these F D I C approval was not required. In 1959, F D I C passed on 23 of 40 possible cases; in the 17
cases not requiring F D I C approval, total assets of $106 million were
involved—75 percent more than the assets involved in the cases where
approval was required.
The Chairman of the Board of Directors of the Federal Deposit
Insurance Corporation, a former chairman and long-time member of
the Banking and Currency Committee, Hon. Jesse P . Wolcott,
summed up this state of affairs as follows: "There is no question,
then, that our present act is largely ineffective when it comes to control of bank mergers."
Summary
The effect of the gaps in Federal banking laws on mergers in recent
years is summarized in the following material furnished by the
Comptroller of the Currency:
3 Old Kent Bank & Trust Co. v. Martin et al. (U.S. District Court for the District of Columbia, Civil
Action No. 1993-58).
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Federal Reserve Bank of St. Louis
8
BmVhATIOK
OF BANK MERGERS
Recapitulation of consolidations, mergers, assumptions, not requiring approval of
• appropriate Federal bank supervisory agency, 1955 through 1959
I. State bank member of Federal Reserve System the continuing bank: Approval
of Board of Governors of Federal Reserve System not required because the
total capital stock or surplus of the resulting or assuming bank was not less
than the aggregate capital stock or aggregate surplus, respectively, of all
the merging or consolidating banks or all of the parties to the assumption
of liabilities.
Requiring
Board
approval
Year
1955
1956
1957
1958
1959
Total.
Not requiring
Board
approval
Total resources,
cases not requiring Board's
approval
Total
38
30
21
21
23
30
24
20
23
19
68
54
41
44
42
$6,431,058, 718
214,314,252
276, 574,435
523,258, 520
1, 988,983, 797
133
116
249
9,434,189, 722
II. State bank insured by Federal Deposit Insurance Corporation, but not a
member of Federal Reserve System, the continuing bank: Approval of
Federal Deposit Insurance Corporation not required because the total
capital stock or surplus of the resulting or assuming bank was not less than
the aggregate capital stock or aggregate surplus, respectively, of all the
merging or consolidating banks or all of the parties to the assumption of
liabilities.
Requiring
FDIC
approval
Year
1955
1956
1957
1958
1959
_
_
_
_
Total
_
_
_.
__
Not requiring
FDIC
approval
Total resources, cases
not requiring
FDIC
approval
Total
25
16
14
18
25
9
11
21
8
17
34
27
35
26
40
$28, 592, 419
30,472,858
286, 765, 741
92,336,858
105,621,323
98
66
162
543,789,199
III. National bank the continuing bank: Approval of Comptroller of the Currency not required to assumption of liabilities cases only because the
capital stock or surplus of the assuming national bank was not less than the
aggregate capital stock or aggregate surplus, respectively, of all the parties
to the assumption of liabilities. While the Comptroller had no authority
to approve or disapprove these transactions because there was no diminution in capital or surplus, the increase in capital by the resulting national
bank did require the approval of the Comptroller. (Comptroller of the
Currency required to approve or disapprove all consolidations or mergers
where the continuing bank is a national bank under the provisions of
specific statutes.)
Year
1956..
1955._
1957
1958-.
1959Total
Consolidations
and mergers
requiring
Comptroller's
approval
Requiring
Comptroller's
approval
Not requiring
Comptroller's
approval
73
69
62
53
73
51
32
20
30
11
2
4
1
330
U44
i Includes 3 District of Columbia nonnational banks.
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Federal Reserve Bank of St. Louis
Total resources,
cases not
requiring
Comptroller's
approval
Assumption cases
Total
$13,490,703
36,950,783
1,285,741
2
126
105
83
83
86
9
483
71,084,412
19,357,185
REGULATION OF BANK MERGERS
9
CONTROL OVER BANK MERGERS UNDER ANTITRUST LAWS
The Sherman Antitrust Act prohibits any contract, combination,
or conspiracy in restraint of interstate or foreign trade or commerce,
and makes it illegal to monopolize, or to combine, conspire, or attempt
to monopolize, any part of such trade or commerce. Section 7 of the
Clayton Act prohibits acquisitions of bank stock "where in any line
of commerce in any section of the country, the effect of such acquisition may be substantially to lessen competition, or to tend to create a
monopoly." Because section 7 is limited, insofar as banks are concerned, to cases where a merger is accomplished through acquisition
of stock, and because bank mergers are accomplished by asset acquisitions rather than stock acquisitions, the act offers "little help," in the
words of Hon. 'Robert A. Bicks, acting head of the Antitrust Division,
in controlling bank mergers. Although the Sherman Act applies to
asset acquisitions as well as to stock acquisitions, it has been of little
use in controlling bank mergers. I t has been used only once in court
(in a proceeding initiated in March 1959) against a bank merger.
S. 1062 would not in any way affect the applicability of the Sherman
Act or the Clayton Act to bank mergers.
SPECIAL STANDARDS NEEDED TO CONTROL BANK MERGERS
Sad experiences in our history have demonstrated that to maintain
a sound banking system in this country banks must be regulated much
more strictly than ordinary businesses. A bank charter may be obtained only after the supervisory authorities are convinced that there
is a need for the bank in the community and its prospects of success
are good. Once it is in operation, it is subjected to careful and continuing supervision, in order to avoid "wildcat banking" and other
excesses which did much to bring on panics in earlier days.
This point is brought out in the following quotation from "Banking
Under the Antitrust Laws," by A. A. Berle (49 Columbia Law Review
(1949) 589, at 592):
Operations in deposit banking not only affect the commercial field, but also determine in great measure the supply
of credit, the volume of money, the value of the dollar, and
even, perhaps, the stability of the currency system. Within
this area considerations differing from and far more powerful
than mere preservation of competition may be operating
under direct sanction of law. I t is the theory, in ordinary
commercial fields, that competition is the desirable check on
price levels—the process by which the efficient are rewarded
by survival, and the inefficient eliminated by failure. The
price of business failures is not regarded as too high for the
community to pay in view of advantages to consumers,
stimulus toward greater efficiency, and freedom of enterprise.
But it is doubtful (to say the least) whether any such assumption is indulged in with respect to deposit banks; certainly the theory is not there accepted to the full extent of
its logic. A bank failure is a community disaster, however,
wherever, and whenever it occurs.
Because banking is a licensed and strictly supervised industry that
offers problems acutely different from other types of business, the
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Federal Reserve Bank of St. Louis
10
REGULATION OF BANK
MERGERS
bill vests the ultimate authority to pass on mergers in the Federal
bank supervisory agencies, which have a thorough knowledge of the
banks, their personnel, and their types of business. For the same
reason, the bill requires consideration of the six banking factors now
listed in section 6 of the Federal Deposit Insurance Act. Thus the
supervisory agency would consider the financial history and condition
of each of the banks involved, the adequacy of its capital structure,
its future earnings prospects, the general character of its management,
the convenience and needs of the community to be served, and whether
or not its corporate powers are consistent with the purposes of the
Federal Deposit Insurance Act.
Reference to these factors, while essential, would not alone suffice,
because the section 6 standards do not give sufficient weight to the
factor of competition.
THE COMPETITIVE FACTOR
The most difficult task your committee faced in considering the bill
was in framing a standard to guide the supervisory agencies in weighing the effects of a proposed merger on competition. But out of the
hearings one principle emerged, on which all witnesses seemed to
agree, as a starting point: Some bank mergers are in the public interest, even though they lessen competition to a degree. Thus, most
witnesses agreed that a bank merger would serve the public interest,
even though it might lessen competition substantially, where there is
a reasonable probability of the ultimate failure of the bank to be
acquired; or where because of inadequate or incompetent management
the acquired bank's future prospects are unfavorable and can be
corrected only by a merger with the resulting bank; or where the
acquired bank is a problem bank with inadequate capital or unsound
assets and the merger is the only practicable means of solving the
problem; or where several banks in a small town are compelled by
an overbanked situation to resort to unsound competitive practices,
which may eventually have an adverse effect on the condition of such
banks, and the merger would correct this situation.
Recognizing that other factors may outweigh an adverse effect on
competition, the Senate bill provided that the banking agency acting
on a proposed merger should consider whether it would "unduly lessen
competition or tend unduly to create a monopoly." In the Senate
Banking and Currency Committee's report this language was interpreted as follows:
The word "unduly" is used to show that any lessening of
competition or tendency to monopoly which may be found by
the agency—whether "appreciable," "perceptible," "slight,"
"substantial," "serious," or "great"—must be weighed and
considered by the banking agency as just one of the several
factors which will go to form its balanced judgment, on the
basis of all of the factors involved.
Several witnesses before Subcommittee No, 2 objected to this language, on the ground that it is too ambiguous. They argued that the
Clayton Act test should be applied because it has acquired more
definite meaning through a long series of court interpretations. Your
committee notes, however, that there have been relatively few cases
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Federal Reserve Bank of St. Louis
REGULATION OF BANK MERGERS
11
interpreting the Clayton Act since it was substantially changed in
1950, and that in one of these few cases it was interpreted as banning
mergers having a given effect on competition, regardless of the benefits
flowing from the merger. To meet this objection, the suggestion was
made to apply the Clayton Act test generally, but write in specific
exemptions to allow approval of mergers in the cases referred to above,
involving probable failures, management problems, inadequate capital
or unsound assets, or overbanked communities. This course seems
unnecessarily hazardous, however, in view of the wide variety of
situations in which a merger may be proposed in all good faith as a
means of providing better banking service. Your committee concluded that it would be unwise to attempt to anticipate all possible
situations where a merger would benefit the public, and incorporate
them in a rigid, specific list of exemptions.
Your committee is convinced the Senate's approach is basically
sound. Where demonstrable benefits would flow from a proposed
merger, these should be weighed against any adverse effect on competition. Your committee feels, however, that the language of the
Senate bill can be improved, to insure that the intent indicated in
the legislative history of the bill in the Senate will be properly carried
out. Your committee concurs with the Senate committee report's
repeatedly expressed intent to allow approval of bank mergers that
would be in the public interest, and with the following description of
the process by which this question should be decided:
The decision in most cases can be expected to be clear.
In many cases the proposed merger will not reduce competition at all and there will be sound and convincing banking
reasons for authorizing the merger. In other cases the proposed merger will clearly increase and strengthen competition, and there will be no banking factors which might lead
to rejection of the merger. In still other cases, there will be
serious danger of very considerable reduction in competition,
and few or no sound banking reasons to approve the merger.
In any of these cases, there need be little hesitation in
approving or denying the application.
The committee recognizes that in a relatively small number
of cases, the balancing of the various factors will be difficult—
some banking factors may be favorable, some may be unfavorable; some competitive factors may be favorable, others
unfavorable.
In such cases, the decision will not be simple. Full consideration will have to be given to the basic purposes of the
statute; to promote a sound banking system, in the interest
of the Government, borrowers, depositors, and the public;
and to promote competition as an indispensable element in
a sound banking system.
We are concerned, however, with some indications that under the
Senate bill a merger could be approved even though it "unduly"
lessened competition. While this result presumably was not intended,
there are conflicting statements on this question in the legislative
history of the bill in the Senate, and in the record of our hearings.
Doubts on this score should obviously be removed. We are convinced, also, that approval of a merger should depend on a positive
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Federal Reserve Bank of St. Louis
12
REGULATION OF BANK MERGERS
showing of some benefit to be derived from it. As previously indicated, your committee is not prepared to say that the cases enumerated
in the hearings are the only instances in which a merger is in the
public interest, nor are we prepared to devise a specific and exclusive
list of situations in which a merger should be approved. We do,
however, reject the philosophy that doubts are to be resolved in favor
of bank mergers. At the risk of saying the same thing another way,
we feel the burden should be on the proponents of a merger to show
t h a t it is in the public interest, if it is to be approved. After ah\the
factors have been weighed, the transaction should be approved only
if the supervisory agency is satisfied that, on balance, its effect will be
beneficial. For these reasons, we recommend adoption of the committee substitute.
REPORTS FROM THE OTHER BANKING AGENCIES
The bill divides responsibility over bank mergers among three
separate agencies. This arrangement is a sound one, because as a
general rule it will mean that the decision will be made by the Federal
agency most thoroughly familiar with the banks involved. At the
same time, it poses a practical problem, which was forcibly brought
out during the hearings by the National Association of Supervisors of
State ; Banks. In the-wards of Hon. Robert Myers, ^secretary of
banking of the Commonwealth of Pennsylvania:
Unless there is uniformity of application of the standards
relating to merger approval to be applied by the Federal
agencies to bank mergers, the equality of competitive position
between the two banking systems so necessary for the continued existence of the dual system, which Congress has
always carefully tried to preserve, will be impaired.
Your committee agrees that every effort must be made to avoid a
situation where one Federal agency is "tough" about mergers and
another one is "easy," where there might be an inducement to arrange
mergers so as to result in the kind of bank where approval could be
easily obtained. To help guard against this kind of development, the
bill provides that the agency having jurisdiction over a proposed
merger shall request a report from the other two banking agencies on
the competitive factors involved, unless it must act immediately to
prevent a bank failure. The committee substitute differs from the
Senate bill as to the mechanics of this consultation. Following a
suggestion made by Chairman Martin of the Federal Reserve Board,
the procedure for obtaining the views of the other two banking
agencies is made to conform with the procedure for obtaining a report
from the Attorney General. T h a t is, under the committee substitute
(but not under the Senate bill) the supervisory agency having jurisdiction over the transaction can act to save a failing bank without
seeking the views of the other banking agencies; and the other banking
agencies are required to submit their views within 30 days (or within
10 days if an emergency exists requiring expeditious action). The
committee substitute also provides that the report shall be requested
on the competitive factors, rather than on all factors to be considered.
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Federal Reserve Bank of St. Louis
REGULATION OF BANK MERGERS
13
The problem of obtaining uniformity is particularly acute in regard
to the competitive factors, and it is expected that this uniformity can
be obtained without asking the other two banking agencies for reports
on the banking factors, which could result in an unnecessary Federal
encroachment on supervision of State banks. I t is expected, however,
that the other banking agencies will be furnished with any available
information needed to render a competent opinion on the competitive
factors involved.
The State bank supervisors expressed considerable concern whether
the system of consultation called for by S. 1062 would achieve the
necessary uniform standards, and therefore recommended that ultimate approval of all mergers involving insured banks be placed in
the hands of one agency, the Federal Deposit Insurance Corporation.
Under this recommendation, all mergers where a national bank
survives would be approved by the Comptroller and the Federal
Deposit Insurance Corporation, and a merger with a State insured
bank surviving would be approved by the State bank supervisor and
the F D I C . The committee recognizes considerable merit in the
State bank super visors' recommendation but believes that the consultation provided for by S. 1062 will achieve their purposes.
The State bank supervisors also recommended that the Comptroller
of the Currency should not be consulted as to a merger involving
just State insured banks, on the grounds that such consultation is
inconsistent with the principles of the dual banking system. Your
committee, however, believes the development of uniform standards
in the administration of S. 1062 is of fundamental importance in preserving the dual banking system, and that such consultation is essential
to the development of such uniform standards.
REPORTS FROM THE ATTORNEY GENERAL
The committee substitute retains a feature of the Senate bill
which should prove most helpful in providing effective control of
bank mergers. That is, it would require the appropriate bank
supervisory agency to seek the views of the Attorney General as
to the competitive factors involved in a proposed merger before acting
on it. As in the case of the report from the other banking agencies,
the report need not be sought where immediate action is needed
to save a failing bank. Normally, the report must be filed within
30 days, but provision is made for filing within 10 days in an emergency. I t should be emphasized that the report from the Attorney
General is purely advisory, just as the reports from the other banking
agencies are. The banking agency has the power and responsibilityto approve or disapprove. At the same time, the Justice Department's long years of experience in the antitrust field have qualified
them to render valuable advice to the bank supervisory agencies in
regulating bank mergers. Your committee is happy to note t h a t
Chairman Martin of the Federal Reserve Board indicated he would
give careful weight to the Attorney General's report. The cooperation between the Federal Reserve Board and the Attorney General
in the administration of the Bank Holding Company Act of 1956
has been most commendable.
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Federal Reserve Bank of St. Louis
14
REGULATION OF BANK MERGERS
REPORTS TO THE CONGRESS
The bill provides that each of the three bank supervisory agencies
shall include in its annual report to the Congress a description of the
mergers it has approved during the period covered by the report. The
report is to include the following information: The name and total
resources of each bank involved; whether a report has been submitted
by the Attorney General and, if so, a summary of its substance
prepared by him; and a statement by the banking agency involved
of the basis for approval. While the bill does not attempt to specify
the particular factual situations in which mergers may be approved,
this reporting requirement will provide the Congress with the
opportunity to review how the standards specified in the bill are
being applied, on a case-by-case basis.
The committee substitute differs from the Senate bill in two respects
as to these reports. First, the Senate bill requires a special report on
mergers, to be submitted semiannually. The committee substitute
provides, instead, for including this information in the agency's
annual report. Your committee recommends this change because it
does not appear that special reports every 6 months are necessary to
apprise Congress adequately of developments in this field. The second
change makes it clear that the summary of the Attorney General's
report on a merger shall be prepared by the Attorney General. Your
committee feels it is not advisable to have the views of one agency
on such involved matters summarized by a different agency.
PUBLICATION OF NOTICE OF PROPOSED MERGERS
Your committee included in the bill as reported a provision requiring
t h a t notice of a proposed merger be published in a newspaper of
general circulation in the community or communities where the
main offices of the banks involved are located. This requirement is
geared to the time limits specified for reports from the other banking
agencies and the Attorney General, so as not to occasion any unnecessary delay. T h a t is, in the normal case, notice must be published at
appropriate intervals for at least 30 days before the banking agency
finally approves or disapproves the merger; in an emergency, this may
be shortened to 10 days. The bill does not require any such notice
where a merger is needed to save a failing bank. This makes no substantial change in existing law for most mergers resulting in national
banks, inasmuch as such notice is already required to run for at least
4 weeks under the act of November 7, 1918, as revised by section 20
of Public Law 86-230 (12 U.S.C. 215), which applies to all such
mergers except those in the form of an acquisition of assets and assumption of liabilities. Thus, for most national bank mergers, the
only change the bill makes is to add 2 days to the notice period in
some cases.
Notice is also required now for mergers resulting in State banks,
under the laws of many States.
This requirement will not, therefore, occasion any delay, or impose
any unnecessary burden on the persons seeking to arrange a bank
merger. I t will, however, provide a means by which the people of
the community served by the banks involved may be given an
opportunity to consider the effects of a proposed merger and express
their views concerning it in cases where they are sufficiently interested.
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Federal Reserve Bank of St. Louis
REGULATION OF BANK MERGERS
15
COMPLIANCE WITH STATE LAW
In the case of every merger where the resulting bank will be a State
bank, approval by the appropriate State supervisor or other banking
authority will, of course, have to be obtained, in accordance with the
applicable State law,4 before the Federal Reserve Board or the F D I C
will have an opportunity to review an application under this bill.
If the State supervisor refuses his approval of the merger, no application to the Federal Reserve Board or to the F D I C would even be
considered. There is, therefore, no possibility that the Board or the
F D I C would approve a merger which the appropriate State authorities had finally rejected.
The only possibility of conflict is that the Board or the F D I C
might deny an application for a merger which the State supervisor
had approved. This kind of conflict is not new under the dual system
of banking, however regrettable any specific instance may be. Under
the Board's or the F D I C ' s standards, the Board may always deny
membership, and the F D I C may always deny insurance, to a State
bank chartered by the appropriate State authority. The bank may
still proceed to operate as a State-chartered bank, without membership or without F D I C insurance, so long as the State supervisor
authorizes it to do so.
CHANGES IN EXISTING LAW
In compliance with clause 3 of rule X I I I of the Rules of the House
of Representatives, changes in existing law made by the bill, as
passed by the Senate, are shown as follows (existing law proposed to
be omitted is enclosed in black brackets, new matter is printed in
italic, existing law in which no change is proposed is shown in roman):
SUBSECTION (C) OF SECTION 18 OF THE F E D E R A L D E P O S I T
INSURANCE ACT
(c) Without prior written consent by the Corporation, no insured
bank shall (1) merge or consolidate with any noninsured bank or
institution or convert into a noninsured bank or institution or (2) assume liability to pay any deposits made in, or similar liabilities of, any
noninsured bank or institution or (3) transfer assets to any noninsured
bank or institution in consideration of the assumption of liabilities for
any portion of the deposits made in such insured bank. N o insured
bank shall convert into an insured State bank if its capital stock or its
surplus will be less than the capital stock or surplus, respectively, of
the converting bank at the time of the shareholders' meeting approving
such conversion, without prior written consent by the Comptroller of
the Currency if the resulting bank is to be a District bank, or by the
Board of Governors of the Federal Reserve System if the resulting
bank is to be a State member bank (except a District bank), or by the
Corporation if the resulting bank is to be a State nonmember insured
bank (except a District bank). [ N o insured bank shall (i) merge
or consolidate with an insured State bank under the charter of a State
bank or (ii) assume liability to pay any deposits made in another
insured bank, if the capital stock or surplus of the resulting or assuming bank will be less than the aggregate capital stock or aggregate surplus, respectively, of all the merging or consolidating banks
or of all the parties to the assumption of liabilities, at the time of the
*This is specifically required by statute in virtually all States.
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Federal Reserve Bank of St. Louis
16
REGULATION OF BANK MERGERS
shareholders' meeting which authorized the merger or consolidation
or at the time of the assumption of liabilities, unless the Comptroller
of the Currency shall give prior written consent if the assuming bank
is to be a national bank or the assuming or resulting bank is to be
a District bank; or unless the Board of Governors of the Federal
Reserve System gives prior written consent if the assuming or resulting bank is to be a State member bank (except a District bank); or
unless the Corporation gives prior written consent if the assuming
or resulting bank is to be a nonmember insured bank (except a District
b a n k ) . ] No insured bank shall merge or consolidate with any other
insured bank or, either directly or indirectly, acquire the assets of, or
assume liability to pay any deposits made in, any other insured bank
without the prior written consent (i) of the Comptroller of the Currency
if the acquiring, assuming, or resulting bank is to be a national bank or a
district bank, or (ii) of the Board of Governors of the Federal Reserve
System if the acquiring, assuming, or resulting bank is to be a State
member bank (except a district bank), or (Hi) of the Corporation if the
acquiring, assuming, or resulting bank is to be a nonmember insured
bank (except a district bank). In granting or withholding consent under
this subsection, the Comptroller, the Board, or the Corporation, as the
case may be, shall consider the factors enumerated in section 6 of this
Act. In the case of a merger, consolidation, acquisition of assets or
assumption of liabilities, the appropriate agency shall also take into
consideration whether the effect thereof may be to lessen competition
unduly or to tend unduly to create a monopoly, and, in the interests of
uniform standards, it shall not take action as to any such transaction
without first seeking the views of each of the other two banking agencies
referred to herein with respect to such question. In the case of a merger,
consolidation, acquisition of assets, or assumption of liabilities, the
appropriate agency shall request a report from the Attorney General
on the competitive factors involved in the merger. The Attorney General
shall furnish such report to such agency within thirty calendar days of the
request: Provided, however, That in case the agency finds an emergency
exists the agency may advise the Attorney General thereof and may
there upon shorten the period for the Attorney General to report to ten
calendar days: Provided further, That where the agency finds that an
emergency makes necessary immediate action in order to prevent the
probable failure of one of the merging banks, the appropriate agency
may act without obtaining such report from the Attorney General: And
provided further, That the Comptroller, the Board, and the Corporation
shall each submit to the Congress a semiannual report with respect to
each merger, consolidation, acquisition of assets, or assumption of liabilities approved by the Comptroller, the Board, or the Corporation, as
the case may be, which shall include the following information: the name
of the receiving bank; the name of the absorbed bank; the total resources
of the receiving bank; the total resources of the absorbed bank; whether a
report has been submitted by the Attorney General hereunder; and if
approval has been given, a summary of the substance of the report made
by the Attorney General, and a statement by the Comptroller, the Board,
or the Corporation, as the case may be, in justification of its findings.
Xo
insured State nonmemoer bank (except a District bank) shall, without the prior consent of the Corporation, reduce the amount or retire
any part of its common or preferred capital stock, or retire anygpart
of its capital notes or debentures.
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Federal Reserve Bank of St. Louis
o
BOARD DF G O V E R N O R S
OF THE
(On office
copies only)
FEDERAL R E S E R V E SYSTEM
WASHINGTON
25. D. C.
ADDRESS
OFFICIAL C O R R E S P O N D E N C E
TO THE
BOARD
May
Dear Sir:
On May 6, I960, the Senate passed the Bank Merger Bill S-1062
and it appears that it will soon be applicable to all mergers, consolidations, and absorptions of banks.
The staff has been working with representatives of the Office
of the Comptroller of the Currency and Federal Deposit Insurance Corporation to prepare a form of application which could be used by banks
applying to the Federal supervisory agencies for approval of mergers,
consolidations, or absorptions under the new Iaw9 The enclosed draft of
form of application is submitted for possible comments and suggestions
and it will be appreciated if we can have your views within the next two
weeks*
Pending the formal adoption of a form of application,, it is
suggested that you request the State member banks to submit their applications for mergers, consolidations, or absorptions in a form similar to
this draft0 Such applications should be forwarded to the Board promptly
followed in due course by your memoranda and recommendation. Inasmuch
as the statute provides that these proposals be submitted by us to the
Office of the Comptroller of the Currency, Federal Deposit Insurance
Corporation^ and Department of Justice, it is requested that an original
and three copies of the application and exhibits be furnished the Board,
in addition to copies needed for use of your bank*
Very truly, ypurs,
X
v.--
Herritt Sherman,
Secretary*
Enclosure
TO THE PRESIDENTS
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Federal Reserve Bank of St. Louis
OF ALL FEDERAL RESERVE BANKS
^ (.A.A
Chairman Martin
B O A R D DF G O V E R N O R S
OF THE
F E D E R A L R E S E R V E SYSTEM
Office Correspondence
To
Board Members (Individually)
From
Jerome W. Shay
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Federal Reserve Bank of St. Louis
Date April u, 1960
Subject:
S. 1062 - bank merger bill
The House today passed the bank merger
bill (S. 1062) without objection under a suspension
of the House rules.
The bill now goes back to the Senate, which
may ask for a conference on the amendments made to the
bill by the House or proceed to consider the bill in
its amended form without going to conference.
cc: Mr. Hackley
Mr. Solomon
Mr. Sherman
Chairman Martin
BOARD DF GOVERNORS
F E D E R A L R E S E R V E SYSTEM
Office Correspondence
Date March 22a I960
To_
Board of Governors
Subject: House Banking and Currency
Frnm
Jerome W. Shay
Committee approval of bank merger bill
lis morning3 the Housd Banking and Currency
Committee ordered favorably reported the bank merger
bill (S. 106z}xin the form re<5ently approved by the
Brown Subcommittee7-~exeepirior one change.
The change made by the full Committee was to
add to the bill a requirement under which a bank merging other banks would have to publish advance notice
of the proposed merger in a local newspaper of general circulation. This requirement is much the same as that
already applicable under the law with respect to national
banks and some State statutes have similar requirements.
The bill, as ordered reported by the Committee
with the one change, was approved on voice vote without
objection.
cc: Mr. Sherman
Mr. Solomon
Mr. Hexter
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Federal Reserve Bank of St. Louis
February 19, I960
The Honorable Paul Brown, Chairman,
Subcommittee Ko. 2,
Coasdttee on Banking and Currency,
House of Representatives,
Washington 2$, D. G.
In accordance with the request made at the hearing before
your Subcommittee oa February 16, I960, with respect to S, 1062,
I am enclosing a copy of a letter that was sent to Senator Robertson
by Governor Balderston of the Beard oa May 3, 1959, setting forth the
Board's views regarding an amendment to the bank merger bill in*
troduced by Senator Q'Mahoney on May 7, 1959*
As was indicated at the hearing on February 16, the Board
reported unfavorably on Senator OlMahoney's amendment, it should be
pointed out that the exceptions contained in his amendment regarding
eases of probable bank failures, incompetent management, inadequate
capital, and over-banked situations would be important and relevant
only if Congress should adopt legislation like Senator O'Mahoney1*
*"*»*feMiBt prohibiting a banking agency from approving any merger that
would substantially lessen competition. However, these exceptions
would be unnecessary if Congress should follow the approach of S. 1062,
since it would leave the banking agencies free to consider all pertinent
factorsi under that bill it would be possible for the agencies to consider situations of the kind described in Senator O'Mahoney's
as warranting approval of a merger notwithstanding lessening*, of
competition.
(SIGNED) WM. McC.
Enclosure
cct Hiss Muehlhaus
Mr. Shay
HHHi^c
2-18-60
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Federal Reserve Bank of St. Louis
llt
BOARD OF G O V E R N O R S
OF THE
F E D E R A L R E S E R V E SYSTEM
W A S H I N GTON
OFFICE OF THE VICE C H A I R M A N
May 8,
The Honorable A. Willis Robertson, Chairman,
Committee on Banking and Currency,
United States Senate,
Washington 25, D. C.
Dear Mr. Chairman:
It is understood from the Chief of Staff of your Committee
that you wish to have the views of the Board regarding an amendment
introduced by Senator C'Mahoney on May 7, 1959, to the bill S. 1062,
relating to bank mergers which was favorably reported by your. Committee on April 17.
The Board strongly opposes enactment of the proposed
amendment. In the Board's opinion, adoption of the amendment
would be directly at variance with the underlying purposes of the.
bill as reported by your Committee. The reasons for the Board1 s
position are set forth in detail in the enclosed memorandum.
Briefly stated, the proposed amendment would (l) prohibit
the Federal bank supervisory agen.cies from approving any bank merger
if its effect might be substantially to lessen competition or to
tend to create a monopoly, except in certain limited circumstances
described in the amendmentj (2) require the appropriate bank supervisory authority to hold a hearing in any case in which either of
the other two Federal bank supervisory authorities or the Attorney
General expresses disapproval of a proposed merger; (3) allow an
appeal from the decision of the bank supervisory authority, to the
Court of Appeals for the District of Columbia,by any party Adversely
affected or by the Attorney General; and (ii) require each of the
bank supervisory agencies to submit a report twice a year with respect
to all bank mergers approved by it, indicating the names and resources
of the banks involved and submitting a copy of the report made by
the other Federal bank supervisory agen.cies and by the Attorney
General regarding the competitive factors involved in the merger.
The proposed amendment, by prohibiting approval of any
merger that might substantially lessen competition, would bar all
consideration of other factors that might make a proposed merger
desirable, or even essential, in the public interest. This would
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Federal Reserve Bank of St. Louis
The Honorable A. Willis Robertson
-2-
represent a fundamental change in the concept of the reported bill
which contemplates that due weight should be given to financial
condition, character of management, and convenience and needs of
the community, as well as effect upon competition. The amendment
would make "substantial lessening" of competition the controlling
factor in all cases.
The holding of hearings with respect to bank mergers as
required by the amendment would be inadvisable and in many cases
could have detrimental effects upon, the banks involved, their customers, and the general public. The provisions of the proposed
amendment granting judicial review of orders of the bank supervisory
agencies at the instance of aggrieved parties are unnecessary.
The authority that would be given the Attorney General to
obtain judicial review of the banking agency1 s decision would vest
in the Attorney General an effective control over bank mergers that
would tend to minimize, if not ignore, factors that should be
considered in determining whether such a merger is in the over-all
public interest. Again, this would be inconsistent with the concept
of giving due weight to all factors pertinent to the public interest
and not to competition alone. It would also be at varian.ce with
the concept of the bill of vesting judgment in the bank supervisory
agencies with respect to all of the statutory factors including the
competitive effect of a particular merger. Furthermore, the Attorney
General would be placed in the anomalous position of representing
the United States in. appealing from the decision of a Federal
agency while at the same time representing the agency itself as
appellee, unless, of course, special arrangements were made for the
use by such agency of its own counsel.
For these reasons the Board earnestly hopes that the
proposed amendment will not be adopted.
Sincerely yours,
C. Canby Balderston,
Vice Chairman.
Enclosure
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Federal Reserve Bank of St. Louis
MEMORANDUM REGARDING AMENDMENT SUGGESTED BY
SENATOR O'MAHONEY TO BANK MERGER BILL (S. 1062)
(1) The proposed amendment would prohibit any merger the
effect of which "may be substantially to lessen competition, or to
tend to create a monopoly" „ The obvious effect of this prohibition
would be to make "substantial" lessening of competition, the standard
now contained in the Clayton Act, the controlling test as to bank
mergerso It would require disapproval of any merger which might
quantitatively lessen competitions notwithstanding offsetting
favorable factors that would clearly make the proposed merger
desirable in the public interest,, While the proposed amendment
would purport to set forth certain situations in which this prohibition would not apply, there is no assurance that the situations
described in the amendment are exhaustive of the types of situations
that might require consummation of a bank merger even though it
would lessen competition,, In other words, the proposed amendment
would be directly contrary to a fundamental concept of the reported
bill, which is designed to enable the bank supervisory agencies to
consider and weigh various factors affecting the public interest,
including but not limited to the effect of the merger upon competition «,
As stated in the Report of the Senate Banking and Currency
Committee of April 1?> 1959, it is essential in the case of a bank
merger that any lessening of competition "should not be used as a
controlling or determinative factor in and of itself" (p. 22) and
"that the competitive factors, however favorable or unfavorable,
are not, in and of themselves, controlling on the decision"„ (p« 2l|)
(2) The proposed amendment would require the holding of
a hearing with respect to every merger considered by one of the
three Federal bank supervisory agencies as to which either of the
other bank supervisory authorities or the Department of Justice
have expressed disapproval. Such a hearing requirement, could well
be detrimental to the public interest* The standards stated in the
reported bill would require the appropriate bank supervisory agency
to consider the financial condition and competency of management of
the banks involved, as well as the competitive effect of the proposed
merger. In order to provide a complete record, a hearing would of
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Federal Reserve Bank of St. Louis
necessity contain references to the internal condition and
management of a bank that for good reasons should not be disclosed other than to the authority considering the matter.
Various items of information of this kind, taken alone,
could easily give rise to unfounded rumors as to the financial
condition of a bank, the adequacy of its capital structure, or
the character of its management, and might well result in
irreparable injury to the bank, its stockholders, its depositors,
and the public. It is for this reason that such information has
always been treated in the most confidential manner by all bank
supervisory authorities0 Furthermore, revelation of all information relating to the required consideration of the competitive
effect of a proposed merger could easily result in giving competing banks information now held in confidence which might unjustly injure the competitive position and business prospects of
the bank involved.
(3) Apart from the inadvisability of such hearings, the
holding of hearings with respect to bank mergers is questionable.
The Federal bank supervisor3?" agency that would be required to pass
on a bank merger would be the agency that normally has supervision
of the bank that would continue after the merger. That agency
would therefore have available to it, or could obtain, full information as to the financial condition, management, and other
factors pertinent to a. decision as to whether the merger should be
permitted. A hearing would add little or nothing to the information available to that agency and needed by it in order to appraise
the merger in the light of the statutory standards.
(Ij.) The proposed amendment would require hearings even
in those cases in which, because of emergency circumstances, a
report would not be required under the reported bill to be obtained
from the Attorney General0 For example, if one of the Federal bank
supervisory agencies should express its disapproval of *bhe proposed
merger, for whatever reason, a hearing would be mandatory, despite
the existence of emergency conditions requiring immediate action.
The provisions of the proposed amendment authorizing
appeal from a bank supervisory agency!s decision on a proposed
merger are unnecessary <> Under present law, a person aggrieved
by the agency's decision could seek judicial review of the agency's
action, either through a suit for a declaratory judgment or an
injunction, or a combination of the two, wherein a court of law
could determine whether the agency's decision was capricious or
arbitrary or in excess of its statutory authority,,
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Federal Reserve Bank of St. Louis
-3(6) The provision of the proposed amendment that would
give the Attorney General a right of appeal from the decision of
one of the bank supervisory agencies as to a proposed merger
would obviously afford the Department of Justice an effective
power to substitute its judgment for the judgment of the banking
agency and to assert that power solely on the basis of the
Department f-s opinion as to the effect of the merger upon competition, without regard to any favorable factors that would make
the proposed merger desirable in the public interest. Again,
this result would clearly be contrary to the basic intent of the
"reported bill.
In this connection, it is important to observe that in
the event an appeal should be taken by the Attorney General pursuant
to the proposed amendment, unless the agency involved obtained
its own counsel, there would result a situation in which the
Attorney General would appear before the appellate court both as
the appellant and also as representative of the appellee, the
particular bank supervisory authority whose decision would be in
question. This result would, of course, follow from the fact
that the Attorney General, as the legal officer of the United
States, normally represents agencies of the Federal Government
in suits involving such agencies.
The proposed amendment would give the Attorney General
an unqualified right to challenge the decision of the appropriate
bank supervisory agency by appeal to a court solely on the basis
of his disapproval of the merger on the ground of its competitive
effect. Nevertheless, the Attorney General's right to appeal
would not be limited to cases in which he might disagree with the
banking agency's judgment as to effect on competition; on appeal
he could challenge that agency1s judgment as to factors related
to financial condition, character of management, and other matters
wholly unrelated to competitive effect.
It should be borne in mind that, if a proposed merger
approved by one of the banking agencies should in fact violate
the antitrust laws, the Attorney General would continue to have
power to prevent the merger pursuant to his jurisdiction under
the Sherman Act. In the absence of such a situation, however, the
proposed amendment would have the effect of substituting the
judgment of the Attorney General for that of the banking agency
as to all statutory factors, including competition, notwithstanding
the banking agency's specialized experience in the field of banking.
This would be in direct conflict with the sound philosophy of the
reported bill and the proposed amendment itself, both of which would
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Federal Reserve Bank of St. Louis
-uplace in the banking agencies charged with primary supervision of
the institutions involved the responsibility for exercising judgment as to all of the statutory factors including the competitive
effects of a proposed bank merger.
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Federal Reserve Bank of St. Louis
MAY 8 1959
HEARINGS ON BANK MERGERS
The Board would be opposed to a requirement that hearings
be held with respect to bank mergers. Such a hearing requirement
could well be detrimental to the public interest.
The standards
stated in the bill would require the appropriate bank supervisory
agency to consider the financial condition and competency of management
of the banks involved, as well as the competitive effect of the proposed merger. In order to provide a complete record, a hearing would
of necessity contain references to the internal condition and management of a bank that for good reasons should not be disclosed other
than to the authority considering the matter.
Various items of information of this kind, taken alone,
could easily give rise to unfounded rumors as to the financial condition of a bank, the adequacy of its capital structure, or the character
of its management, and might well result in irreparable injury to the
bank, its stockholders, its depositors, and the public.
It is for
this reason that such information has always been treated in the most
confidential manner by all bank supervisory authorities.
Furthermore,
revelation of all information relating to the required consideration
of the competitive effect of a proposed merger could easily result in
giving competing banks information now held in confidence which might
unjustly injure the competitive position and business prospects of the
bank involved.
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Federal Reserve Bank of St. Louis
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Aparb from the inadvisability of such hearings, it is
questionable whether they would serve any useful purpose. The Federal
bank supervisory agency that would be required to pass on a bank
merger would be the agency that normally has supervision of the bank
that would continue after the merger. That agency would therefore
have available to it, or could obtain, full information as to the
financial condition, management, and other factors pertinent to a
decision as to whether the merger should be permitted. A hearing would
add little or nothing to the information available to that agency and
needed by it in order to appraise the merger in the light of the statutory standards.
HHHjjc
2-12-60
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Federal Reserve Bank of St. Louis
THE STANDARD OF COMPETITION;
"UNDULY" V. "SUBSTANTIALLY"
One of the principal points of discussion in connection
•with the bank merger bill has related to the phrasing of the provision regarding consideration of the factor of competition.
Several
alternatives have been considered*
"Unduly" * - S. 1062, as it was introduced in the Senate and
as it passed the Senate provided that each banking agency should consider whether the effect of a proposed merger may be to
"lessen competition unduly or tend unduly to
create a monopoly,"
In the past, the Board, the Controller of the Currency, and the Federal
Deposit Insurance Corporation have espoused this approach on the theory
that it avoids the exclusively quantitative connotation of the word
"substantially" as used in the Clayton Act, and makes clear that the
banking agencies are authorized to approve a merger that may substantially
lessen competition if the prospective benefits outweigh this factor so
that the merger will not unduly lessen competition. The Department of
Justice has opposed use of the WDrd "unduly" on the ground*that, unlike
"substantially", it has no judicially settled meaning. On the contrary,
however, the term "unduly" has been used in court decisions.
"Substantially". - It is likely that suggestions will be made
in the House to substitute "substantially" for "unduly" as a means of
compromise - both because it would be more acceptable to Justice Department and because it has been favored by Chairman Celler of the Judiciary
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Federal Reserve Bank of St. Louis
-2-
Committee. However, it is probable that this substitution would be
opposed by the CouptroHer of the Currency and the FDIG; and it might
not be acceptable to Senator Bobertson*
Last March, when Governor Robertson testified in the Senate
on behalf of the Board, he indicated that the Board would not oppose
substitution of "substantially" for "unduly". In his statement, he
said:
"It should be emphasized here that the Board's position
with respect to standards is not based upon any semantic distinction between the words "substantially" and "unduly",
although obviously the word "substantially" carries only a
quantitative connotation, whereas 'hinduly" implies a broader
meaning. The point of the matter is that, in passing upon a
bank merger, its effect upon competition should be one, but
not the only, factor to be considered. The supervisory agency
having jurisdiction over a merger should be required to weigh,
pro and con, all factors affecting the public interest financial condition, management, and needs of the community,
as well as competitive effect. Admittedly, the effect of a
bank merger as lessening competition is always an important
factor and should be carefully weighed; but, in determining
whether any such merger would be inconsistent with the public
interest, the test should be whether competition would be
lessened to such a degree as to outweigh whatever favorable
factors may be present in the particular situation*"
Cardon proposal. - It is possible that certain "compromise"
language suggested by Mr. Cardon, Clerk of the House Banking Committee,
may be brought up at the hearing on February 16. That suggestion was
to require the banking agencies to consider whether the effect of a
merger might be "substantially" to lessen competition, and if the agency
should find that the merger would have such an effect, to prohibit the
agency from giving its consent unless it finds "that the transaction
would nevertheless be in the public interest because, after considering
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Federal Reserve Bank of St. Louis
(
—3—
the factors enumerated in section 6 [the "banking" factors], it finds
that the benefits to the public to be derived from the transaction
outweigh the adverse effect on competition*w
The Comptroller!s Office has indicated that it would oppose
this suggestion. However, representatives of the ABA and, apparently,
representatives of the FDIC, felt that it would be unobjectionable,
provided the words "in the public interest" were changed to "consistent
with the public interest," (This raises the "philosophic" question
whether a merger should be approved only if it will affirmatively
promote the public interest.)
"Preservation of competition". - In order to avoid use of
either "unduly" or "substantially", it may be suggested that the bill
be changed to require the banking agency to consider whether the
merger will be "inconsistent with the preservation of competition in
the field of banking." This is similar to language used in the Bank
Holding Company Act. It would seem to have some advantages as a
possible compromise. However, it is doubtful whether it would be
acceptable to the Department of Justice.
Effect upon competition. - A final alternative would be to
require the banking agency to consider simply the "effect of the proposed merger upon banking competition." This would permit consideration
of whether the merger would result in too much as well as too little
competition. Logically, it would seem to be the most appropriate language. However, in view of the history of the matter, it is unlikely
that such language would satisfy the Department of Justice.
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Federal Reserve Bank of St. Louis
-uTactical considerations* - On principle, the alternative
last mentioned would be the preferable one. Tactically, however, it
may be desirable to settle for any of the alternatives indicated if
it is made clear that lessening of competition is not necessarily
the decisive factor, but only one that is to be weighed along with
other factors. Adamant insistence upon the use of the word "unduly11
might well result in failure of this bill and passage of legislation
of the kind advocated by the Justice Department, which would place
bank mergers under the Clayton Act and in effect give the Department
of Justice and the banking agencies concurrent antitrust control over
the merger of banks. In that event, the sole consideration would be
whether the merger would "substantially" lessen competition, and other
aspects affecting the public interest -would be ignored.
HHH:vr
2/12/60
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Federal Reserve Bank of St. Louis
HOLDING COMPANY'S ACQUISITION OF STOCK OF
BANK IN PADUCAH, TEXAS
A small holding company controls a bank in Childress
(at the base of the Texas Panhandle) and another in nearby Oklahoma.
In addition, it owned 5 per cent of the stock of a bank in Paducah,
30 miles south of Childress.
It requested the Board to approve ac-
quisition of another 5 per cent.
The areas served by the bank in Childress and the one in
Paducah may potentially overlap to some degree, although at present the
people of the area tend to deal with the nearest bank. The majority
of the Board (two dissented) concluded that the proposed increase in
the holding company's ownership of the Paducah bank fromj? per cent to
10 per cent would not "expand the size or extent of the bank holding
company system involved beyond limits consistent with . . . the
preservation of competition", having in mind the existence of a number
of other banks within a radius of 30 to i|0 miles over straight, good
roads.
The Texas Banking Commissioner objected on the ground that
the holding company's charter prohibited the proposed acquisition.
The Board took the position that this was a matter within the jurisdiction of the State rather than that of the Board.
Representative Patman objected on the grounds that (1) the
Holding Company Act forbids the acquisition because Texas law prohibited branch banking, and (2) the Board had violated the Holding
Company Act by failing to notify the Texas Banking Commissioner.
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Federal Reserve Bank of St. Louis
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Both of these objections seemed clearly untenable, and the first was
dealt with in the Board's Statement in this case. Other objections
made by Representative Pataian were (3) that the proposed acquisition
would violate the antitrust laws and (k) that the Board's decision
reached the wrong result in view of the facts generally.
The Board
did not consider it necessary to mention these objections specifically
in its Statement.
DBHijc
2-12-60
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Federal Reserve Bank of St. Louis
REASONS AGAINST COVERING BANK MERGERS
UNDER THE CLAITON ACT
Some pending bills would seek to meet the problem by bringing
acquisitions of bank assets, and therefore bank mergers, within the
coverage of section 7 of the Clayton Act. Some of these bills would,
in addition, require prior notification to be given to the Attorney
General and the Board with respect to all bank mergers involving banks
with combined capital, surplus, and undivided profits of more than
$10 million, subject to certain exceptions.
In recent years, the Board has consistently expressed the
view that the most effective approach to the problem would be through
an amendment to the banking laws which would require prior approval of
all bank mergers by the appropriate Federal bank supervisory agencies.
The bill S. 1062 reflects this approach. The Board favors this approach
rather than an amendment to the Clayton Act because of (l) the desirability of preventing mergers of insured banks without the advance
approval of the appropriate Federal bank supervisory agency, (2) the
t
greater enforcement problems resulting from coverage of bank mergers
by the antitrust laws, and (3) the need for more flexible standards
than the standard prescribed by the Clayton Act.
Advance approval would afford opportunity to consider all
aspects of the public interest and, at the same time, would avoid the
difficulties arising from after-the-fact consideration of the question
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Federal Reserve Bank of St. Louis
(
-2-
whether a consummated bank merger is consistent with the public
interest. By contrast, expansion of the Clayton Act to cover bank
mergers would place upon the Government the burden of taking the
initiative to restrain or undo any merger deemed to violate the law.
Under a bill like S. 1062, the burden would be on the banks in every
case to obtain approval of a proposed merger; and if the proposal
was found to be contrary to the public interest, for competitive or
other reasons, the merger would never take place.
As to enforcement, the Federal banking agencies are
believed to be qualified by experience to determine whether a proposed merger should be approved as being in the public interest. No
new enforcement problems would be presented. On the other hand,
extension of section 7 of the Clayton Act to cover bank mergers would
give rsie to all of the multitude of problems inherent in attempting
to undo a merger that has already taken place. Practical and legal
difficulties would be involved in unscrambling the assets and liabili—
ties of constituent banks after a merger has occurred, particularly
if a considerable period of time has elapsed. These difficulties
would be far greater than those involved in requiring divestment of
stock illegally acquired under the Clayton Act.
In addition to these problems, coverage of bank mergers by
the Clayton Act would substantially add to the Board's responsibilities
in the antitrust field. At present, the Board has enforcement
authority under the Clayton Act where banks are involved, but that
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Federal Reserve Bank of St. Louis
-3authority is limited to stock acquisitions, and its significance has
been considerably lessened by the fact that under the Bank Holding
Company Act the Board must pass in advance upon acquisitions of bank
stock by bank holding companies. However, an extension of the Clayton
Act to cover acquisitions of bank assets would impose upon the Board
enforcement responsibility with respect to every bank merger, even
though it may already have been considered and approved by one or
more other bank supervisory agencies.
The principal responsibilities and functions of the Federal
Reserve System lie in the fields of monetary and credit regulation
and bank supervision.
The prosecuting functions incident to the
enforcement of the antitrust laws are of a character quite different
from the administrative functions normally exercised by the Board in
passing in advance upon particular transactions in the bank supervisory
field. In brief, enforcement of the antitrust laws and bank supervision represent different spheres of governmental operation, despite
the fact that both may involve questions of possible adverse effects
V
upon competition.
Finally, if bank mergers were brought under the Clayton
Act, the sole test would be whether a particular merger would substantially lessen competition or tend to create a monopoly, to the
exclusion of other considerations that might have an equally important
bearing upon sound banking and the public interest. Thus, every
bank merger that would result in a substantial lessening of competition
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Federal Reserve Bank of St. Louis
would be made unlawful, no matter how desirable the merger might be
in order to improve the financial condition or quality of management
of the banks involved or to protect the community against the growth
of unsound banking practices. There may well be instances in which the
over-all public interest would be clearly served by a bank merger even
though it would lessen competition. For example, a bank may be an
uneconomic unit, too small to provide the banking services needed by
its community; or a bank may be one of a number of banks in an overbanked community where excessive competition for business may lead to
unsound banking practices. In such situations, the public interest
might actually be promoted by the merger of two banks, even though a
lessening of competition might result.
Banking, perhaps more than any other type of business,
directly affects credit conditions and the basic economy of the
country. Accordingly, there is a need to maintain strong competition
in the banking field in order to make certain that business and the
public will have access to adequate alternative sources of banking
services. But there is also a need, of at least equal importance, for
the maintenance of sound, strong, and efficient banks that will be
able to meet the credit and financial requirements of growing communities.
Both of these needs must be considered in determining whethei
a particular bank merger will be in the public interest.
HHH:jc
2-12-60
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Federal Reserve Bank of St. Louis
MERGERS, CONSOLIDATIONS AND ABSORPTIONS BY STATE MEMBER BAMS
19 $0
1951
1952
1953
19 5U
1955
1956
1957
1958
1959
Number of
Mergers and
Consolidations
Number of
Absorptions
(Purchase
of Assets)
9
18
16
22
15
16
12
11
7
12
55
19
37
37
13
5
U
8
S8
5
LIST OF
•
Total
Assets
under
15,000,000
25
30
27
29
27
68
5U
Ul
b5
12
10
12
8
Size of banks taken over
Assets
Assets
$5,000,000
$10,000,000
to
to
$10,000,000
$50,000,000
5
5
3
6
1
_
6
U
11
8
10
10
12
26
25
11
6
16
13
18
9
1U
1U
8
10
6
19
1U
15
Assets over
$50,000,000
11
12
12
18
38
30
«*tfi 2*
u *y 5Jx^21
*tf*
Number of
cases not
requiring
approval
Number of
banks converted to
branches
11*
20
2U
2U
18
12
17
9
30
2U
15
3
7
1
2
Number of
cases requiring Federal
Reserve Board
aatjroval
r*
20
^i/lfy <tff «# ^
20
BANKS T7ITH ASSETS OVER $50 MILLION WTICH "WERE J!ERGSD INTO OR ABSORBED BT STATE MEMBER BANKS
43
22
3
Existing
branches
acquired
in takeover
26
61
33
28
13
10
96
102
39
2U
32
25
50
U8
U3
40
30
(in thousands)
Bate
10-16-50
9-13-50
8- 7-50
3-19-Sl
U-23-51
5-23-51
6-18-51
9- U-51
11- i-5l
n- 3-52
7- 1-5U
8- 9-5U
10-18-5U
l- 3-55
2-21-55
3-21-55
U- 1-55
U-n-55
10- 3-55
12-31-55
9-1-56
U-29-57
12- 2-57
5-21-58
6-23-53
9-15-59
Ii-28-58
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Federal Reserve Bank of St. Louis
Banks taken over
Brooklyn Trust Co,,, Brooklyn, N. Y.
Lawyers Trust Co., New York
Title Guarantee & Trust Co., New York
National Safety Bank & Trust Co., New York
Powei City Trust Co., Niagara Falls
Commercial National Ban!-- & Trust Co,, New York
Corn Exchange Natl. Bk. & Tr. Co., Philadelphia
Mississippi Yalley Trust Co., St. Louis
Ruode Island Hospital National Bank, Providence
Equitable Trust Co., HI.n1 ngton, Delaware
Phoenix State Bank & Trust Co., Hartford, Conn.
Colonial Trust Co., Pittsburgh
Corn Exchange Bank & Trust Co., New York
Monterey Co. Trust & Savings Bank, Salinas, Calif,
Second National Bank, Boston, Massachusetts
Bronx County Trust Company, New York
Chase National Bank, New York
Public National Bank & Trust Co., New York
First National Bank, Philadelphia
Market Street National Bank, Philadelphia
Detroit-Wabeek Bank & Trust Co., Detroit, Mich.
Tradesmens Bank & Trust Co., Philadelphia
Commercial National Bank, Charlotte, N. C.
National Metrotxslitan Bank, Washington, D. C.
Passaic-Clifton national Bank, Clifton, N.J,
Po tter Bank & Tru s t Co., Pi ttsburgh, J>a.
Upper Darby National Bank, tipper T)arby, Pa.
By
Assets
$ 2UU,070
79,896
65,21*3
109,127
81,832
213,683
302,878
250,582
156,330
5U,630
ia,585
1UO,U2U
832,296
65,526
180,081
75,6lli
5,6£?,059
562, U97
219,691
65,855
178,000
295, 6U8
58,3S7
70,106
129, 2h9
60,270
52,998
Manufacturers Trust Co., New York
Bankers Trust Company, New York
Bankers Trust Company, New York
Chemical Bank & Trust Co., New York
Marine Trust Co., Buffalo
Bankers Trust Co., New York
Girard Trust Co., Philadelphia
Mercantile Commerce Bk. & Tr., St. Louis
Rhode Island Hospital Tr. Co., Providence
Security Trust Co., Wilmington
Connecticut Bank & Trust Co., Hartford
Fidelity Trust Co., Pittsburgh
Chemical Bank & Trust Co., New York
American Trust Co., San Francisco
State Street Trust Co., Boston
Bank of Manhattan Co., New York
Bank of Manhattan Co., New York
Bankers Trust Co., New York
Pennsylvania Co. for Bkg. & Trusts, Phila.
Tradesmens Bank & Trust Co., Phila.
Detroit Bank &>Trust Co., Detroit, Mich.
Provident-Tradesmens Bk. & Tr. Co., Phila.
American Commercial Bank, Charlotte, N.C.
American Sec. & Trust Co., Washington, D.C,
New Jersey Bank *r Trust Co., Clifton, N.J.
Fidelity Trust Company, Pittsburgh, Pa.
Girard Trust Corn Exchange Bk., Phila. Pa.
• over -
Assets
$2,271,811
1,U99,329
1,U99,329
1,716,202
386,722
1,663,150
237,122
1|13,1UU
88,582
U7,3UO
202,085
Commen t
Approved
n
Approval
Approved
Approval
Approved
Approval
n
Approved
by Board
n
n
not required
by Board
not reqiired
by Board
not required
n
n
by Board
n
n
Approval not required
87,908
1,9U9,72U
1,323,321
215,232
1,628,393
1,70U,507
2,207,022
816,680
222,790
786,200
225,lU2
191,722
2U7,988
121,736
281,128
663,615
Approved
Approval
Approved
At>t»roval
by Board
not required
by Board
not recuired
Approved by Board
n * n ~^ n
Approval
Atroroval
Anproval
Approved
AoDroval
not required
not required
not reqrir-d
by Boardnot req .' rt c
Pat*
4-27.59
9-23*59
9- 9-59
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Federal Reserve Bank of St. Louis
Banks taken over
J. P. Morgan In*., New York
National City Bank, Troy, N. Y.
New York Trust Co., New York
Assets
969,355
63,969
817,348
fr
Guaranty Tru.it Co., Hew York
State Bank of Albany, New York
Chcraieal Corn Exhange Bank, New York
^ Assets
$3,073,968
326,503
3,489,406
Cc'Mwnt
Approval not r«qulr«d
H
II
It
II
II
II
BOARD OF GOVERNORS
OF THE
FEDERAL RESERVE SYSTEM
Statement for the Press
For release at U p.m. EST
January 13, I960
The Board of Governors of the Federal Reserve System has
issued an Order approving the application of Farmers and Mechanics
Trust Company, Childress, Texas, filed pursuant to section 3(a) of
the Bank Holding Company Act of 19f?6, for prior approval of the
acquisition of $ per cent (l£0 shares) of the outstanding voting
shares of The First National Bank, Paducah, Texas.
This Order was issued after publication of a Notice of
Tentative Decision in the Federal Register and after the expiration
of the period specified in that Notice for the filing of comments
on or objections to the Board's proposed action. Comments received
by the Board were taken into consideration prior to the issuance of
the Board's Order.
V
Attached are the Board's Order and accompanying Statement.
A Dissenting Statement by Governors Szymczak and Robertson in support
of their vote against this action is also attached.
Attachments
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Federal Reserve Bank of St. Louis
UNITED STATES OF AMERICA
BEFORE THE BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
WASHINGTON, D. C.
In the Matter of the Application of
FARMS AND MECHANICS TRUST COMPANY
Childress, Texas
for prior approval of acquisition of
voting shares of The First National Bank,
Paducah, Texas
ORDER APPROVING APPLICATION UNDER
BANK HOLDING COMPANY ACT
There having come before the Board of Governors pursuant
to section 3(a)(2) of the Bank Holding Company Act of 1956 (12 U.S.C.
18U3) and section U(a)(2) of the Board!s Regulation Y (12 CFR 222.h
(a)(2)), application on behalf of the Farmers and Mechanics Trust
Company, Childress, Texas, for the Board1s prior approval of the
acquisition of 3> per cent (15>0 shares) of the outstanding voting shares
t
of The First National Bank, Paducah, Texas; a Notice of Tentative
Decision referring to a Tentative Statement on said application having
been published in the Federal Register on December £, 195^9 (2k F.R. 9801);
said Notice having provided interested persons an opportunity, before
issuance of the Board's final order, to file objections to or comments
upon the statements of fact and conclusions reached in the Tentative
Statement; and the time for filing such objections and comments having
expired and comments received having been duly considered;
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Federal Reserve Bank of St. Louis
-2-
IT IS HEREBY ORDERED, for the reasons set forth in the
Board's Statement of this date, that the said application by Farmers
and Mechanics Trust Company for approval of the acquisition of
5> per cent of the outstanding voting shares of The First National
Bank, Paducah, Texas, be and hereby is granted and approved, provided
that such acquisition is completed within three months from the date
hereof.
Dated at Washington, D« C., this 13th day of January, I960.
By order of the Board of Governors.
Voting for this action: Chairman Martin, Vice Chairman
Balderston and Governors Mills, Shepardson and King0
Voting against this actions Governors Szymczak and Robertson.
(Signed) Merritt Sherman
Merritt Sherman,
Secretary.
(SEAL)
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Federal Reserve Bank of St. Louis
\
BOARD OF GOVERNORS
OF THE
FEDERAL RESERVE SYSTEM
APPLICATION BY FARMERS AliD MECHANICS TRUST COMPANY,
CHILDRESS, TEXAS, FOR PRIOR APPROVAL OF ACQUISITION OF
VOTING SHARES OF THE FIRST NATIONAL BANK, PADUCAH, TEXAS
STATEMENT
Farmers and Mechanics Trust Company ("Farmers"), a bank
holding company, has applied, pursuant to section 3 (a) (2) of the Bank
Holding Company Act of 1956 ("the Act"), for the Board's prior approval
of its acquisition of 5> per cent (15>0 shares) of the outstanding voting
shares of The First National Bank, Paducah, Texas ("National").
Views and recommendations of supervisory authorities. - Section 3(b) of the Act requires the Board, upon receipt of an application
for approval under section 3, to "give notice to the Comptroller of
the Currency, if the applicant company or any bank the voting shares
or assets of which are sought to be acquired is a national banking
association or a District bank, or to the appropriate supervisory
I
authority of the interested State, if the applicant company or any bank
the voting shares or assets of which are sought to be acquired is a
State bank . . , ". Farmers, the applicant company, is not a bank. The
bank, the voting shares of which are sought to be acquired, is a national
bank. Pursuant to the requirements of the Act, notice of the receipt of
this application was given to the Comptroller of the Currency, and the
Comptroller recommended that the application be approved*
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Federal Reserve Bank of St. Louis
-2-
Statutory factors. - Section 3(c) of the Act requires the
Board to take into consideration the following five factors:
(1)
the financial history and condition of the company and the banks
concerned; (2) their prospects; (3) the character of their management; (i|) the convenience, needs9 arid welfare of the communities
and area concerned; and (£) whether or not the effect of the
acquisition would be to expand the size or extent of the bank
holding company system involved beyond limits consistent with adequate and sound banking, the public interest, and the preservation
of competition in the field of banking.
Discussion. - Farmers presently has two subsidiary banks:
one, with deposits of about $2.3 million, in the town of Childress
in Childress County, Texas, and the other, with deposits of about
?)2.7 million, in the town of Ho His in Harmon County, Oklahoma.
Harmon County is northeast of, and partly contiguous to, Childress
County. National, the bank in which Farmers seeks to acquire stock,
is located in Paducah in Cottle County, Texas, which is just south
of Childress County. National is the only banking office*, in Cottle
County, and holds deposits of about $U million.
At present, Farmers owns 5> per cent of National!s stock.
The proposed acquisition of 15>0 additional shares of stock would cause
Farmers to own 10 per cent of National's outstanding stock* National
would not become a "subsidiary" of the holding company within the
meaning of the Act, since subsidiary status is based upon ownership
of 2£ per cent or more of the voting shares of a bank.
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Federal Reserve Bank of St. Louis
-3Insofar as the first three statutory factors are concerned,
it appears that the financial history and condition of Farmers and
National are satisfactory and that their prospects and the character
of their management are good. As to the fourth factor, Farmers asserts
that its increased stock ownership of National would enable it to use
its greater influence in the management of the bank to expand the bank's
loan operations to accommodate worthy farmers, ranchers, and businessmen
in the Paducah area. However, there is no evidence that National has
not been serving its area adequately or that demand for loans by qualified borrowers has not been satisfied»
In the Board1s opinion, the
proposed stock acquisition would not substantially contribute to,
although it would not be inconsistent with, the "convenience, needs,
and welfare of the communities and the area concerned".
Turning to the fifth statutory factor, there is no suggestion
that the proposed expansion of the size or extent of the holding company
system involved would be inconsistent with adequate and sound banking.
The crucial question is whether such expansion would be consistent with
the public interest and the preservation of competition in the field of
banking.
\
The area concerned is sparsely populated and the towns are
relatively small0 Paducah accounts for a large part of the population
of Cottle County. The nearest town with banking facilities is Childress,
31 miles to the north, which has two banks. One is a subsidiary of
Farmers, as previously mentioned; the other is about twice the size of
Farmers' bank and is not controlled by a holding company. There are four
banks located in three other towns in adjoining counties, located from
32 to U2 miles distant from Paducah.
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Federal Reserve Bank of St. Louis
-uTo the extent that the proposed transaction might result in
a diminution of banking competition, it would, in the Board's opinion,
be limited to the area between and around Paducah and Childress in
which there are three banks, one being Farmers1 subsidiary in Childress,
Assuming that the acquisition by Farmers of additional stock of National
would tend to draw further within its influence a second of the three
banks in this area, it might diminish, to some degree, the availability
to residents of the area of alternative sources of banking services
under separate and independent control. However, one of the remaining
alternative sources would be the second bank in Childress, the largest
bank in the area; and, as previously indicated, there are four other
banks in towns which, in view of geographic and population factors,
may be regarded as only a relatively short distance from the ChildressPaducah area.
After consideration of the foregoing facts in the light of the
purposes of the Act and the factors contained in section 3(c) thereof,
it was the BoardTs tentative decision, notice of which was duly published
in the Federal Register, that approval of this applicatioVi would be consistent with the statutory objectives and the public interest. As permitted by that notice, certain objections and comments were submitted
to the Board; and all of such objections and comments have been carefully
considered.
One of the objections received and considered by the Board
urges that the acquisition by Farmers of additional voting shares of
National cannot lawfully be approved by the Board because the acquisition
proposed by Farmers would be ultra vires, that is, beyond the powers
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Federal Reserve Bank of St. Louis
conferred on Fanners as contained in its charter granted by the State
of Texas.
In the Board's opinion this objection cannot be sustained.
In connection with bills that preceded the passage of the
Bank Holding Company Act of 195>6, Congress considered various proposals that would have precluded approval by the Board of any
acquisition in conflict with applicable State law. Congress rejected
all such proposals, with the single exception, not here pertinent, of
the provision contained in section 3(d) of the Act that prohibits
approval of acquisitions across State lines. The Board has previously
taken the position that no provision of the Bank Holding Companjr Act
operates to preclude the Board from approving a particular transaction
merely because it appears to be in contravention of a State statute,
(In the matter of the Applications of First New York Corporation, et al.,
hk Federal Reserve Bulletin 902, 90£ (195>8)) This position is here
reaffirmed; and the same principle must be applied to a provision in
an applicant's corporate charter. This does not mean, of course,
that a particular transaction need not meet the requirements of any
statute, Federal or State, that might be applicable to any aspects of
<
such transaction. It is not the province of the Board, hdwever, to
determine whether such a transaction would vjolste State law or exceed
the charter powers of a State corporation; such questions are within
the jurisdiction of the appropriate State administrative and judicial
authoritieSo
Another objection received by the Board in this case urges
that common control of two or more banks in the State of Texas contravenes that State's prohibition against branch banking and, as a
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Federal Reserve Bank of St. Louis
-6consequence, contravenes the provisions of the Bank Holding Company
Act. In the Board's view, this objection is clearly answered by the
legislative history of that Act.
Chief among the proposals considered by Congress for limiting
the Board's discretionary authority under the Act was that contained
in a bill passed by the House of Representatives which would have prohibited approval of any acquisition of stock of a bank in any State
except "within geographic limitations that would apply to the establishment of branches of banks under the statute law of such State", unless
the acquisition was affirmatively authorized by the law of the State0
This proposal, however, was rejected by the Senate, and the bill finally
enacted into law contained no provision that would require the Board to
consider the existence or not of branch banking legislation within a
particular State in passing upon an application that would result in
holding company expansion within that State. At the time of passage of
the Act, Congress was apparently aware of the existence of legislation
in several States that prohibited branch banking.
Congress was pre-
sumably aware of the fact also that in the National Bank Act it had
I
specifically taken into consideration the existence of State branch
banking laws in authorizing the Comptroller of the Currency to approve
the establishment or operation of a branch by a national bank only if
State laws specifically and affirmatively authorized State banks to have
such branches. No mandatory reference to State branch banking provisions
was included in the Bank Holding Company Act, Thus, notwithstanding
proposals made on the floor of the Congress regarding the relation of
State branch banking laws to holding company expansion, the existence
in a particular State of a prohibition against branch banking cannot be
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Federal Reserve Bank of St. Louis
-7weighed as an adverse consideration by the Board in exercising its
judgment on a holding company's application to acquire stock of a
bank in that State.
It appearing that the proposed acquisition would be consistent
with the statutory objectives and the public interest, it is the judgment of the Board that the application should be approved. It is so
ordered*
January 13 ^ I960-
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Federal Reserve Bank of St. Louis
Dissenting Statement of Governors Szymczak and Robertson
The proposed acquisition in this case would tend to lessen
banking competition. At present, persons residing in the area betxreen
and around Paducah and Childress have three conveniently available
choices of banking services: The First National Bank of Paducah and the
two banks in Childress, one of which is a subsidiary of the holding company. The Holding Company already owns 5 per cent of the stock of the
Paducah bank. Its acquisition of an additional 5 per cent will admittedly
and purposefully increase its influence in the affairs of that bank and
to that extent will likely result in a diminution of competition between
the Paducah bank and the holding company^ subsidiary bank in Childress,
Against this adverse factor of probable lessening of competition,
there are no offsetting favorable considerations.
It is apparent that
the Paducah bank is adequately meeting loan demands in its community.
There is no positive indication that the proposed stock acquisition would
in any way tend to improve banking services or otherwise contribute to
the public interest.
The facts that the holding company and the bank involved in
\
this case are relatively small and that the area concerned is now sparsely
populated (although it may not always be so), do not warrant a departure
from the general principles that would be applied in a case involving
larger institutions and more heavily populated areas, when considered
in the light of the factors stated in section 3(c) of the Bank Holding
Company Act. In our judgment, the application should be denied.
1/13/60
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Federal Reserve Bank of St. Louis
BOARD OF G O V E R N O R S
OF THE
FEDERAL R E S E R V E SYSTEM
Office Correspondence
Chairman Martin
PVnin
Mr.
mcWlMy
/ XfT/f
Date
February 12,1960,
Subject; Briefing material with
respect to bank merger hearing on
February 16
With the thought that it may be of assistance to you in
ig for the hearing on the bank merger bill on February 16,
I am attaching brief notes on certain questions that might be raised
in the course of the hearing. These notes relate to the following
matters:
(1) Standards as to competition ("unduly" v.
"substantially11). This note is merely for your
information and background.
(2) Reasons against covering bank mergers under
the Clayton Act. This is almost a literal paraphrase
of the Board's statement last year before the Senate
Committee and it could be available for reading at
the House hearing if necessary.
(3) Hearings on bank mergers. This note also is
a paraphrase of a statement sent to Senator Robertson
by the Board last year and could, if necessary, be
read in the event a question of this kind is raised.
(10 Judicial review. Again, this reflects a
statement made by the Board last year and could be
read at the hearing.
(5) A brief statement regarding the recent case
in which the Board approved a bank holding company's
acquisition of stock of a bank in Paducah, Texas.
This note is solely for your information and background!
and would not be suitable for reading.
I shall, of course, be glad to discuss any of these matters
with you or to prepare any additional material that you may think
desirable.
Attachments
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Federal Reserve Bank of St. Louis
February 10, I960
To:
Board of Governors
From? Mr, Hexter
Subject: Testimony on proposed
bank merger legislation
There is attached for the Board's consideration a draft of
a statement to be made by Chairman Martin on February 16 before the
House Banking Committee regarding S, 1062, which passed the Senate in
the 195>9 Session with the support of the Board and other Federal bank
supervisory agencies.
The attached draft is much shorter than the statement on
So 1062 that was made by Governor Robertson before the Senate Banking
Committee on March 18, 1959• It omits certain "orienting" information
that seems unnecessary at this time, and also omits any discussion
contrasting S. 1062 with bills that would bring bank mergers within the
coverage of section 7 of the Clayton Antitrust Act, Likewise, the statement would not go into the question of the relative merits of the terms
"unduly" and "substantially" in the proposed legislation, nor the
compromise solution of this controversy informally suggested by Mr* Cardon,
the Clerk of the House Banking Committee. However, brief discussions of
these questions are being prepared for use in the event that they are
taken up with Chairman Martin in the course of his testimony*
It is understood that the Comptroller of the Currency, in his
statement before the Committee, will indicate a preference for S« 1062
as originally introduced*, It was then identical with H« R0 U373> which
also is pending before the Committee, (So 1062 and H. R0 U373 were
introduced by Senator Robertson and Representative Kilburn, respectively,
at the request of the Treasury Department*) The proposed statement by
Chairman Martin would deal with S, 1062 as amended by the Senate, and
would support its aims and general approach without drawing any distinction between the bill as introduced and as amended. It is believed that
this is appropriate because the Senate amendment, although probably
unnecessary, does not materially undermine the desirable main features
of the bill. However, if the question should arise it is presumed that
Chairman Martin would inform the Committee that the Board prefers
S. 1062 in the form in which it was introduced.
Attachment
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Federal Reserve Bank of St. Louis
January 27, I960.
Board of Governors
Mr. Hackley
Subject: Bank merger legislation 'Further raeeting with representatives
of the Comptroller of the Currency and
Federal Deposit Insurance Corporation
This supplements my memorandum of January 26 regarding bank
merger legislation. As indicated in that memorandum, Mr, Jennings
had agreed to advise me of the thinking of the Comptroller of the
Currency regarding this matter, particularly as to the draft of a
possible amendment to the merger bill submitted by Mr. Cardon.
This morning, at the request of Mr. Jennings, a meeting
was held in my office attended also by Mr. Englert, Mr. Coburn,
Mr. Greensides, Mr. Hexter and me.
Briefly, Mr. Jennings indicated that the present view of
Mr. Gidney is that he would prefer the bank merger bill as it was
originally introduced in the Senate (S. 1062), but that he would
support the bill as it passed the Senate in May 1959. He would not
wish to see a change in the bill that would substitute "substantially"
for "unduly"; and he would not wish, therefore, to consider the draft
of amended language suggested by Mr. Garden. Mr. Coburn indicated
that Chairman Wolcott of the FDIC has similar views.
Mr. Coburn made it clear that when Mr. Cardon had given
him his draft of a possible amendment, it was understood that Mr. Cardon
was asking only for the informal attitude of Mr. Coburn and the staffs
of the Comptroller's Office and the Board. It was not intended as
a request for an official expression of views by the banking agencies.
In this connection, Mr. Jennings indicated that his office would not
call Mr. Cardon or volunteer any views unless expressly requested
by the Committee. I said again that the matter had not been considered by the Board and that it was my understanding that \he
Board had not been requested for its comments.
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Federal Reserve Bank of St. Louis
BOARD OF G O V E R N O R S
or THE
FEDERAL RESERVE SYSTEM
Office Correspondence
T
Chairman Martin
Jerome W. Shay
Pate
March 1Q
*
196
°
Subject* Favorable action on S« 1062—
Bank Merger Bill.
This afternoon the Brown Subcommittee (No. 2) of the
House Committee on Banking and Currency ordered favorably reported
to the full Committee, with amendments, the bank merger bill (S. 1062),
on which you testified on February 16*
The amendments adopted by the Subcommittee were offered by
Mr. Multer. Briefly, they include the three recommended by the Board
in your formal statement before the Subcommittee: (l) the same latitude would be granted with respect to obtaining reports from other
bank supervisory agencies as was extended by S. 1062 as passed by the
Senate with respect to reports from the Attorney General on any pending merger; (2) annual reports with respect to bank mergers approved
during the year would be permissible, rather than semi-annual reports,
as required by S. 1062 as passed by the Senate; and (3) these annual
reports would be required to contain a summary of his views on the
merger, prepared by the Attorney General rather than by the agency to
which the views were rendered, as would have been the case under
S0 1062 as passed by the Senate. The most important of Mr. Multer!s
amendments, however, would require a banking agency in acting on a
merger to take into consideration (in addition to the so-called
"banking factors") "the effect of the transaction on competition
(including any tendency toward monopoly), and shall not approve the
transaction unless, after considering all of such factors, it finds
the transaction to be in the public interest,"
The above quoted provision would supersede the provision
in the Senate-passed bill, merely specifying that the agency shall
take into consideration whether a particular merger may lessen competition unduly j or tend unduly to create a monopoly.
It is understood that the action of the Subcommittee in
this matter was unanimous. It now goes before the full Committee.
cc: Each Board Member
Mr. Sherman
Mr. Young
Mr. Thomas
Mr, Molony
Mr. Fauver
Mr. Knipe
Mr. Hackley
Mr. Solomon
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Federal Reserve Bank of St. Louis
COPY
HOUSE OF REPRESENTATIVES
Committee on Banking and Currency
Washington
January 27, I960
Honorable William McChesney Martin
Chairman
Federal Reserve Board
Washington 25, D. C.
Dear Mr. Martin:
This is to confirm arrangements which I understand have already
been made for your appearance before Subcommittee No. 2 of the House
Banking and Currency Committee on Tuesday morning, February 16th, to
testify on S. 1062, a bill to regulate bank mergers. I am looking
forward to the pleasure of hearing your views at that time.
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Federal Reserve Bank of St. Louis
With best wishes, I am
Sincerely,
(Signed) Paul Brown
Paul Brown, Chairman
Subcommittee No. 2
86m CONGRESS
IST SESSION
IN THE HOUSE OF EEPEESENTATIVES
MAY 18,1959
Referred to the Committee on Banking and Currency
To amend the Federal Deposit Insurance Act to provide safeguards against mergers and consolidations of banks which
might lessen competition unduly or tend unduly to create
a monopoly in the field of banking.
1
Be it enacted by the Senate and House of Eepresenta-
2 tives of the United States of America in Congress assembled,
3 That subsection (c) of section 18 of the Federal Deposit In4 surance Act is amended by striking out the third sentence
5 thereof and substituting in lieu thereof the following: "No
6 insured bank shall merge or consolidate with any other
7 insured bank or, either directly or indirectly, acquire the
8 assets of, or assume liability to pay any deposits made in,
9 any other insured bank without the prior written consent
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Federal Reserve Bank of St. Louis
I
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Federal Reserve Bank of St. Louis
1
(i) of the Comptroller of the Currency if the acquiring,
2 assuming, or resulting bank is to be a national bank or a
3 district bank, or (ii) of the Board of Governors of the Fed4 eral Reserve System if the acquiring, assuming, or resulting
5 bank is to be a State member bank (except a district bank),
6 or (iii) of the Corporation if the acquiring, assuming, or
7 resulting bank is to be a nonmember insured bank (except a
8 district bank). In granting or withholding consent under
9 this subsection, the Comptroller, the Board, or the Corpora10 tion, as the case may be, shall consider the factors enumer11 ated hi section 6 of this Act. In the case of a merger,
12 consolidation, acquisition of assets or assumption of liabili13 ties, the appropriate agency shall also take
into consideration
f
t
' ~
f*
14 whether the effect thereof may be to lessen competition
•**«
*-.••_
,v
—
15 'undulyi or to tend unduly to create a monopoly, and, in the
16 interests of uniform standards, it shall not take action as to
17 any such transaction without first seeking the views of each
«
18 of the other two banking agencies referred to herein with
19 respect to such question. In the case of a merger, consolida20 tion, acquisition of assets, or assumption of liabilities, the ap21 propriate agency shall request a report from the Attorney
22 General on the competitive factors involved in the merger.
23 The Attorney General shall furnish such report to such
24 agency within thirty calendar days of the request: Provided,
25 however, That in case the agency finds an emergency exists
.
1
3
1 the agency may advise the Attorney General thereof and
2 may thereupon shorten the period for the Attorney General
3 to report to ten calendar days: Provided further, That where
4 the agency finds that an emergency makes necessary im5 mediate action in order to prevent the probable failure of
. 6 one of the merging banks, the appropriate agency may act
. 7 without obtaining such report from the Attorney General:
8 And provided further, That the Comptroller, the Board, and
9 the Corporation shall each submit to the Congress a semi10 annual report with respect to each merger, consolidation, ac11 quisition of assets, or assumption of liabilities approved by
12 the Comptroller, the Board, or the Corporation, as the case
13 may be, which shall include the following information: the
14 name of the receiving'bank; the name of the absorbed bank;
15 the total resources of the receiving bank; the total resources
16 of the absorbed bank,- whether a report has been submitted
17 by the Attorney General hereunder; and if approval has been
18 given, a summary of the substance of the report made by the
19 Attorney General, and a statement by the Comptroller, the
20 Board, or the Corporation, as the case may be, in justification
21 of its findings."
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Federal Reserve Bank of St. Louis
Passed the Senate May 14, 1959.
Attest:
FELTON M. JOHNSTON,
Secretary.
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Federal Reserve Bank of St. Louis
86THCONGKESS
IST SESSION
. R. 4373
IN THE HOUSE OF BEPKESENTATIVES
FEBRUARY 11,1959
Mr. KILBURN introduced the following bill; which was referred to the Committee on Banking and Currency
BILL
To amend the Federal Deposit Insurance Act to provide safeguards against mergers and consolidations of banks which
might lessen competition unduly or tend unduly to create
a monopoly in the field of banking.
1
Be it enacted by the Senate and House of Bepresenta-
2
lives of the United States of America in Congress assembled,
3 That subsection (c) of section 18 of the Federal Deposit
4 Insurance Act is amended by striking out the third sentence
I
5 thereof and substituting in lieu thereof the following: "No
6 insured bank shall merge or consolidate with any other
7 insured bank or, either directly or indirectly, acquire the
8 assets of, or assume liability to pay any deposits made in,
9 any other insured bank without the prior written consent
I
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Federal Reserve Bank of St. Louis
o
1
(i) of the Comptroller of the Currency if the acquiring,
2 assuming, or resulting bank is to be a national bank or a
3 district bank, or (ii) of the Board of Governors of the
4 Federal Eeserve System if the acquiring, assuming, or
5 resulting bank is to be a State member bank (except a dis6 trict bank), or (iii) of the Corporation if the acquiring,
7 assuming, or resulting bank is to be a nonmember insured
8 bank (except a district bank). In granting or withholding
9 consent under this subsection, the Comptroller, the Board or
10 the Corporation, as the case may be, shall consider the
11 factors enumerated in section 6 of this Act. In the case of
12 a merger, consolidation, acquisition of assets, or assumption
13 of liabilities, the appropriate agency shall also take into con14 sideration whether the effect thereof may be to lessen com15 petition unduly or to tend unduly to create a monopoly,
16 and, in the interests of uniform standards, it shall not take
17 action as to any such transaction without first seeking the
18 views of each of the other two banking agencies Deferred to
19 herein with respect to such question; and in such a case the
20 appropriate agency may also request the opinion of the
21 Attorney General with respect to such question."
Statement by Joseph H. Colman, President,
First Bank Stock Corporation, Minneapolis,
On behalf of the Association of Registered
Bank Holding Companies to Subcommittee No. 2
of the House Committee on Banking and Currency
in support of the bank merger bill, S. 1062.
February 16, 1960
My name is Joseph H. Colman, President of First Bank Stock Corporation, Minneapolis, and I have prepared this statement on behalf
of the Association of Registered Bank Holding Companies, of which I
am also the President.
The Association of Registered Bank Holding Companies represents twenty companies registered with the Federal Reserve Board pursuant to the Bank Holding Company Act of 1956.
A list of the Associ-
ation1 s officers and directors is attached to this statement.
S. 1062, as passed by the Senate, would amend section 18(c) of
the Federal Deposit Insurance Act to give the three Federal banking
agencies statutory authority to consider the competitive aspects, as
well as the banking aspects, of any merger, consolidation, or acquisiI
tion of assets involving an insured bank. The bill would require all
mergers by insured banks to receive the prior approval of (1) the
Comptroller of the Currency, if the continuing bank is a national bank
or a district bank? (2) the Board of Governors of the Federal Reserve
System, if the continuing bank is a state member bank? (3) the Federal Deposit Insurance Corporation, if the continuing bank is a nonmember insured bank.
Thus, every merger by an insured bank would be
subject to the scrutiny of one of the three Federal Banking agencies
before it could be consummated.
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Federal Reserve Bank of St. Louis
- 2-
Every Bank is Monopolistic
The National Banking Act in 1863 established the policy of the
Federal government that unrestricted competition among banks is not
in the public interest.
Similarly, all of the state banking laws
recognize that free competition in the banking field would lead to
chaos.
A bank charter represents the grant of a monopoly power.
No
competing bank can be established without the approval of the appropriate Federal or state bank supervisory authorities.
The restric-
tions on the granting of bank charters are designed to safeguard the
public against competitive abuses.
In the case of banks, the public
policy involved in maintaining their financial safety (with resulting
protection to their depositors) outweighs the public policy of unlimited competition which prevails as to other businesses.
Undue
competition between banks is contrary to our state and national policy.
The merger of banks is, in effect, the merger of monopolies and
»•
obviously involves considerations completely different from those presented by the merger of industrial corporations.
Bank mergers should
obviously be considered by a supervisory agency expert in the field
of banking and in the degree of competition proper to maintain and
not to destroy the banks' financial integrity.
Bank mergers should
not be regulated by an agency, such as the Justice Department, steeped
in the theory of unlimited competition.
The bill's requirement that
the Comptroller, the Federal Reserve Board, or the Federal Deposit
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Federal Reserve Bank of St. Louis
- 3Insurance Corporation, as the case may be, must request a report from
the Attorney General on the competitive factors involved in each
merger fully protects the interests of the Justice Department.
"Unduly" Lessening Competition
S. 1062 recognizes the unique characteristics of bank mergers
by requiring the Federal banking agencies to consider both the banking and competitive aspects of such mergers.
The banking factors to
be considered are those enumerated in section 6 of the Federal Deposit Insurance Act and which have been used so successfully in determining the eligibility of a bank for insurance of its accounts.
The banking agencies would also be required to consider whether
the effect of a proposed merger would be to "unduly" lessen competition.
Opponents of this bill who favor applying the Clayton Act to
all bank mergers argue that the word "unduly" injects a new criterion
to determine the degree of the lessening of competition.
this is a new competitive test.
Certainly
<
This is necessitated by the restric-
tive manner in which the courts have construed the "substantially"
lessening of competition criteria of the Clayton Act.
The "failing corporation" exemption as stated by the United
States Supreme Court in the case of International Shoe Company v. the
Federal Trade Commission (280 U. S. 291) is often cited to show the
liberality of the courts in applying the Clayton Act.
stated that where the corporation acquired is —
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Federal Reserve Bank of St. Louis
The Court there
"a corporation with resources so depleted and the
prospect of rehabilitation so remote that it faced
the grave probability of business failure * * * we
hold that the purchase of its capital stock by a
competitor (there being no other prospective purchaser) , not with a purpose to lessen competition,
but to facilitate the accumulated business of the
purchaser and with the effect of mitigating serious
injurious consequences otherwise probable * * * does
not substantially lessen competition or restrain
commerce within the intent of the Clayton Act."
An insured bank in the condition described by the Court would
have already been taken over by the Federal Deposit Insurance Corporation in order to protect the depositors1 accounts.
We do not believe
that the only bank mergers in the public interest are those involving
failing banks.
Certainly there are many other situations where bank
mergers are desirable and benefit the public.
S. 1062 is designed to provide effective regulation of bank
mergers while, on the other hand, the Clayton Act approach is designed to prohibit such mergers.
A freeze on bank mergers results
almost inevitably from the Clayton Act competitive test because that
test is based on a numerical
calculation and deals with businesses
which, unlike banks, are not already monopolistic.
For example, if
two of the five banks in a community merge, only four banks are left
and under the Clayton Act test competition has been "substantially"
lessened.
Actually, merger of two weaker banks might well result in
much keener competition between the resulting four banks. While we
agree that all bank mergers should be subject to prior approval of a
Federal supervisory agency, we certainly do not feel that all, or
substantially all, future bank mergers should be prohibited.
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Federal Reserve Bank of St. Louis
— 5 —
Relation of Bill to Bank Holding Companies
The Bank Holding Company Act requires the prior approval of
the Federal Reserve Board for (1) a company to become a bank holding
company by acquiring 25% of the voting shares of two or more banks;
(2) a bank holding company to acquire ownership or control of more
than 5% of the voting shares of a bank; (3) a bank holding company to
acquire all or substantially all of the assets of a bank; or (4) any
bank holding company to merge or consolidate with another bank holding company.
It should be noted that the Act requires the Board to
consider banking factors, as well as "the preservation of competition
in the field of banking" in determining whether to approve or disapprove these acquisitions.
Thus, the Congress recognized the need to
consider both the competitive and the banking aspects of acquisitions
under the Bank Holding Company Act, just as it is proposed to do in
S. 1062.
The Bank Holding Company Act exempts mergers through asset acv
quisitions by a bank affiliated with a bank holding company from the
requirement of prior approval by the Federal Reserve Board.
Asset
acquisitions by a bank affiliated with a holding company are not fundamentally a bank holding company problem but, rather, a question of
the regulation of bank mergers.
Thus, such mergers by affiliated
banks are treated the same as mergers by banks generally, and S. 1062
would apply equally to holding company owned banks as well as all
other banks.
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Federal Reserve Bank of St. Louis
- 6-
We believe that banks affiliated with holding companies should
be subject to the same ground rules as all other banks and, for that
reason, we favor the approach of S. 1062.
This is certainly prefera-
ble to the recommendation of the Federal Reserve Board in its May 7,
1958, Report to the Congress on the administration of the Bank Holding
Company Act.
The Board recommended (Recommendation No. 15) that it
be given authority to approve all mergers through asset acquisitions
by banks affiliated with bank holding companies.
This recommendation
would cut across the authority of the Comptroller of the Currency, the
Federal Deposit Insurance Corporation, and the state bank supervisors
and would be a complete departure from the theory that the Bank Holding Company Act was designed to regulate bank holding companies and
not their affiliated banks.
We believe that the traditional division
of authority among the banking agencies should be maintained and that
the basic purposes of the Bank Holding Company Act should not be
altered.
,
v
We are happy to join with the Comptroller of the Currency, the
Federal Reserve Board, the Federal Deposit Insurance Corporation, and
the American Bankers Association in supporting S. 1062.
We hope that
the House Committee on Banking and Currency will report the bill favorably and that it will be passed by the House.
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Federal Reserve Bank of St. Louis
ASSOCIATION OF REGISTERED BANK HOLDING COMPANIES
Officers
Presidents
Joseph H. Colman
First Bank Stock Corporation
Minneapolis, Minnesota
Vice Presidents
Mills B. Lane, Jr.
Citizens & Southern Holding Co,
Savannah, Georgia
Vice Presidents
Frank L. King
Firstamerica Corporation
Los Angeles, California
Treasurer s
Henry Y. Offutt, Jr.
Trustees, First National Bank
Louisville, Kentucky
Donald L. Rogers, Secretary & Executive Director
Washington, D.C.
Directors
*Philip Eiseman
Baystate Corporation
Boston, Massachusetts
*Mills B. Lane, Jr.
Citizens & Southern Holding Co,
Savannah, Georgia
J. A. Bancroft
Empire shares Corporation
New York, New York
Edwin T. Holland
The First Virginia Corporation
Arlington, Virginia
*William G. Brumder
First Wisconsin Bankshares Corp,
Milwaukee, Wisconsin
Jack G. Butler
General Bancshares Corporation
St. Louis, Missouri
*Frank L. King
Firstamerica Corporation
Los Angeles, California
*Baldwin Maull
Marine Midland Corporation
Buffalo, New York
*Joseph H. Colman
First Bank stock Corporation
Minneapolis, Minnesota
*Goodrich Lowry
Northwest Bancorporation
Minneapolis, Minnesota
Henry Y. Offutt, Jr.
Trustees, First National Bank
Louisville, Kentucky
*George S. Eccles
First Security Corporation
Salt Lake City, Utah
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Federal Reserve Bank of St. Louis
W. W. Witherspoon
Old National Corporation
Spokane, Washington
Arthur B. Tyler
Shawmut Association
Boston, Massachusetts
*Members of Executive Committee
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Federal Reserve Bank of St. Louis
Mr. Chairman and Members of the Committee:
You have asked me to comment on S. 2755, a bill to require disclosure of finance charges in connection with extensions of credit. First,
I should like to say that the protection of borrowers by regulating the
trade practices of those who extend credit to them is a commendable social
and economic objective.
As the Committee knows, this has been recognized
in the passage of legislation in many States which requires lenders and
vendors to set forth the charges which are made in connection with instalment sales and consumer loans.
The bill before you goes further than most State laws in several
respects. It covers a broader area than is generally encompassed by State
legislation and it also requires that the finance charges be translated
into a simple rate of interest. Its objective, as stated by the Chairman
of this Subcommittee,is "to require lenders and vendors to tell the truth
about interest rates and finance charges."
Before proceeding, I should like to emphasize that I am not
personally an expert on finance charges in the consumer credit field. Nor
is regulation of lenders' and vendors' trade practices a current responsibility of the Federal Reserve System. I am sure that there are numerous
technical problems involved in applying the requirements of the bill to the
wide variety of credit transactions it comprehends. Even if business loans
were exempted, the proposed regulation would apply to hundreds of millions
of individual transactions, carried out by over 50,000 financial institutions
and hundreds of thousands of retail outlets.
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Federal Reserve Bank of St. Louis
c
r
-2-
As was indicated to your Committee in our written response, the
Board's most immediate concern is with the provisions of the bill which
would place responsibility for its administration in the Federal Reserve
System, We feel that the administration of such legislation would not
constitute an appropriate activity for the Federal Reserve System.
It would require the Federal Reserve to police the trade
practices of hundreds of thousands of credit granters over which it now
has no supervisory authority,, The major activities of most of these are
far removed from basic Federal Reserve responsibilities, and their operations entail practices and problems with which the Federal Reserve is
totally unfamiliar. As the Chairman of this Subcommittee has pointed out,
it is not the purpose of this bill to control credit. It is not intended
that the regulatory requirements would be varied from time to time to
encourage or discourage the volume of credit extended. Accordingly, the
reasoning that in the past has prompted the Congress to assign responsibility for stock market, consumer instalment^and real estate credit
regulations to the System would not seem to apply in this case. The fact
that adaptation to changing economic conditions is not involved also suggests that a possible alternative solution might be to recast^ the bill as
a criminal statute, not designed for administration by a regulatory
authority, and to be enforced by regular law enforcement agencies.
As you know, the major responsibilities of the Federal Reserve
relate to the supply, availability, and cost of credit and money. The
System is interested in movements of consumer credit primarily as they
affect changes in the total volume of credit. It has also the responsibility of supervising member banks to ensure sound banking practices; this
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Federal Reserve Bank of St. Louis
-3is closely related to its responsibilities in the monetary area. Our
principal objection to giving the Federal Reserve responsibility for
administering this legislation is that it does not pertain to the control
of credit. Full disclosure between parties to credit transactions is, in
the final analysis, a question of trade practice and the prevention of
fraud.
A whole body of legal precedent and regulatory procedure, with
which we are unfamiliar, is involved.
It is alien to our existing
activities,
I am not aware of the extent to which your Committee has had an
opportunity to study the experience of the States which have had disclosure laws in force. It would seem that their experience might be of
some assistance in determining the most effective approach to regulation
in this area, particularly with respect to problems of administration and
enforcement. Certainly, their experience is more directly relevant than
any incidental
gained by the Federal Reserve in conjunction with
•——••—••••""""experience
••^*»».
either its past or present responsibilities.v
In its present form the bill seems to us to raise a number of
difficult problems of administration and enforcement. It may be worthI
while to investigate how States operating under similar laws'* have overcome
these problems.. For example there is the question of identifying which
lendersand vendors should be subject to the terms of the bill. Many
vendors that do not normally charge for credit granted may, on occasion,
levy penalties for late payments and thus be subject to the terms of the
B
I
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*
*
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proposed legislation. Also, some light might be shed on how best to deal
with the large number of cash loan transactions between individuals*
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Federal Reserve Bank of St. Louis
-4Another problem is to define finance charges, which are of many
kinds, and which may or may not be graduated with the amount or maturity
of the credit involved. Many of the instalment transactions that would
be covered include not only financing, but also the provision of insurance and other services for which a fee is customarily charged. The way
in which States have coped with separating the total cost of the transaction into cash price, finance charges, and charges for other services
would be illuminating. States have undoubtedly faced the difficulties
that would be encountered if the requirements led some credit granters
to attempt to conceal finance charges in the cash price of the goods or
in the costs of additional services provided.
The conversion of charges into simple interest rates presents
problems going beyond the experience of the various States, but which
seem to us to require furtjierjconsideratiojn. Very detailed and complex
instructions would be needed to assure uniformity among credit granters,,
Examples of the kind of problems that would have to be treated explicitly
are the handling of such charges as commitment fees and required insurance
and provisions for prepayment and late payment penalties.
Leasing arrange-
ments, which are becoming increasingly common in many durable goods areas,
would be exceedingly difficult if not impossible to handle.
As I remarked at the outset, men of good will wish the consumers
not to be deceived by lenders and thus fail to receive the value they
thought they had bargained for0
Caveat emptor^can scarcely operate in the
absence of knowledge by the potential buyer and debtor as to how much he
is really paying.
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Federal Reserve Bank of St. Louis
^MI-
OF GOVERNORS
OF THE
FEDERAL RESERVE SYSTEM
WASHINGTON
OFFICE OF THE CHAIRMAN
May 11, I960
The Honorable Oren Harris, Chairman,
Committee on Interstate and Foreign Commerce,
House of Representatives,
Washington 25, D. C.
Dear Mr. Chairman:
This is in response to your request of April 25, I960,
for a report on H.R. 11867, a bill "To supplement the national
policy against unfair methods of competition and unfair or deceptive acts or practices in commerce by requiring full disclosure of finance charges in connection with extensions of
credit."
The bill would require a person engaged in the business of extending credit to furnish to the person to whom such
credit is extended a statement in writing, in accordance with
rules and regulations which the Federal Trade Commission would
prescribe, (1) setting forth the total amount of the credit to
be extended, (2) setting forth the total amount of the finance
charges to be borne by such person in connection with such extension of credit, and (3) stating the percentage that such
amount of finance charges bears to the outstanding principal
obligation, or unpaid balance, expressed in terms of simple
annual interest.
The Board is in full sympathy with the purpose of preventing unfair or deceptive practices in connection with the
extension of credit, considering this to be a worthwhile social
and economic objective. The present bill appears to be consistent in purpose with the "Trade Practice Rules" of the Federal
Trade Commission which require disclosure of finance charges
in connection with automobile instalment sales.
By assigning administrative responsibility to the
Federal Trade Commission, H.R. 11867 seems preferable to S. 2755,
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Federal Reserve Bank of St. Louis
B O A R D '-- G O V E R N O R S
The Honorable Oren Harris
OF THE
F E D E R A L R E S E R V E 5^'
-2-
which assigns administration of similar provisions for disclosure
of finance charges to the Board of Governors of the Federal Reserve
System. As indicated in its report and testimony on the Senate
bill, the Board feels that regulation of trade practices is not an
appropriate activity for the Federal Reserve, which is primarily
responsible for general credit and monetary policy.
The Board would be glad, of course, to comply with the
provision of the bill that would1 authorize it to furnish the
Federal Trade Commission, upon request, views on matters falling
within the Federal Reserve's field of responsibility and knowledge*
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Federal Reserve Bank of St. Louis
Sincerely yours,
Wm. McC. Martin, Jr,
\
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Federal Reserve Bank of St. Louis
BOARD OF GOVERNORS OF THE FEDERAL RESERVE
Date
May 11, I960
To
Chairman Martin
From
Jerome W, Shajf
MESSAGE:
You may be interesi-ecUin the
attached address of Senator Douglas,
concerning his "truth in lending" bill,
Attention is invited particularly to
that part beginning at the bottom of
page U relating to "The Stabilization
Objective" and the portion beginning
on page 8 relating to "Federal Minimum
Standards **•
Attachment
F.R. 468
Rev. 1/47
For P. M. Release
Tuesday, May 10, I960
TRUTH IN LENDING
Address by Senator Paul H. Douglas (D., 111.) -•*
Before the
National League of Insured Savings Associations
Statler-Hilton Hotel, Washington, D. C., May 10, 1960.
I welcome this opportunity to discuss with you today the
subject of truth in lending.
Truth in lending is the objective of a consumer credit
labelling bill (S. 2755) which I introduced in the Senate early this
year on behalf of myself and 19 cosponsors.
The bill is basically a simple and moderate measure.
It
would require that anyone engaged in the business of extending credit
at the retail level disclose the price of the credit to the customer,
in writing, before the transaction is consummated.
The disclosure would contain two vital pieces of information
for the American consumer:
(1) The finance charge in dollars and cents.; and
(2) The finance charge as a simple annual rate on the unpaid,
declining balance.
These are the two indispensable measures of the price of
credit. The first tells you how much more you will have to pay for
something if you buy it on credit rather than for cash.
The second
reduces the price of credit to a common denominator - - a common
standard or yardstick -- in terms of an annual rate, which enables
you to shop around and compare alternative offers of credit.
Extensive hearings were held by the Senate Subcommittee on
Production and Stabilization, and. an amended version of the original
bill has been recommended to the Committee on Banking and Currency.
Although time is running out on this session of the Congress,
I am hopeful that the bill will be given a high enough priority for
favorable action this year.
The work of our Subcommittee was somewhat delayed and embarrassed by the fact that a number of organizations which are critical of the bill did not wish to come forward and testify publicly,
but contented themselves with submitting a statement for publication.
The U. S. Chamber of Commerce, for example, which frequently purports
to speak for the business community, flatly refused to discuss its
statement in public hearings.
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Federal Reserve Bank of St. Louis
- 2 -
As Subcommittee chairman, I personally requested and urged
many associations to come in and discuss the issues -- to give us
their criticisms and suggestions.
We received valuable help~£rom
opponents as well as proponents, and I think the bill has been improved as a result of their testimony.
I am a little baffled by the tactics of the opposition.
I
am certain they would agree that we conducted the hearings in a
neutral and impartial manner. We leaned over backwards not to mention
the name of any firm which may have been guilty of sharp practices.
We did not pillory any individual.
I refused to open our voluminous
legislative
files to the Department of Justice, on the grounds that a/committee
cannot legislate effectively if it serves as an arm of the prosecutor.
What we are trying to do is to clean up a situation which
apparently has many abuses. We ask only for improvements in the
future and are not concerned with apportioning blame about the
present or the past.
Let me make it perfectly clear that I am not trying to indict the American business community.
Undoubtedly, the overwhelming
majority of lenders and sellers are honest and law-abiding.
But in
pursuing the consumer at the retail level, businessmen have wandered
into a competitive Jungle, where they apparently believe -- erroneously, in my Judgment -- that survival depends upon camouflaging the
real price of credit.
Credit Camouflage
Here are some typical examples of credit camouflage.
As
experienced lenders yourselves, you will recognize them as the prevailing rule in significant sectors of the finance industry -- and
not as exceptions to the rule.
(1) The "easy terms11 quotation.
So much down, so much a month.
The price of credit is not stated, either in dollars or as a rate.
The true rate may vary up to 100 percent and more, but is never disclosed.
(2) The price of credit is quoted as a percentage of the principal amount, rather than of the unpaid, declining balance. An extension of credit which is repaid on an instalment basis gives tfoe
customer an average use o>£ approximately one-half the principal amourt
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Federal Reserve Bank of St. Louis
- 3 over the life of the credit extension.
Under these circumstances,
the simple or true rate is roughly double the quoted "add-on" or "discount" rate.
Thus, when a bank advertised:
"We offer to finance
your new car at a cost to you of 4 percent interest/' the true rate
was closer to 8 peroont.
(3) The pi-icfi of credit is quoted as a monthly rate.
This is
typical of the small loan field and the relatively new field of revolving credit, in which the simple annual rate is 12 times the quoted
monthly rate.
Most consumers first learn about rates early in grade
school -- in simple annual terms.
As a saver in a bank or a savings
and loan association, he is paid in simple annual terms. As a homeowner, he pays on his mortgage in simple annual terms.
If he reads
the financial pages, he sees that the price cf credit extended to
businesses such as sales finance companies, small loan companies, and
merchants is invariably quoted in simple annual terms.
Only the instalment borrower or buyer in the chert-term
credit market is denied a disclosure of the annual rate.
As mortgage lenders, you are accustomed to quoting the
price of credit in simple annual terms.
I have not heard of a 6 per-
cent mortgage quoted in terms of a 3 percent add-on or one-half percent a month on the unpaid balance.
On the other hand, it may not be the universal practice for
a mortgage lender to spell out the total interest char^o^ over the
life of the mortgage.
I would think that a prospective homebuyer
would become a more rational manager of his family budget if he knew
in advance, for example, that the' interest charges on a $15,000 mortgage at 6 percent would add up to a total of $17,400 over a 30-year
period, compared with $10,812 for 20 years -- a saving cf $6,588, or
more than a year's income for the average family.
I was encouraged
by testimony, during the hearings, that many mortgage lenders make
such a dollar disclosure as a matter of routine business practice.
As I see it, there are at least 3 reasons why S. 2755 should
be enacted.
competition.
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Federal Reserve Bank of St. Louis
First, ethics; second, economic stabilization, and third,
I would like to comment briefly on each of these.
^
The Ethical Objective
Because of the widespread use of misleading and deceptive
methods of stating the price of credit, an ordinary citizen fjLnds it
difficult to understand and make sense out of business practices.
In
the current era of payola, there is a tendency to believe that the
economic end of profit justifies unethical means of achieving it.
Nothing could be further from the truth.
Is the American consumer entitled to the truth about credit
rates and charges?
The ethical question is basically as simple as
that.
For example, the American Bankers Association has taken a
significant step toward a higher ethical standard of rate advertising.
In connection with the case, I cited a few minutes ago, of a bank's
"offer to finance your new car at a cost to you of 4 percent interest," which was presented to the Association witnesses for comment
during the hearing last week, the Vice President of the- Association
expressed the opinion that it was "untruthful."
Moreover, he indicat-
ed that he would instruct the Chairman of their Instalment Credit
Commission that a bulletin go out to all the advisory board members
and that the banks in each State be canvassed and have called to their
attention that "this is inadequate and improper disclosure of the
rate being charged."
Another example of an ethical problem is the promotion of
teen-age credit. It is one of the unfortunate nev; developments in
consumer credit.
It is aimed at a youngster too old to spank, too
young to garnishee, who should be learning the savings habit.
In the
forthright words of President Earl Schwulst of the Bowery Savings Bank,
teen-age credit "is something like teaching the young to use narcotics
. . . . merchants and merchants' associations ought to repudiate this
sort of thing . . . . It is this kind of thing which gives the Russians ammunition against our private enterprise system, saying that
all we are interested in is building up volume, and anything for the
buck."
The Stabilization Objective
The Declaration of Purpose in the bill reads as follows :
"The Congress finds and declares that economic stabilization is
threatened when credit is used excessively for the acquisition of
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Federal Reserve Bank of St. Louis
- 5 property and services. The excessive use of credit results frequently from a lack of awareness of the cost thereof to the user. *-rt is
the purpose of this Act to assure a full disclosure of such cost with
a view to preventing the uninformed use of credit to the detriment
of the national economy."
At the end of 1959, personal debt reached the all-time high
of $183 billion, divided between mortgage debt on non-farm 1- to 4family properties and consumer credit, as follows:
Mortgages
$131 billion
Consumer Credit
52
Total . . .$i83 billion
Since the end of World War II, mortgage debt has increased
nearly 6 times -- from $18.6 billion in 1945 to $131.2 billion in
1959; consumer credit has increased more than 8 times — from $5.7
billion in 1945 to $52 billion by the end of 1959.
During the 1950's alone, personal debt increased 160 percent.
By the end of this year, the American consumer will be entangled in a $200 billion web of debt.
At this rate, personal debt could exceed the federal public debt in just a few years from now.
The increase in consumer debt held by commercial banks may
be of particular interest in a tight money period. Banks increased
their total loans and investments about $2.7 billion from February
1959 to February I960. They increased their residential mortgage
holdings $1.8 billion, but their consumer credit outstanding increased
by $2.5 billion in the same period.
The banks have followed the path of retail merchants in
the devices by which they have increased consumer credit -- a heavy
use of advertising, and a notable development of revolving credit.
Revolving credit has been described by one commercial banker as a
"perpetual loan scheme." Another banker characterizes it as putting
the borrower rather than the banker in control of the volume of
credit; this same banker stated that revolving credit makes the customer much more able to yield to his impulses in buying, and that it
allows him to continue to pile up debt even if his income should decline or stop.
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Federal Reserve Bank of St. Louis
^
- 6Implicit in these developments are the possibilities that
consumer credit will initiate and carry looms too far, and that re*»•*.*>.
trenchment of purchasing will intensify future recessions.
The danger is greater because the cost of consumer debt is
not advertised, and is quoted in various fashions, all of which are
designed to understate the cost. The consumer-debtor is not flagged
down by being told that the credit he uses will cost him 12$, 18$ or
more.
The Senate bill to require disclosure of the amount and
rate of charge on consumer credit would give consumers information
about the price of credit which would lead any rational family
manager to control and stabilize buying and borrowing.
When rates
are Increased in tight money periods, the increase would become apparent, and encourage consumer restraint. I firmly believe that the
American consumer is his own best credit manager, if he has all the
information about the costs involved.
It is important to remember that the sole product of the
bill is information. It does not set a ceiling on finance charges.
Nor does it control credit terms.
Its immediate impact would stem
from a change in the state of buyer knowledge, not in the price of
instalment credit.
There is a possibility that this effect might be very small,
for most experts in the field agree that the volume of consumer demand for credit is quite unresponsive to changes in credit prices -especially in contrast to contract terms (downpayment and maturity)
which have a relatively larger effect on the size pf the monthly payment.
On the other hand, this lack of response might be traced di-
rectly to the lack of information about the price of credit. Once
the price of credit use becomes identifiable, it may become a much
more important determinant of changes in the total volume of credit.
There is another reason why the immediate impact of a change
in the statement of finance charges would not be very large.
The use
of consumer credit has had ever-widening acceptance and practice.
Indeed, for many families, the increase in savings in institutionalized forms such as social security, insurance, and payroll savings
bonds precludes additional private savings in advance of major purchases, Furthermore, a large part of credit buying is replacement
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Federal Reserve Bank of St. Louis
purchasing or in the category of necessity, or whatever the family
may decide to put in the category of necessity.
Given the habits
of our economy, then, there is probably a fairly high minimum* level
of instalment pur-chases to be made as long as incomes are maintained.
Finally, since monthly payments would not be changed at all, and since
the bill would affect all instalment lenders and sellers at the same
time, the period of consumer adjustment should be very short.
Constitutional Basis_p_f_S. 2733
The question has been raised from time to time of the Constitutional basis of S.2755.
The Legal Tender Cases, 79 U. S. 457 (1870) support the following propositions:
(1) The power conferred on Congress by Art. I, section 8
of the Constitution "to coin money, regulate the value thereof,
and of foreign coin * * *" does not limit by its terms the power
of Congress with respect to the currency.
(2) This power, coupled with (i) the "necessary and proper
clause", and (ii) the denial to the States (Art. I, section 10)
of any power to coin money, emit bills of credit, and to make
anything but gold and silver coin a tender in payment of debts,
vests whatever power there is over the currency in Congress.
(3) For an Act to be constitutional it is not necessary
to nhow that it is indispensable in order to give effect to a
specified power.
Congress has the choice of means to a permis-
sive end.
From these general propositions one may reasonably contend
that the control or regulation by Congress of the use of credit is
supported as an exercise of its power ever the currency; such control or regulation having been determined by the Congress to be
necessary in order to stabilize the economy and thereby protect the
value of the currency.
The competitive reason for the Senate bill was stated very
aptly by a witness at our hearings who described the annual rate disclosure as
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Federal Reserve Bank of St. Louis
" . . . part and parcel of the purest of classical economics
and the basic principle of the free enterprise system -- the
u- 8rational informed man buying in the free market place, with full
knowledge of the prices, and making a decision which is best for
him and, therefore, best for the entire economy."
„,.*
The benefits of effective competition cannot be realized
if the buyers (borrov/ers) do not have adequate knowledge of the alternatives available to them,.
S. 2755 would invigorate competition in the consumer credit
market by stimulating a return to price competition.
Extra-normal profits er.rned through the ability to mislead
borrowers would be minimized.
Federal Minimum Standards
In the amended version of the Senate bill, we have spelled
out a Federal-State relationship that I sincerely hope v:ill place the
burden of enforcement on the States, and avoid Federal preemption of
State responsibilities.
This is accomplished by setting forth minimum standards
for an acceptable system of State enforcement. Where these minimum
standards are met, the States would run the program. Where they are
not met, either because a State has no law or an inadequate law, the
Federal government would undertake to fill the gaps and require the
appropriate disclosures.
Administration of the bill is placed in the Federal Reserve
Board.
The Board has unusual knowledge of financial institutions
throughout the Nation, and the System which it governs provides a
very large part of the total of consumer credit. The Board, however,
desires to avoid substantial enforcement duties. The possible alternative administrative agency, the Federal Trade Commission, is
experienced in enforcement problems arising from other Federal disclosure legislation.
However, by its own admission, the FTC is not
acquainted with the practices of credit and financial institutions.
The problem of evidence of failure to comply with the requirements of S. 2755 is not serious; whether disclosure was or was
net made in any transaction could be established readily.
I fully expect that the burden of enforcement will be
assumed by the States in accordance with minimum Federal standards.
I also expect the statute to be virtually self-enforcing, because
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Federal Reserve Bank of St. Louis
- 9local publicity, local legal aid societies, better business bureaus
and chambers of commerce would uphold it in the interests of equity
and fair competition. If I am correct in these assumptions, the,n
«•"* the
remaining tasks of definition and exemption are peculiarly appropriate
subjects for the financial expertness of the Federal Reserve Board.
A pointed observation was made by the Federal Reserve Bank
of Philadelphia in the April, I960 issue of its Business Review.
In a lead article entitled, "$52 Billion on the Cuff," tne Philadelphia bank states that a real burden for the economy "occurs because
consumers often buy on time in an uninformed way without knowing the
cost of the money they are borrowing.
When they do this, they not
only hurt themselves, but they reduce the efficiency with which the
economy provides goods and services in accordance with consumer
tastes."
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Federal Reserve Bank of St. Louis
####
Chairman Martin
BOARD OF GOVERNORS
or THE
FEDERAL RESERVE SYSTEM
Office Correspondence
To.
Board of Governors
Frmn
Jerome W» Shay
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Federal Reserve Bank of St. Louis
Date
April 28f I960
Subject! Subcommittee action on interest
disclosure bill
This morning, the Subcommittee on Production
and Stabilization of the Senate Committee on Banking
and Currency ordered favorably reported to the full
Committee the interest rate disclosure bill (S. 2755)>
with certain amendments.
Administration of the bill, as in the original
version, would remain in the Federal Reserve Boardo It
is understood that the principal amendment by the Subcommittee is a provision which in effect would exempt
States from the billfs provisions if the State either
has or will adopt laws comparable to the bill's provisions .
The action of the Subcommittee was by a
k to 3 vote. The three votes against the Subcommittee's
action were those of the three minority members.
cc: Mr* loung
Mr. Thomas
Mr. Molony
Mr. Fauver
Mr. Sherman
Mr. Noyes
Mr. Hackley
CHAIRMAN MARTIN
Office Correspondence
Xo
Board of Governors (Individually)
TTrnm
Jerome W. Shay
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Federal Reserve Bank of St. Louis
pate April 25,1960—
Subject! Oliver bill re disclosure of
finance charges.
For the Board1s information, Congressman
Oliver has introduced a bill (H.R. 1186?) similar to
Senator Douglas1 bill (S. 2755)> to require full disclosure of finance charges9 on which the Board has
reported and testified.
The main difference between the Oliver and
Douglas bills is that the former would be administered
by the Federal Trade Commission and not by the Federal
Reserve Board, as in the case of the present version
of S 0 2755.
The Oliver bill has been referred to the
House Interstate and Foreign Commerce Committee.
t
cc:
Mr.
Mr.
Mr.
Mr.
Molony
loung
Hackley
Noyes
APR 2 2 I960
Tb* KsnoraiO* P«ai H.
„—,
Cfcidnfla, Stt^coamitt^ <m Fxoi^tlon
CoHKlttM oo Baakiag end Currency,
ffelt** Stat^i Smato,
VashiDgtou 25f D. C.
Bear Mr. Chai;
This is la reply to your letter of pril 11 raising
questions about oar coasuaer credit statistics arising in conaection with Professor Sector's t«stl«ony on S.2?52 ani with
th« •atonal which I safettlttad In ooci»ctloa with my totlaaigr.
In |ur»8«atlag historical iiiamiy data fbr outstanding
consumer credit we have topically published end-of-jear fi«aresf
as we h&ve for hanking sad other credit statistics. As Professor
Beekasa notes, temver, this practice differs fro* that with respect to certain indexes of business actirity such as the index
of industrial production sad consunor and wholesale price indexesy
which are published on sa annual nisie^e sasis. Jftcosi t4Mi stand*
point of ahnving the broad sweep of developments, we have fbnad
the 7ear»end credit data satisfactory. Moreover^ certain probless are encootttersd in constructing annual averages from aonthend data an oatstaadings which are not net in averaging the flow
data to which PxQfeseor Beckaen refers.
We ngrei with Professor Bedosac^ however, that <^>r
SQSJS analytical purposes the j?ear-end data have defects. '¥hs
ratio 0f the DeceAber data to the aonoal average varies from
/ear to year as Professor B«ckaan points oat. fhe variation
reHeots in large part ecoaosic deveXopsjents over the comrse
of the yearf which can best be taken into account bv analysing
aonthly data. The use of Monthly data is particularly desirable
fbr saay analysis of cyclical developments. Monthly data are
published currently in tl» yoderal ieserve Bulletin sad in
various alaeographed releases and beck data are available froa
our division of Eesearch and Statistics,
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Federal Reserve Bank of St. Louis
fto*Hoj*>rable Paulft,Doogla*
*t*
We agree with Frofeasor Beefc&sa that It is preferable
to «*» annual averages of outstanding credit vhan the data aye
related to annual data an disposable personal iaoo**, b*t tlie
differences between the aovessant of title ratio aad erne esspited
from ^rear-cad outstanding* vlll not be great* la prep**riag
aaterial pertinent to ay tcstlaaitir befbre jrour COM it tee, for
example^ tiie Board's staff included data showing tjje x^tia of
oatetaniLute cxmmswir debt ^ Be^nfeer 31 to disposable inoaae
fbr t^e /ear ae one t>xo«d seasu2« of debt treads. The data
wexe readily a?*ilafcle ^ thi« Ibm, amd It veji 1>elie^ed tfe^t
tlie eioad l^eeA* would be similar regardless of the as^»t of
oosiputetiaG. Ve feate sine* caopited tto eonual data da outataading credit and its ratio to disposable iaeoae om t&e basis
of aaatlii^ averages and &»*e arranged vlth jromr staff to revise
fable 6 and tfee textual reference aeoordiagl^. The effect of
tfie re-nsion is to reduce the level of the ratios soaewfeat
vit^oat aaterially affeetiag tfee tren&i both seta of data sbow
an imere&ee of abomt ^0 per eeat in the ratio of outstanding
<M>UHaser credit to disposable personal ineosm fratt 1^2 to
3^!^.
The ratio of otttstaMiasg credit to disposable personal
debtediteee. We hate aade vider «•§ of ratios of extensions and
repayments to disposable ino^w bonever, for detailed anal/a IB
of ©jclioal dereloisieate in iaatalaKint credit. The ratio of
repajwemte to disposable iaooa» measures tbe oirreat imrden of
debt peasants, fhe ratio of eactanaioas to disposable iaooiae
refleets currttnt flaan«iag activity aore pros*ptly aad foresbadovs
future ©feaages in debt pa^wnta. We 4b aot have data oa extensions ana repayments of ^miaetalns&t credit*
ffes ratio of insttOjeent credit repejaeBta to ext<mslonit>
to whieh Profesiior Bedosam refers^ is on® w*jr of lookiag at tlie
grovtli in outstaadlag credit. During periods of rapid edbansion
saefe a» 1955 ®»* H^y erfceesioas Increase ware rapidly ttoa
repapMmte| vMch are imflm«ne«4 to a large extent tgr tbe teme
of pf«t inataUaamt contracts. Furthenaore^ when aaturities are
leogthflaiag, as la 1£32, th« Apical lag la tbe rate of repay*
aemtft is acceatuated by the redacod rate of reps^aetits on new
contracts« /*JLtbe>iigh tl^ ratio of luetnlaeat credit repa^aeiits
to ejttej^iioas Is a useful analytical tool^ it does not appear to
us to be a directffieaetareof credit iualitjr.
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Federal Reserve Bank of St. Louis
The HoDorabl* Paul I. Dougla*
*3*
V* belie** that t» of J**»fe»«Mr Beckwn'a reofcrfcs
afcrat aar consumer credit data ore the aevsult 0f ttimmd^retandizj^*.
Me &» aat understand the basis for hi» atatsaent that 002? ^«aav««54
e«tijs»tdg ajre m»t ©^pajetae ftrow /«ir to |r*&r. M h« jpolata out?
it IB neceaear? fxtsu tli» to tta» to review the ostiaatee on th»
baeie nf aare accupete data. Each tliw tola has b^^i aaae? h0ir*
irvwr. ti» nrrislcm bae INMKI ea*?i*t out fbr ae fficnjr /earu &e
MNPWNU Certaiaiy nnriMNI »»ti«at»® for <me p*xlo4 etoald not
^ «M9ft»»A with marrrlw^ «itin&t*s l^r anath»r pdHod.
It «botad aiuo b« ao-Ud tl»t Fi&f***9r BocJ«an? la hi*
neste to fmbX» 3, attributes tas>t m&b «ff«et to tli<i introduction
of Alaok* and E^rail is $$y$* ®&* »mtb3a av«ra«« 0f outetandiJ^
eoiuwaaer cJW»Slt eicludiag d^ta ft** Aia«ka and Mftwaii !• ft?,60
aHJUan^ fittft tae imtio $f tfeis to 4i»poaafei« puraoaal inccaa ie
Hi.2^ f«r wat. flit ooag?ai«bio ngm?®« Vneludtng Alaaioi and
Kwaii are ^7 761 «HUaa and lA-.a? p@r oast, fae differ^ce
la tlw arep«g«a i« afe^t $100 igUOl£mf mtlMr tlm tb^ $JL biUion
*^^«^^^^^^m-
"|p
* j»^''* ^P^P^Pi^^
"^F%^MM^P*MM 4
I bopo tl^t t)NNM HIBMifttS Will k* fe«lpl^ll tO ^OU «ad
the BIMUM 9f jpouap Sufcowitte*,
vfij, pO^aae let ua knov.
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Federal Reserve Bank of St. Louis
It v* «•» ««Bi«t ia «^r ^tfc«r
SlnA*mlv iHMauMi
HH« M0«€* Maartin^ «l"jp*
SSgATE COI^ijCTTgE ON B/NIOLMG AMD CURRENCY
SiyBCOmigTEE^ I PRODUCT; ON AND STABILI^ J)N
Room 5302,, New Senate Office Building
on
S•
O*" ' *~
tz : 2.
Tuesday, Aprj 'I 3/1960
Hon. William McC. Martin, Jr.
Cl airman, Board of Governors
deral Kesei*ve System
Peter Henle
;>arch Department
'PL - CIO'
Jerry Voorhis
Executive Director
Cooperative League of USA
Sally Butler
General Federation of Women?s Clubs
Dxmcan
.-?n
Prof, Theodore Beekman
k, L- Trotter
tonal Retail Merchants Association
I960
National Farmers Union
Robert Morgan
lonal Association of Mutual Savings B
Paul Selby
tonal Consumer France Associat:
Dr, Albert Haring
i.onal Retail Furniture Associ^
William Ch&fney
ianal Foundation for Consumer Grec
v
Thursday, Api
Hon. Onrille Freeman
Julius Stone
ernor of I^lnnesota
Ciedit Union National Association
Herbert E, Cheever
e Presidentj First National Bank
rookings, South Dakota
John
eral Counsel
.fctora! Small Business Men*s Assoalat-
Gosnell
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Federal Reserve Bank of St. Louis
This article is protected by copyright and has been removed.
Article Title:
Auto Financing Puzzle to Martin
Journal Title:
Journal of Commerce
Date:
April 6, 1960
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Federal Reserve Bank of St. Louis
This article is protected by copyright and has been removed.
Article Title:
FRB Not Equipped to Handle Disclosure Code, Martin Says: Tells
Senate Group Fed Lacks Credit Background, Data
Journal Title:
American Banker
Date:
April 6, 1960
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Federal Reserve Bank of St. Louis
April 6, I960
To
Chairman Martin/AnjN
Subject: Hearings on S e 2755
From
Jerome W. Shay \
interest disclosure bill.
« ^J
Following your appearance yesterday morning before the
Douglas Subcommittee on the above bill,, the following three witnesses testified in_f^vor__of_the Jbill• Peter Henle, Assistant
Director of Research, AFL-GIOj former Congressman Jerry Voorhis,
Executive Director3 Cooperative League of USA; and Sally Butler,
General Federation of Women1s Clubs.
Mr, Henle stressed "deceptive practices" as the "critical situation" today in the consumer credit field. He said the
"real cause for alarm" is that the consumer credit business, in
contrast to other credit business, has become "so complicated and
confused that the average user of such credit has no idea how much
he pays for it," a problem which he characterised as being I!more
human than economic0" He documented his case with copies of credit
instruments in actual use and with advertisements from various newspapers. Mr. Henle related that, while the Federal Reserve's 1957
study of consumer credit contained less on the subject of the cost
of such credit than he had urged, the study did indicate that consumers were not properly informed on the matter,, He said that the
AFL-CIO Executive Council fully endorsed the bill.
While the testimony of Mr. Voorhis and Miss Butler added
little to earlier favorable testimony on the bill, Mr. Voorhis tied
the bill to the "high interest rate problem" and said that the bill
would militate in the direction of reducing interest rates? and
would divert borrowers from "usurers" to such lenders as savings
and loan associationsy credit unions and some commercial banks,
where loan rates are "reasonably decent".
At a four-hour session of the hearings yesterday afternoon, three witnesses testified against the bill, They were
Dr. Theodore Beckman, Professor of Marketing at Ohio State University and a Consulting Economist, testifying in behalf of the National
Retail Merchants Association; A. L. Trotta, Manager and Director of
Research and Credit Management of NRMAj and Duncan Holthausen,
Vice President of the A. Holthausen Department Store, Union City,
N. J. (formerly on the Board's research staff).
Briefly, Dr, Beckman, with an extensive array of arguments,
tables and charts, undertook to demonstrate that the express Congressional findings on which the bill is predicated are unsupportable,
because, in his view, (l) consumer credit is not being used excessively; (2) consumer credit is not a destabilizing factor in the
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Federal Reserve Bank of St. Louis
economy; (3) any lack of awareness of credit costs to the consumer
does not frequently result in excessive use of credit; and (W the
disclosures required by the bill would riot really remedy the situation.
Especially significant is Dr. Beckman1s conviction that
"most sellers of goods on credit to consumers <>, * ..cannot possibly
convert a finance charge that may vary from customer to customer
and from transaction to transaction into a simple rate of interest
per annum." And, in reply to a comment by Senator Proxmire that
SiiSSSlSiSSl suj^^di £°r ^ne bill by Household Finance Corporation,
Dr. Beckman said that the problems and business of lenders (especially the larger ones) are vastly different from those of seiQers (particularly the small retailor) with respect to whom the bill probably
could not be enforced. He added that a very likely outcome of the
bill would be to drive finance charges "underground" to the detriment
of consumers, and thus constitute a decided setback to progress made
in this field in recent years under State disclosure laws and the
Federal fair trade practice rules administered by the Federal Trade
Commission. Finally, Dr, Beckman was somewhat critical oi' the Board
for using what he called "distorted" year-end figures as annual
figures for consumer credit, rather than averages for the whole year,
In brief, Messrs. Trotta and Holthausen, for the most part,
elaborated upon the same points made by Dr. Beckman. They emphasized
particularly the "unworkability" of the simple annual interest rate
provision of the bill, the "meaninglessness" of such a rate in most
of the many various kinds of retail credit-sale transactions, and
their belief that the bill would stir up customer resentment against
legitimate dealers.
During the afternoon, Senator Douglas was absent most of
the time. Senator Bennett sided with the opposition to the bill,
while Senator Proxmire defended the bill. No other members of the
Subcommittee were present at the afternoon session.
cc: Each Board Member
Mr. loung
Mr. Thomas
Mr. Molony
Mr. Fauver
Mr. Knipe
Mr* Sherman
Mr. Hackley
Mr. Solomon
Mr0 Noyes
Miss Dingle
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Federal Reserve Bank of St. Louis
WASHINGTON
25. D. C.
ADDRESS OFFICIAL C O R R E S P O N D E N C E
TO THE
BOARD
April If, I960
Mr. J. H. Tingling, Chief of Staff,
Committee on Banking and Currency,
United States Senate,
Washington 25, D. C.
Dear Mr. Yingling:
This is in response to your letter of March 25, relating
to a document entitled "State Requirements for Retail Instalment
Sales Contracts", which was inserted in the record of the hearings
on March 23 with respect to S. 2755> a- bill to require the disclosure of finance charges in connection with extensions of credit.
Senator Douglas has requested that the Board of Governors prepare a
table, similar in form to Table 17 of the Committee Print entitled
"Consumer Credit Statistics", which would indicate in greater detail
the requirements of the various States with respect to the several
matters listed under the heading "Disclosure" in the above-mentioned
document.
i
As you will recall, when the material later published in
the Committee Print entitled "Consumer Credit Statistics" was
furnished to you, it was pointed out that much of it was not the
result of primary research and study but was compiled from a number
of other sources, and was being made available in this form for use
in connection with the Committee's consideration of the bill.
\
The information in the document entitled "State Requirements for Retail Instalment Sales Contracts" was derived, in the
main, from a summary of State instalment regulatory laws published
in the periodical Time Sales Financing (issue of September 1959)>
supplemented to a limited extent from other sources. Pursuant to
your request, this information has been set up along the lines of
Table 17 in the Committee Print entitled "Consumer Credit Statistics",
showing the presence or absence of statutory provisions regarding
disclosure of various items of information in each of the States
listed.
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Federal Reserve Bank of St. Louis
Mr. J. H. Yingling
-2-
It is hoped that this tabulation -will be of use to the
Committee. Needless to say, however, the Board is not in a
position to present it as accurate and up-to-date in all respects,
and consequently it is requested that the tabulation not be
presented to the Committee, or published, as a Federal Reserve
product. It is probable that the tabulation is substantially correct,
but it does not purport to cover legislation that may have been
enacted, repealed, or amended in recent months. Furthermore, since
a table of this type summarizes, with an "X", a provision that may
be a long paragraph in the statute involved, differences in interpretation are almost inevitable.
If the Committee or its staff should desire to consult the
chief source of this tabulation, it should be noted that the various
categories follow generally those enumerated on page k of the
September 1959 issue of Time Sales Financing, and the provisions of
the various States on this matter are presented as item U of the
summaries beginning on page 7 of that issue. As noted on that page,
those summaries only outline the major aspects of these laws, and
reference to the text of the particular law itself is recommended for
complete details.
Very truly yours,
(Signed) Merritt Sherman
Merritt Sherman,
Secretary.
Enclosure
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Federal Reserve Bank of St. Louis
State Disclosure Requirements for Retail Instalment Sales Contracts
State
California I/
Colorado I/
Connecticut
Florida I/
Idaho
Cost of
Amount of down
Name and
Unpaid insurance Fees paid
Descripcash
payment
Date of tion
address
and other or other Unpaid
Cash
of parties signing of goods _grlce_ Total Cash Trade-in balance benefits charges balance
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
!£
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
x
31
31
11
111
X
X
Illinois 2/
Indiana
Iowa
Kansas
Kentucky
X
X
Louisiana
Maine
Maryland
Massachusetts I/
Michigan
X
X
X
Minnesota
Mississippi
Montana
Nebraska
Nevada
New Jersey
New Mexico
New York
North Dakota
Ohio
Oregon V
Pennsylvania
South takota
Texas
Utah
X
X
X3/
X
X
X
X
X
X
X
X
X
xv
XV
X
X
X
Virginia k/
Wisconsin
X
X
X
X
Total
111
2
16
X
X
X
X
X
X
X
X
X
X
X
X
X
.
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
x
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
x
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
^
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
xv
X
X
X
X
X
X h/
X
X
X
X
X
x
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
31
*
2?
X
X
X
X
X
21
1
3c£/ 1
22^
27
I/ Essentially same for motor vehicles and for other roosir,.
5/ Insurance and finance charges may be combined in one figure and principal ralf.nces omitted for mote
to buyer in ?0 days.
V Also description of any security taken.
V Automobiles only.
V Excludes one State combining cost of insurance and other benefits with fees paid ami other charptn.
o/ Not included'for motor vehicles.
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Federal Reserve Bank of St. Louis
X
X
X
X
X
X
X
X
X
X
Number,
amount
and due
dates of
instalments
X
X
X
X
X
x V
X
r
X
X
X
X
X
X
X
Amount of
Time sale
time price
price
differential Contract (down payor finance
or time ment plus
charge
balance time balance)
xV
X
X
X
X
X
X
vehicles if stated in writing
X
X
X
X
X
X
X
UNITED STATES SENATE
Committee on Banking and CurrencyMarch 25, I960
Ron* William McChesney Martin, Jr.
Chairman, Board of Governors
Federal Reserve System
Washington 25, D, C,
Dear Mr, Chairman:
I wrote a letter under date of February 5, I960, addressed to
Mr, Jerome W» Shay, Legislative Counsel, Board of Governors, Federal
Reserve System, summarizing an understanding reached between us relating
to technical assistance to be afforded by the Federal Reserve Board!s
staff in connection with S. 2755, a bill to assist in the promotion of
eo> nomic stabilization by requiring the disclosure of finance charges
in connection with extensions of credit*
Among other matters upon which we reached agreement as to the
assistance to be rendered by the Federal Reserve Board was that described
under item No» 2 in my letter, as follows:
tt
(2) To help develop a compilation of State requirements
in the areas of small loans, sales finance, credit life insurance, and the like*"
The Board has furnished the Committee a paper dated December 29,
1959, entitled, "State Requirements for Retail Instalment Sales Contracts."
This paper was inserted in the record of the hearings on March 23<• In
the course of a discussion of this paper between Senators Douglas and
Bush, Senator Douglas asked that the Federal Reserve Board prepare a
table which would indicate in greater detail the various State requirements under the heading entitled, "Disclosure,n in the above mentioned
paper* Senator Douglas asked that the table be prepared in similar form
to table 17 in the enclosed Committee Print entitled, "Consumer Credit
Statistics,"
It would be appreciated if your staff could furnish^ the Committee
this information for insertion in the record of the hearings fen S, 2755*
Hearings will be resumed on this bill on April 5, and if this information
could be received by that time, it would be greatly appreciated*
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Federal Reserve Bank of St. Louis
Sincerely yours,
(Signed) J. H, Tingling
J, H. Tingling
Chief of Staff
A. WILLIS ROBERTSON, VA., CHAIRMAN
J. W. FULBRIGHT, ARK.
JOHN SPARKMAN, ALA.
HOMER E. CAPEHART, !NL>.
WALLACE F. BENNETT, UTAH
J. ALLEN FREAR, JR., DEL.
PAUL H. DOUGLAS, ILL.
JOSEPH S. CtARK, PA.
PRESCOTT BUSH, CONN.
J. GLENN BEALL, MD.
JACOB K. JAVITS, N.Y.
WILLIAM PROXMIRE, WIS.
ROBERT C. BYRD, W. VA.
HARRISON A. WILLIAMS, JR., N.J.
EDMUND s. MUSKIE, MAINE
COMMITTEE ON BANKING AND CURRENCY
J. H. YINGLING, CHIEF OF STAFF
MATTHEW HALE, CHIEF COUNSEL
MclPCl
1 QoO
Hon. William McChesney Martin., Jr.
Chairman, Board, of Governors of the
Federal Reserve System
Washington 25, D. C.
Dear Mr. Chairman:
You are scheduled to appear before the
Senate Subcommittee on Production and Stabilization
at 10:00 A.M., next Tuesday, April 5, in Room 5302,
New Senate Office Building, to testify on S. 2755I would appreciate your making available
to the Subcommittee a sufficient number of advance
copies of your prepared statement in order that
members will have an opportunity to study your
views and prepare questions.
Enclosed are a committee print of certain
consumer credit statistics, which your staff was
most cooperative in helping us to assemble, and a
copy of a memorandum,, which states my views on
various aspects of the problem we are trying to
solve by the enactment of S. 2755.
Faithfully yours,
Paul H. Douglas
PHD:msb
Enclosures
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Federal Reserve Bank of St. Louis
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
86th Congress 1
3d Session
/
COMMITTEE PRINT
CONSUMER CREDIT STATISTICS
MATERIALS PREPARED FOR USE IN
HEARINGS ON S. 2755
SUBCOMMITTEE ON PRODUCTION
AND STABILIZATION
OF THE
COMMITTEE ON BANKING
AND CURRENCY
UNITED STATES SENATE
Printed for the use of the Committee on Banking alid Currency
UNITED STATES
GOVERNMENT PRINTING OFFICE
52881 O
WASHINGTON : 1960
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Federal Reserve Bank of St. Louis
86TH CONGBESS
O
tt
fj P* P*
IN THE SENATE OF THE UNITED STATES
JANUARY 7,1960
Mr. DOUGLAS (for himself, Mr. MONRONEY, Mr. LONG of Louisiana, Mr. PROXMIRE, Mr. ENGLE, Mr. NEUBERGER. Mr. MORSE, Mr. BUSH, Mr. HUMPHREY,
Mr. MUSKIE, Mr. YARBOROUGH, Mr. CLARK, Mr. LONG of Hawaii, Mr.
GRUENING, Mr. Moss, Mr. CHURCH, Mr. JACKSON, and Mr. KEFAUVER)
introduced the following bill; which was read twice and referred to the
Committee on Banking and Currency
(
To assist in the promotion of economic stabilization by requiring the disclosure of finance charges in connection with
extensions of credit.
1
Be it enacted by the Senate and House of Representa-
2
tives of the United States of America in Congress assembled,
3 That the Congress finds and declares that economic stabiliza4 tion is threatened when credit is used excessively for the
I
5 acquisition of property and services. The excessive use of
6 credit results frequently from a lack of awareness of the
1 cost thereof to the user. It is the purpose of this Act to
8 assure a fuU disclosure of such cost with a view to preventing
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Federal Reserve Bank of St. Louis
2
1
the uninformed use of credit to the detriment of the national
2 economy.
3
SEC. 2. As used in this Act, the term—
4
(1) "Credit" means any loan, residential mortgage,
5 deed of trust, advance, or discount; an}^ conditional sales con6 tract; any contract to sell, or sale, or contract of sale of
7 property or services, either for present or future delivery,
8 under which part or all of the price is payable subsequent to
9 the making of such sale or contract; any rental-purchase
10 contract; any contract or arrangement for the hire, bailment,
11 or leasing of property; any option, demand, lien, pledge, or
12 other claim against, or for the delivery of, property or
13 money; any purchase, discount, or other acquisition of, or
14 any credit upon the security of, any obligation or claim aris15 ing out of any of the foregoing; and any transaction or series
16 of transactions having a similar purpose or effect.
17
(2) "Finance charges" includes charges such* as inter-
1®
est, fees, service charges, discounts, and such other charges
19 as the Board of Governors of the Federal Reserve System
20 may by regulation prescribe.
(3) "Person" means any individual, partnership, asso22 ciation, business trust, corporation, or unincorporated organi23
24
zation.
SEC. 3. Any person engaged in the business of extend-
c
c
3
1 mg credit shall furnish to each person to whom such credit
2 is extended, prior to the consummation of the transaction, a
3 clear statement in writing, in accordance with rules and
4 regulations which the Board of Governors of the Federal
5 Reserve System shall prescribe, (1) setting forth the total
6 amount of the finance charges to be borne by such person in
7 connection with such extension of credit, and (2) stating
8 the percentage that such amount bears to the outstanding
9 principal obligation, or unpaid balance, expressed in terms
10 of simple annual interest.
11
SEC. 4. Any regulation under this Act may be estab-
12 lished in such form and manner, may contain such classifica13 tions and differentiations, and may provide for such adjust14 ments and exceptions as in the judgment of the Board of
15 Governors of the Federal Reserve System are necessary or
16 proper to effectuate the purposes of this Act or to prevent
17 circumvention or evasion, or to facilitate enforcement of this
18 Act, or any rule or regulation issued under this Act.
In
19 prescribing any exceptions hereunder with respect to any
20 particular type of credit transaction the Board shall consider
21 whether in the case of such transaction substantial compli22 ance with the disclosure requirements of this Act is being
23 achieved under any other Act of Congress or the law of any
24 State. The Board shall also exempt those credit transac
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Federal Reserve Bank of St. Louis
r
•
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Federal Reserve Bank of St. Louis
4
1 tions between business firms as to which it determines ad2 herence with the disclosure requirements of this Act is not
3 necessary to carry out the purpose of this Act.
4
SEC. 5. No person shall extend credit in contravention of
5 this Act or of any regulation presciibed thereunder.
6
SEC. 6. Any person who willfully violates any provision
7 of this Act or any rule or regulation issued thereunder shall
8 be fined not more than $5,000 or imprisoned not more than
9 one year, or both.
BOARD DF G D V E R N D R S
Chairman Martin
OF THE
F E D E R A L R E S E R V E SYSTEM
Office Correspondence
To
Board of GoveYnorp/^\)^\
PVnm
Jp-rnmP. W- Shay /TVK_S \
pate March 211,1960
Subject:
Hearings on interest disclosure
bill—S. 2755.
The first wipfcnesls^s this morning at the second session of hearings before the Dougla^oubcommittee on the above bill were representatives
of the Navy Federal Credit Union. Mr. William A. Hussong, General Manager
of the Credit Union, made a very good presentation. The burden of his testimony was that there is so wide a variation in the customs and practices
of credit grantors with respect to interest, finance charges, insurance
charges, et cetera, it is impossible for consumers to shop intelligently for
credit and that S. 275>5 would remedy this situation by providing a basis for
comparison, i.e., the requirement that aH grantors of credit show interest
and finance charges in terms of a simple annual interest rate. The testimony
was well documented and supported by case histories of Navy personnel*
The other witnesses—all from Chicago—were:
Mr. John Kearney, Chairman,
Committee for Fair Credit Practices in Illinois0
Mr. James Ganly,
Catholic Council on Working Life.
Mr. Arthur Young, Executive Director,
Legal Aid United Charities.
Mr. Jerome Shure, Chairman,
Legal Committee,
Committee for Fair Credit Practices.
These witnesses also supported the bill. As their affiliations might suggest,
each devoted virtually all of his testimony to the social and economic problems
attributable to so-called "easy credit11 purveyed by fringe operators who look
for most of their business among low-income groups. This testimony was fairly
well documented by actual cases, in which the problems ran all the way from
suicides and divorces to bankruptcies and questionable practices by some
lawyers—all of which was referred to by one witness as "a very sordid sector
of this country's life."
As he did at the time he introduced the bill and again at the opening of the hearing on yesterday, Senator Douglas made it a point to emphasize
that "the purpose of the bill is not to discourage installment sales."
Subcommittee members present this morning, in addition to Senator
Douglas, were Senators Proxmire and Bush, neither of whom, however, participated
much in the questioning of witnesses.
These hearings have been very well attended by the public and particularly by representatives of organizations and trade associations that would be
affected in the event of passage of the bill*
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Federal Reserve Bank of St. Louis
Board of Governors
-3-
Hearings will resume for four days, beginning on April 5. It
is quite likely that a representative from the Board will be asked to
testify.
cc: Mr.
Mr.
Mr.
Mr.
Mr.
Sherman
Young
Molony
Noyes
Hackley
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Federal Reserve Bank of St. Louis
Chairman Martin
B O A R D OF G O V E R N O R S
OF THE
F E D E R A L R E S E R V E SYSTEM
Office Correspondence
To
Board of Goveraops^C^X
From
Jerome V. ShayVfaHfllxK
Date March 23,1960
Subject! Headings on interest disclosure
bill—S. 21$$.
Hearings siterteci this morning before the Subcommittee on Production
and Stabilization o^the Senate Committee on Banking and Currency on the
bill S. 2755 > which woti±a require disclosure of financing costs on credit
transactions in terms of simple annual interest rates. The hearing this
morning was attended by Senators Douglas (chairman)9 Frear, Clark, Proxmire,
Bennett, and Bush,
In an opening statement, Senator Douglas emphasized the bill's purpose as one requiring that the customer know the truth about interest rates
and finance charges and stated specifically (as he did when he introduced
the bill): MIt is not our purpose to control credit...,Our objective is,
above all, to strip the disguises and camouflage that hide or distort the
true price of credit.11 Also, he pointed out that, on the basis of its
present rate of increase, "personal
debt could exceed the Federal public
debt in just a few years from now.11
The first witness was Mr. Victor H. Nyborg, President, Association
of Better Business Bureaus, Incorporated, who favored the bill but whose
testimony was quite specific that, from his experience, installment purchasers are not interested in the interest rate but rather in the dollar
amount of interest, finance charges, and premium for credit life insurance
and other types of insurance, if any. In fact, the burden of his testimony
dealt with complaints regarding the alleged failure of installment purchasers of automobiles in not being told that they were being charged for
credit life insurance.
The other two witnesses this morning were Mr, William Kirk, representing the Union Settlement Association, New York City, and Mr. Harold Rosner,
representing Robert Hall Clothes.
Mr. Kirk's Association is interested in the financial! welfare of people
living in slum clearance and low-priced housing projects. He supported the
bill, but the bulk of his testimony related to the alleged practices of the
less reputable stores and peddlers who oversell low income groups shoddy merchandise on installment basis.
Mr. Rosner also favored the bill as somewhat of an impediment to what
he regarded as excessive growth of consumer credit. His organization sells
only for cash.
On the basis of their questioning of the witnesses, it seems clear that
Senator Proxmire favors the bill largely as a means of educating the public with
respect to interest rates, while Senator Bennett opposes the bill as aimed at a
few marginal dealers against whom any legislation probably would be ineffective.
Senator Bush, the only Republican co-sponsor of the bill, was clearly sympathetic
to the need for some such legislation. Senator Frear's questioning was rather
noncommittal, and Senator Clark did not question any of the witnesses.
cc: Messrs. Sherman, Young, Molony, Noyes, and Hackley
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Federal Reserve Bank of St. Louis
B O A R D OF G O V E R N O R S
or THE
FEDERAL RESERVE SYSTEM
Office Correspondence
To.
Frnm
Date January 13> I960
Chairman Martin
Subject: Bills to require disclosure of
Jerome W. Shay
interest or finance charges in credit
transactions*
There was circulated to the Board the Congressional
Record for January 7, containing Senator Douglas1 bill
(S. 27Ji>5) which would require the disclosure of interest or
finance charges in credit transactions. This was discussed
at the Board meeting on January 8. Senator Douglas1 bill
has not yet been printed, as it was left on the table for
co-sponsors.
Congressman Reuss has now introduced in the House
H.R. 95159 which is virtually identical with Senator Douglas1
bill. A copy of H. R. 95l5 is attached.
Attachment
cc: Each Board Member
Messrs. Young
Thomas
Molony
Fauver
Noyes
Hackley
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Federal Reserve Bank of St. Louis
86TH CONGRESS
2n SESSION
JLJLe Jl\«
tt/o3 JL O
IN THE HOUSE OF REPRESENTATIVES
JANUARY 11,1960
Mr. REUSS introduced the following bill; which was referred to the Committee on Banking and Currency
A BILL
To assist in the promotion of economic stabilization by requiring the disclosure of finance charges in connection with extensions of credit.
1
Be it enacted by the Senate and House of Represented
2
lives of the United States of America in Congress assembled,
3 That the Congress finds and declares that economic stabiliza4 tion is threatened when credit is used excessively for the
5 acquisition of property and services.
The excessive use of
6 credit results frequently from a lack of awareness of the cost
7 thereof to the user. It is the purpose of this Act to assure
8 a full disclosure of such cost with a view to preventing the
9 uninformed use of credit to the detriment of the national
10 economy.
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Federal Reserve Bank of St. Louis
I
c
2
1
SEC. 2. As used in this Act, the term—
2
(1) "Credit" means any loan, residential mortgage,
3 deed of trust, advance, or discount; any conditional sales
4 contract; any contract to sell, or sale, or contract of sale of
5 property or services, either for present or future delivery,
6 under which part or all of the price is payable subsequent
7 to the making of such sale or contract; any rental-purchase
8 contract; any contract or arrangement for the hire, bail9 ment, or leasing of property; any option, demand, lien,
10 pledge, or other claim against, or for the delivery of, prop11 erty or money; any purchase, discount, or other acquisition
12 of, or any credit upon the security of, any obligation or claim
13 arising out of any of the foregoing; and any transaction or
14 series of transactions having a similar purpose or effect.
15
(2) "Finance charges" includes charges such as inter-
16 est, fees, service charges, discounts, and such other charges
17 as the Board of Governors may by regulation prescribe.
18
(3) "Person" means any individual, partnership', asso-
19 ciation, business trust, corporation, or unincorporated orgari20 ization.
21
SEC. 3. Any person engaged in the business of extend-
22 ing credit shall furnish to each person to whom such credit
23 is extended, prior to the consummation of the transaction,
24 a clear statement in writing, in accordance with rules and
25 regulations which the Board of Governors of the Federal
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Federal Reserve Bank of St. Louis
(
C
3
1 Reserve System shall prescribe, (1) setting forth the total
2 amount of the finance charges to be borne by such person
3 in connection with such extension of credit, and (2) stating
4 the percentage that such amount bears to the outstanding
5 principal obligation or unpaid balance expressed in terms of
6 simple annual interest.
7
SEC. 4. Any regulation under this Act may be estab-
8 lished in such form and manner, may contain such classi9 fications and differentiations, and may provide for such
10 adjustments and exceptions as in the judgment of the Board
11 of Governors are necessary or proper to effectuate the pur12 poses of this Act or to prevent circumvention or evasion,
13 or to facilitate enforcement of this Act, or any rule or
. * regulation issued under this Act. In prescribing any excep•*•* tions hereunder with respect to any particular type of credit
1" transaction the Board shall consider whether in the case of
"
IK
such transaction substantial compliance with the disclosure
requirements of this Act is being achieved under any other
Act of Congress or the law of any State.
SEC. 5. No person shall extend credit in contravention
** of this Act or of any regulation prescribed thereunder.
SEC. 6. Any person who willfully violates any provision
of this Act or any rule or regulation issued thereunder shall
** be fined not more than $5,000 or imprisoned not more than
**
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Federal Reserve Bank of St. Louis
one year, or both.
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Federal Reserve Bank of St. Louis
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Federal Reserve Bank of St. Louis
.
Letter of March 12 to Chairman Martin signed by,
and his acknowledgment of March 18 addressed to -Also reply of April 14
Senators:
Paul H. Douglas
Clinton P. Anderson
Or en E. Long
William Proxmire
Eugene J. McCarthy
Pat McNamara
Wayne Morse
Jennings Randolph
E. L. Bartlett
Harrison A. Williams, Jr.
Joseph C. O'Mahoney
Frank E. Moss
Gale W. McGee
Edmund S. Muskie
Joseph S. Clark
Howard W. Cannon
Ernest Gruening
Hubert H. Humphrey
Frank Church
John A. Carroll
James E. Murray
^
V
BOARD OF GOVERNORS
OF THE
F E D E R A L R E S E R V E SYSTEM
WASHINGTON
OFFICE OF THE CHAIRMAN
April 114, I960
The Honorable Pat McNamara,
United States Senate,
Washington 2£, D. C.
Dear Senator McNamara:
Let me thank you again for the interest in monetary affairs
shown by you in the letter of March 12 which you signed with other
Senators* It is important to have public understanding of our monetary problems and of the reasoning that underlies decisions in this
field. The very fact that there are no easy answers to the problem of
maintaining a sound money makes even more important thoughtful study
and discussion of the subject.
On the basis of your letter, it would appear that we can readily
agree that monetary policy should exert a counter-cyclical force, combating inflation and deflation alike so as to contribute to a healthy,
growing economy, aided by stability in the purchasing power of the
dollar, that will provide a high level of dependable jobs. That agreement over the methods of attaining these objectives is more difficult
to achieve than agreement over the .objectives themselves is only
natural, since highly technical matters are involved.
The portion of your letter concerning the desirability of preventing harmful speculation and undesirable practices in the Government
securities market illustrates the point. The fact that neither the
Treasury nor the Federal Reserve has as yet felt ready to recommend
legislation directed to that end is not ascribable to a reluctance to
make detailed legislative proposals if we are confident that such are
needed. Our studies of the problem have shown, however, that some very
real, practical difficulties would be faced in drafting such legislation.
The studies have also indicated that future speculative excesses may be
adequately limited without new legislation.
I am sure that we all agree that it is important to maintain
a strong and efficiently functioning market for Government securities.
To both the Treasury and Federal Reserve, this is a matter of primary
importance. By and large, we have such a market today. In this country,
indeed, we are accustomed to a broad, resilient market through which:
(a) large amounts of funds can be transferred expeditiously and at low
cost among financial and nonfinancial institutions; (b) the Treasury
can float substantial cash offerings of securities without formal underwriting 5 and (c) the Federal Reserve can provide or withdraw bank reserves
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Federal Reserve Bank of St. Louis
The Honorable Pat McNamara
-2-
as needed* In striving to correct market imperfections or deficiencies,
care is needed to avoid injuring the market1s capacity to bring buyers
and sellers together in transactions involving both very large and
relatively small amounts of investable funds.
When legislation to regulate the securities industry was being
formulated in the early 1930's the Congress determined that the interests
of the Government and the economy in general called for the exemption of
both U. S. Government securities and those of State and local governments,
and the Congress excluded them from the legislation as enacted. One of
the difficult questions raised by proposals to regulate trading in and
margin on U. S. Government securities is whether such regulation could
and should also include State and local issues.
If you have had an opportunity to examine the quite voluminous
stucty of the Government securities market by the Treasury and the Federal
Reserve System, copies of which were provided to the members of the Joint
Economic Committee and to the Chairmen of the Committees on Banking and
Currency, Ways and Means, and finance, in July 1959, I am sure you will
share the view that this is a very complex subject, with a highly
technical background.
As the Congress recognized in the 1930's, the Government securities market differs from the stock market in many important respects*
Stock brokers carry margin accounts for their customers, thus extending
credit directly to them. The vast bulk of margin transactions in stocks
is handled in this way. In contrast, most of the transactions in the
Government securities market are handled by dealers who, unlike brokers,
take positions in securities, and absorb the market risk growing out of
any fluctuations in their value. Borrowing for purchasing or carrying
of Government securities by these dealers is arranged through a wide
variety of channels, bank and nonbank. The transaction between the
dealer and his customer is a cash transaction. For this reason, the
regulation of U. S. Government security dealers or their practices
would not have any effect on the margins on which securities are carried
by their customers, who must arrange the financing from otjjier sources.
An important use of credit in this market is by dealers to
finance the holdings of Government securities which constitute their
"stock in trade." Dealer borrowing is both protected and limited by
their capital as well as by any specific margin lenders may impose on
dealers' borrowings. I am sure that we are all mindful that any
significant additional limitation on the availability of financing to
dealers would necessarily reduce dealer participation in Treasury financings,
to the disadvantage of the Government. It should also be mentioned that
a large share of dealer financing relates to the carrying by dealers of
very short-term Treasury bills, where the period to maturity is so short
that the risk of loss attributable to market fluctuations is negligible.
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Federal Reserve Bank of St. Louis
The Honorable Pat McNamara
-3-
As we further assess the problems of preventing undue speculation in Government securities it has seemed to both the Treasury and
the Federal Reserve System that substantial progress can be made toward
desired objectives under existing authority. One approach that has been
taken has been the issuance of a supervisory instruction to national
bank examiners that prudent and sound bank lending practice calls for
appropriate margins in the case of all loans to nondealer borrowers
against Government securities as collateral. It is possible that an
approach of this kind will not only influence the lending practices of
banks but also, indirectly, those of nonbank corporations that advance
funds on a temporary basis to the Government securities market through
repurchase agreements and similar arrangements.
Leading banks and corporations have already been cautioned about
the unfortunate consequences of under-margined credit such as occurred
in the 19£8 episode. It is our understanding that the Treasury will not
hesitate to warn against any credit extensions which appear to contribute
to excessive speculation if and when such excesses should threaten to
recur. Our study of the market gives reason to believe that much of the
unmargined credit extension in 19^8 was an unwitting contribution to
speculation and that the officers of banks and nonfinancial corporations
so involved are eager to avoid any repetition.
In addition, the Treasury has already announced plans to modify
its refinancing procedures to discourage the assumption of speculative
positions in maturing issues. When appropriate, it will rely on issues
for cash rather than on exchange offerings, thus making it feasible to
require sizable downpayments as a bar to excessive speculation. Also,
the absence of value on the "rights" of holders of maturing issues
would avoid speculation in "rights," and curb speculation in the market
at the time of refundings. This type of speculative activity was an
important source of instability in the Government securities market in
mid-19^8.
\».
Last year's study of the Government securities market revealed
evidence of widespread satisfaction on the part of buyers and sellers
with the mechanism of the market and the trading practices which prevail
in it. We found little or no feeling that present mechanisms or practices are disadvantageous to the investing public to any significant
degree, and we gathered a definite impression that existing transaction
arrangements are efficient and economical. There was a commonly expressed need, however, for additional statistical information, available
promptly to the public, about the flow of transactions through the
market, and about the market's use of credit. The Treasury and the
Federal Reserve System have now inaugurated such a program. From the
standpoint of public interest, these comprehensive factual materials
about the market should be helpful in future evaluations of its
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Federal Reserve Bank of St. Louis
The Honorable Pat McNamara
-1^-
performance, and in identifying what needs there may be for regulatory
intervention.
It is our belief that this informational program will be an
effective supplement to the steps mentioned above, all of which will
help to reduce the future dangers of speculative excesses in the market.
It is not possible to determine at this stage if such steps will be
sufficient to avoid completely future speculative excesses. We will
continue, therefore, to study the problem as to whether statutory regulation of the market is desirable, and, if so, what character it should
take to be most effective.
The second item in your letter would have the System discontinue
the practice of normally limiting its transactions in the United States
Government securities market to the short-term sector. By this limitation, which has been, we believe inaccurately, referred to in some commentary as the "bills only" policy, the System limits the effect of its
open market operations on the pattern of security yields and prices by
maturities established by the free interplay of savings-investment
processes in the market. From inception of this policy, the System has
been aware of exposure to criticism by those who adhere to the viewpoint
that the Government should exert more active, direct influence over the
levels and structure of market interest rates. To take account of this
viewpoint and make sure, in the light of developing experience and
critical reappraisal, that its policy was effectively serving the
public interest, the System has frequently reviewed this decision. The
Open Market Committee is prepared to make, and in fact does make,
adaptations in its operating procedure when it believes that economic
or market conditions call for such action. For example, the Committee
authorized such adaptations in November 195>£ and July 195>8, when the
System acquired some longer term securities, in connection with Treasury
financings; and in August 19^9 and February I960, when the System exchanged its maturing issues for other than short-term securities.
That the System has shown its readiness to make adaptations to
unusual conditions does not alter the fact that the System", needs normally
to follow operating procedures which will have as little disturbing influence as possible on the functioning of the Government securities
market. It follows that, if the System is to abandon its practice of
normally conducting its open market operations in short-term securities,
the alternative adopted should measure up to this criterion. On the
basis of our experience, the Federal Open Market Committee does not
believe that an alternative of continuing intervention in the longterm as well as short-term sectors of the market would result in a
better functioning market from the standpoint of public interest and
does believe that such a policy would make the market more unstable.
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Federal Reserve Bank of St. Louis
The Honorable Pat McNamara
-£-
For these reasons the Federal Open Market Committee has continued the System1s procedure of normally conducting its operations in
short-term securities. However, if the suggestion that we abandon our
present operating procedure is based on the assumption that our present
policy is as rigid and inflexible as is sometimes attributed to us, I
want to assure you that we have always been and continue to be prepared
to alter these procedures whenever conditions may make it appropriate to
do so.
On your third point, we are in substantial agreement. Our
principal difference would seem to relate to the way in which changes
in the turnover or velocity of money should be taken into account in
arriving at a rate of growth in the quantity of bank credit and money
that will be consistent with maximum economic growth and reasonable
price stability. As I have testified to the Congress on various
occasions, it is the Board's position that we should provide for such
increases in the money supply as can be absorbed in a growing economy
without generating inflationary pressures. Over the long run this may
result in a rate of growth in the money supply which, as you suggest,
might broadly match the long-term growth in real gross national product*
In your discussion, however, you suggest that the relationship
between the money supply and gross national product over a period of a
few years will tend to be quite close. Actually, short- and intermediateterm fluctuations in the ratio between these two aggregates, which is
sometimes referred to as income velocity, appear to be fairly wide and
to have a degree of independence from the pace of economic growth.
These trends are related in part to variations in the public1s attitudes
toward the use of funds in general, and particularly to movements in the
volume of other assets in the community which perform a short-term store
of value function in competition with currency and demand deposits—
often referred to as liquid assets, near monies, or money substitutes.
;
For this reason, we have found that it is important to consider
not only the volume of money, narrowly defined$ i.e., dentend deposits
adjusted and currency outside banks, but also the amount 6f time deposits
at commercial banks and mutual savings banks, of shares in savings and
loan associations, and of savings bonds and short-term Government securities in the hands of the public. If one includes the growth in these
liquid assets in recent years, money and liquid assets expanded by an
average rate of lj.2 per cent per year from 19^3 to 1959. In my own
judgment, the principal explanation of the slow rate of growth in the
money supply
over postwar years is that, during the war period, the
public1s holdings of money and of other liquid assets, especially U. S.
Government securities, were built up to an abnormally high relative to
gross national product, and, hence, in postwar years less expansion in
money was needed while we returned to a more normal relationship between
the money supply and gross national product.
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Federal Reserve Bank of St. Louis
The Honorable Pat McNamara
-6-
The final point in the letter is an important but technical one.
Its acceptance would require the System to determine in the present its
choice as to the use of the instruments of monetary policy in future
circumstances.
It is my personal view that, in absorbing the large volume of
redundant reserves generated during the great depression in the 1930's
and then supplemented by war finance, reserve requirements were pushed
up to levels higher than are necessary or desirable in the long run,
and higher than Congress intended they should be maintained indefinitely.
It would be a mistake, however, to assume that it is our established
policy to provide for all future increases in the money supply by
reducing reserve requirements from the present average of around 16 per
cent to some lower level, say 10 per cent.
I should like to point out that, in reply to a question from the
Joint Economic Committee last fall, the Board stated unequivocally that
"The Federal Reserve has had no policy specifically directed toward
achieving a long-run secular decrease in reserve requirements.11 It
follows from this statement that the Board accepts the use of the open
market instrument as one way, and an important one, of providing the
bank reserves needed to support long-term growth in the money supply.
The System, in fact, has added to its holdings of United States Government securities regularly for this purpose in the decade since the
Treasury-Federal Reserve accord. What the Board is not prepared to do
is to commit itself and its successors not to use an instrument for
monetary regulation that Congress devised and reaffirmed in the last
session, when, all things considered, the use of that instrument would
be the best way of making reserve funds more readily available to the
banking system.
I might mention in this connection that legislation passed by
the Congress in 19^9 authorized certain changes in the structure of
reserve requirements, including authority to count vault cash as reserves
and the eventual elimination of the central reserve city classification.
The equitable implementation of this legislation would appear to require
some provision of the reserves needed for monetary growth through adjustments of reserve requirements.
To summarize, the Board1s position on this point is that it
would be improper for it to enter into any commitment which would limit
the discretionary authority specifically granted to it by the Congress.
We believe, and have testified, that it is desirable for the System to
have authority to vary reserve requirements from time to time in either
direction. We have also stated, however, that such authority is not
indispensable to the effective day-to-day functioning of the System.
If reserve requirements are to be maintained at present levels, or their
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Federal Reserve Bank of St. Louis
The Honorable Pat McNamara
-7-
use circumscribed, we believe that this should be accomplished by
legislative action, not by a renunciation of authority by the Board.
In closing, I want to assure you of the Board's desire to
cooperate with you at all times in furthering understanding of our
policies, our reasons for them, and their relation to the economic
condition of the United States*
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Federal Reserve Bank of St. Louis
Sincerely yours,
(Signed) Wm. McC. Martin, Jr,
Wm. McC. Martin, Jr.
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Federal Reserve Bank of St. Louis
March 18, i960.
The Honorable Paul H. Douglas,
United States Senate,
Washington 25, D. C.
Dear Senator Douglas:
As it will of coarse take some time to
consider the various matters set forth in the letter
•
of March 12 in which you joined with other Senators,
I do want you to know now that your interest is appreciated and that you shall have a reply as promptly
as possible.
Sincerely yours,
.(Signed) Wm. McC. Martin, Jr.,
Wra. McC. Martin, Jr.
*
CM:mnm
Identtel letters to Senators signing letter of March 12 (list attached)
cc: Mr. Shay
Mr. Molony
Miss Muehlhaus
FAOL H. DOUGLAS. ILL.. CHAIRMAN
JOHN SPARKMAN. ALA.
J. W. FUL43RIOHT, ARK.
JOfEPHC.O-MAHONEY. WYO.
JOHN F. KENNEDY. MASS.
sssjsu.
JACOB K. JAViTS. N.Y.
LEHMAN CLERK AND
ACTiNo EXECUTIVE DIRECTOR
Congress of tfje ®mteb
i>
^
WMOMT FATMAM. TBC.. VICE CHAIRMAN
HKMAMO BOCLINO. MO.
HALE BOOOS. LA.
HENRY 8. RCUSS, WI8.
FRANK M. COFFIN. MAINE
WILUAM •. WIDNALL. N.J.
JOINT ECONOMIC COMMITTEE
.CREATED I-URSWANT TO SEC. s (•) OF FUMJC LAW »«, T»TH CONOMCM)
March 12, 19&0
The Honorable William McChesney Martin, Chairman
Federal Reserve Board
Washington 25, D. C.
My dear Chairman Martin:
We are addressing this letter to you in the hope that the Federal Reserve
Board may adopt certain very definite reforms which, if accompanied by parallel
action on the part of the Treasury, may remove or greatly lessen the very real
dangers to the people of the United States which we believe would be created by
the lifting or removal of the interest ceiling on long-time government bonds.
Combined with needed Treasury reforms, these would have the effect of increasing
the price and lowering the yield and hence the interest rate on government bonds
without resorting either to "pegging" the market or inflationary devices. Somewhat similar proposals for reforms were made to you during 1959 &&& in January
of this year by certain majority members of the Joint Economic Committee. At
those times you were firm in your refusal to accept these reforms.
We wish to help the country and reduce the tension which is developing
between the Board and a large section of Congress, and we hope that further
reflection upon these matters may have induced a greater willingness on your
part and that of the Board to reconsider basic issues of policy.
We now appeal to you to signify your intent and that of the Eoard to make
at least four basic reforms or improvements in the conduct of the Board's affairs:
1. To recommend the establishment of margins on the purchase of government
securities by customers of security dealers, and to regulate the activities of
the security dealers themselves.
As the debacle of the summer of 195& clearly showed, it is intolerable that
there should be such widespread speculation in government securities on infinitesimal
or non-existent margins. This can be damaging to the credit of the United States
of America. We have waited for you to give us a lead on this matter on the basis
of your long study of the incident and have been disappointed by your silence and
your failure to act.
This offers the possibility of' fruitful cooperation between your Board arid
Congress, and if you will assign some of your experts to work with us, we shall be
glad to draft legislation which will deal with the great abuses which have been
revealed and yet be fair to all parties.
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Federal Reserve Bank of St. Louis
- 2-
Honorable William McCbesney Martin
2. A second reform which we believe the Reserve Board should adopt is to
abandon its "bills only" policy. We have scarcely been able to find a single
competent economist who endorses this policy to which., with rare exceptions,
you have held for so many years. The abandonment of this mistaken policy would
be desirable in itself and would clear the way for further reforms.
3. In our judgment, it is imperative that you should, over a period of
time, permit an increase in the money supply (currency plus demand deposits) at
approximately the same rate as that at which the real gross national product is
growing. This would not be inflationary. Rather it would be a stabilizing force,
We regret that,during the years from 1953 to 1959 when the economy was
growing at the excessively slow rate of 2.3 percent a year, your Board would only
permit the money supply to grow at the still slower rate of 1.8 percent a year.
The increase in population cut the growth of the money supply on a per capita
basis to . l percent per annum. In our judgment, this slow rate of growth was
one of the causes which artificially increased the interest rate and hence
retarded home building, expansion by small business, and state and local investment. It was therefore one of the causes for the increasing unemployment during
this period and for slowing down the rate of growth itself.
We must honestly state that your failure to expand the supply of money at an
adequate rate has been in large part responsible for this.
Let us, 'however, emphasize two things: First, we want relative stability in
the price level, with the long-time growth in the money supply only matching the
long-time growth in the real gross national product.
Second, we are not opposed to some cyclical variations in the growth of the
money supply. The availability of credit could, for example, be relatively
increased in periods of recession or depression, or slightly dampened down in an
undue upswing. But -these variations should not be used to alter the long-run
policy of expanding the money supply in line with the increase in the production
of goods and services so as to avoid both inflation and deflation, but also with
a view to maximum employment and adequate growth.
4. The Federal Reserve should use open market purchases to provide the
increase in member bank reserves for the needed long-time or secular expansion
of the money supply. Taking normal velocity into account, this would be at the
rate of about 3 to k percent per year.
As you know, such expansion could be achieved by one of two ways: a) the
reserve requirements of the member banks could be lowered; or b) the same end
could be accomplished by open market purchases.
You hav.e stated publicly that you felt that the reserve ratios should be
lowered still further and the banking system appears to be aiming for an
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Federal Reserve Bank of St. Louis
- 3Honorable William I-fcChesney l&irbin
ultimate average level of about ten per cent as preferable to the present
level of approximately 16 per cent. A reduction in reserve requirements
from 16 to 10 per cent vould support, with present member bank reserve balances,(an expansion in demand deposits from the present lOJLO billion to
about v!90 billion, or an increase of $80 billion.
If the creation of this $80 billion is accomplished by lowering reserve requirements, it vould be done without any increase in the capital
assets and earnings of the Federal Reserve System. The interest on these
additional sums and the profits fiora this great expansion of credit would
accrue entirely to the private commercial banks, without the Reserve System
or the government sharing in the profits then made through having delegated
the government's power to create monetary purchasing power or money to the
banks. In other words, private banks will get all the interest and profits
on this money, with little or no cost to themselves. In these circumstances,
one can understand why the banks are so anxious to use this method and why1
those who support the banks find it possible to justify this method. HUGO
sums are at stake.
According to Federal Reserve System figures, the average rate of earnings of member banks on their combined capital, surplus and undistributed
profits in 1958* the last full year for which figures are available, was
17.3 per cent before taxes and 9*7 per cent after taxes.
In view of the fact that the risks of bank stockholders have been decreased in the last decade* by the guarantee of bank deposits and the abolition of double liability, this rate of earnings on capital and surplus (accumulated from prior earnings) would seem to be amply adequate.
Now, if you feel that the private banking system of the country, whose
major source of profit is the loans and deposits created by the fractional
reserve system at little cost to the oanl:c themselves, clecervec higher rates
of earnings than these, then you should franlcly say so for the record and
'justify your reasons. You should do this for that would "oo^the effect of
creating the long-run needed expansion of the money supply vby the method
of reducing reserve requirements which you advocate.
If instead, the creation of these amounts is done 'by open market purchases, the government will get 90 per cent of the interest and profits on
one-sixth of the «'$0 billion, or on about $13-1/3 billion. The "banks will
still receive the interest and profits on $56-2/3 billion. Certainly the
"banks should not be unhappy to see the government and the people get this
small profit for the delegation to them of the Constitutional power of the
Congress to "coin money and regulate the value thereof."
As you understand, if the expansion were accomplished by open market
purchases, then the Federal Reserve System would acquire added earning assets
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Federal Reserve Bank of St. Louis
Honorable William liceiiesney ISirtin
of approximately $13-1/3 billion in government bonds over the years at an
initial rate of about $570 million a year and an average rate of about §7^0
million per year*
At k per cent interest, this would mean initial earnings of approximately $23 million a year and rising by slightly more than this amount each
year to over §U6 million in the second year, $69 million the third year,
etc., until at the end of the period, the annual added earnings would be
approximately $9^0 million a year and would continue from then on. The cumulative amounts of these earnings which would accrue to the Federal Reserve
system in the period would be over $4.5'billion. Under prevailing practices,
at least 90 per cent of these sums, or over (-h billion, would be turned over
to the Treasury.
These may seem to be small and inconsequential amounts to you, Ilr.
Chairman, but to the hard-pressed taxpayers of this country and the members
of Congress charged with the duty of fiscal responsibility, they are of great
importance. They would help to balance the budget and provide needed services.
Moreover, the large volume of annual purchases of govemnent bonds would raise
their prices and lower their yields and hence lower the basic interest rates
on governments about which you and the Treasury have been complaining.
This" action, along with 'a more appropriate fiscal policy, would result
in long-term interest rates well below the ^ per cent ceiling and would
make the question of whether the ceiling should be removed largely an academic
one.
Instead of focusing on the question of the symptoms of our problem, namely
the 4J per cent ceiling, we urge you and the Treasury to get at the basic
causes of the problem, namely excessively high interest rates in a period
characterised not by full employment, forced draft growth, and inflation but
one characterized by excessive unemployment, a slow rate of groirfch, and stable
prices.
Ue should emphasize that we are not proposing that present reserve requirements be raised but that they be kept at existing levels. Thus, we are
not advocating that the government's share in the creation of additional purchasing power be increased, but merely that it not be reduced, as you would
have it done.
"When we have questioned you on this issue, you have objected on the
grounds that in times of recession, lowering reserve requirements may ba a
faster and quicker way of expanding credit than through achieving these effects by open market purchases.
However, this answer has to do .with the short-run and does not affect
the question of the secular or long-run expansion about which we are concerned.
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Federal Reserve Bank of St. Louis
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Federal Reserve Bank of St. Louis
- 5The Honorable William I-fcChesney Martin
It nay "be proper to lover and raise reserve requirements for cyclical
or short-run purposes. Yet during the years 1951 to 1SXSO, a period dominated
by the ticht money policy of the Federal Reserve System, the Federal Reserve
has love red reserve requirements during recessions but has not subsequently
raised then during periods of expansion. The effects, therefore, have been
to lower reserve ratios permanently.
In other words, since 1951 you have not raised reserve requirements and
hence have not used them as a counter cyclical weapon in periods of expansion.
This fact seriously diminishes the force of the single argument you have used
in opposition to our view that open market operations are to be preferred to
the method of lowering reserve requirements for secular expansion. In the
first place, you have been using a short-run argument in reply to our point
that the long-run expansion should occur by open market purchases. In the
second place, even in the short run you have not used reserve requirements
fully as a counter cyclical weapon for they have been changed only downward
and have not been raised.
With respect to the long run, the ultimate effects of the two methods
would, as you have admitted, be the same. Even the immediate effects would
be substantially. similar. The public interest calls for using the open market purchase method for the long run or secular expansion of the money supply
and we call upon you and the Federal Reserve Board to issue a clear statement
of policy to that effect.
In short, we believe that a proper sense of fiscal responsibility should
lead you (l) to work cooperatively with Congress for requiring margins on
the purchases of government bonds and for proper regulation of that market,
(2) to abandon the discredited "bills only" policy, (3) to effect the longtime increase in the money supply at appropriately the same rate as the
growth in the real national product, and (H) to do this by oj>en market operations rather than by lowering reserve ratios.
We will welcome your cooperation for these worthy ends.
With best wishes,
Sincerely yours,
@FedFRASER