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THE FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS HEARINGS BEFORE T H E SUBCOMMITTEE ON DOMESTIC FINANCE OF THE COMMITTEE ON BANKING AND CURRENCY HOUSE OE REPRESENTATIVES EIGHTY-EIGHTH CONGRESS SECOND SESSION ON H.R. 3783 A B I L L TO P R O V I D E F O R T H E R E T I R E M E N T O F F E D E R A L R E S E R V E BANK STOCK, AND F O R O T H E R P U R P O S E S H.R. 9631 A B I L L TO INCREASE TO 12 T H E NUMBER O F M E M B E R S O F T H E F E D E R A L R E S E R V E BOARD, AND FOR O T H E R P U R P O S E S H.R. 9685 A B I L L TO A M E N D T H E F E D E R A L R E S E R V E ACT TO P R O V I D E T H A T I N T E R E S T R E C E I V E D BY F E D E R A L R E S E R V E BANKS ON OBLIGATIONS O F T H E U N I T E D STATES SHALL B E COVERED INTO T H E TREASURY AS MISCELLANEOUS R E C E I P T S , TO A U T H O R I Z E A P P R O P R I A T I O N S F O R T H E E X P E N S E S OF T H E F E D E R A L R E S E R V E BANKS AND T H E BOARD O F GOVERNORS O F T H E F E D E R A L R E S E R V E SYSTEM, AND F O R O T H E R P U R P O S E S H.R. 9686 A BILL TO REQUIRE T H E P A Y M E N T OF INTEREST ON CERTAIN FUNDS OF T H E UNITED STATES H E L D ON DEPOSIT IN COMMERCIAL BANKS, TO PROVIDE FOR REIMBURSEMENT OF COMMERCIAL BANKS FOR SERVICES P E R F O R M E D FOR T H E UNITED STATES, A N D FOR OTHER PURPOSES H.R. 9687 A B I L L TO AMEND T H E F E D E R A L R E S E R V E ACT AND T H E F E D E R A L D E P O S I T INSURANCE ACT BY E L I M I N A T I N G T H E P R O H I B I T I O N AGAINST T H E P A Y M E N T O F I N T E R E S T ON DEMAND D E P O S I T S H.R. 9749 A B I L L TO AMEND T H E F E D E R A L R E S E R V E ACT TO P R O V I D E F O R F E D E R A L R E S E R V E S U P P O R T O F GOVERNMENT BONDS W H E N M A R K E T Y I E L D S EQUAL OR E X C E E D 4 % P E R C E N T VOLUME 1 JANUARY 21, 22, 23, 29, 30; FEBRUARY 3, 4, 5, AND 6, 1904 Printed for the use of tne Committee on Banking and Currency 28-680 U.S. GOVERNMENT P R I N T I N G O F F I C E WASHINGTON : 1964 COMMITTEE ON BANKING AND CURRENCY W R I G H T PATMAN, Texas, A L B E R T RAINS, Alabama ABRAHAM J . MULTER, New York W I L L I A M A. B A R R E T T , P e n n s y l v a n i a LEONOR K. SULLIVAN, Missouri H E N R Y S. R E U S S , Wisconsin THOMAS L. ASHLEY, Ohio C H A R L E S A. VANIK, Ohio W I L L I A M S. MOORHEAD, P e n n s y l v a n i a R O B E R T G. S T E P H E N S , J R . , Georgia F E R N A N D J . ST GERMAIN, Rhode I s l a n d H E N R Y B . GONZALEZ, T e x a s CLAUDE P E P P E R , F l o r i d a J O S E P H G. M I N I S H , New J e r s e y C H A R L E S L. W E L T N E R , Georgia R I C H A R D T. HANNA, California BERNARD F . GRABOWSKI, Connecticut C H A R L E S H . WILSON, California COMPTON I. W H I T E , J R . , I d a h o Chairman CLARENCE E . KILBURN, New York W I L L I A M B . WIDNALL, New Jersey E U G E N E SILER, Kentucky P A U L A. FINO, New York F L O R E N C E P . DWYER, New Jersey SEYMOUR H A L P E R N , New York J A M E S HARVEY, Michigan OLIVER P . BOLTON, Ohio W. E . ( B I L L ) BROCK, Tennessee R O B E R T T A F T , J R . , Ohio J O S E P H M. McDADE, P e n n s y l v a n i a SHERMAN P . LLOYD, U t a h B U R T L. TALCOTT, California D E L CLAWSON, California J O H N R. STARK, Clerk and Staff Director J O H N E . BARRIERE, Professional Staff Memoer ORMAN S. F I N K , Minority Staff Memoer SUBCOMMITTEE ON DOMESTIC W R I G H T PATMAN, Texas, H E N R Y S. R E U S S , Wisconsin C H A R L E S A. VANIK, Ohio CLAUDE P E P P E R , F l o r i d a J O S E P H G. M I N I S H , New Jersey C H A R L E S L. W E L T N E R , Georgia R I C H A R D T. HANNA, California C H A R L E S H . WILSON, California W I L L I A M B . WIDNALL, New Jersey J A M E S HARVEY, Michigan O L I V E R P . BOLTON, Ohio W. E . ( B I L L ) BROCK, Tennessee R O B E R T T A F T , J R . , Ohio ROBERT E . WEINTRAUB, Senior R O B E R T A. S C H R E M P , H A R V E Y W. G E I S T , Economist Investigator Investigator S T E P H E N D. KENNEDY, Research u FINANCE Chairman Assistant CONTENTS H . R . 3783. A bill to provide for t h e retirement of Federal Reserve bank Page stock, and for other purposes 1 H . R . 9631. A bill t o increase t o 12 t h e number of members of t h e Federal Reserve Board, and for other purposes 3 H . R . 9685. A bill to a m e n d t h e Federal Reserve Act to provide t h a t interest received by Federal Reserve b a n k s on obligations of t h e United States shall be covered into t h e Treasury as miscellaneous receipts, to authorize appropriations for t h e expenses of t h e Federal Reserve banks a n d t h e Board of Governors of t h e Federal Reserve System, and for other purposes 6 H . R . 9686. A bill to require t h e p a y m e n t of interest on certain funds of t h e United States held on deposit in commercial banks, t o provide for reimbursement of commercial b a n k s for services performed for t h e United States, and for other purposes 6 H . R . 9687. A bill to a m e n d t h e Federal Reserve Act and t h e Federal Deposit Insurance Act by eliminating t h e prohibition against t h e p a y m e n t of interest on d e m a n d deposits 7 H . R . 9749. A bill t o a m e n d t h e Federal Reserve Act to provide for Federal Reserve support of Government bonds when m a r k e t yields equal or exceed 4J4 percent 7 Proposals affecting t h e Federal Reserve System, joint s t a t e m e n t of t h e Republican members of t h e House Banking and Currency C o m m i t t e e . _ 29 Suggested comment for Mr. P a t m a n on Republican press release 30 S t a t e m e n t of— Bopp, Karl R., president Federal, Reserve Bank of Philadelphia 421, 441 Bryan, Malcolm, president, Federal Reserve Bank of A t l a n t a 444 Clay, George H., president, Federal Reserve Bank of K a n s a s City 784 Deming, Frederick L., president, Federal Reserve Bank of Min» neapolis 688 Ellis, George H., president, Federal Reserve Bank of Boston 267 Hayes, Alfred, president of t h e Federal Reserve Bank of N e w York; accompanied by J o h n J. Clarke, vice president a n d general counsel; a n d Alan R. Holmes, vice president, research d e p a r t m e n t . 525, 555 H i c k m a n , W. Braddock, president, Federal Reserve Bank of Cleveland; accompanied by J o h n J. Hoy, assistant vice president 135 Irons, W a t r o n s H., president, Federal Reserve Bank of Dallas 843, 866 Martin, William McChesney, Chairman, Federal Reserve Board; accompanied by C. C a n b y Balderston, Vice C h a i r m a n of t h e Federal Reserve Board 9, 34, 68 Mills, A. L., Jr., J. L. Robertson, a n d Charles N . Shepardson, Governors, Federal Reserve Board 103 R a m s e y , R a l p h E., Associate General Counsel; accompanied by F r e d Smith, D e p u t y Director, accounting and auditing policy staff, General Accounting Office 902 Scanlon, Charles J., president, Federal Reserve Bank of Chicago 751 Shuford, H a r r y A., president, Federal Reserve Bank of St. Louis__ 290, 292 Swan, Eliot J., president, Federal Reserve Bank of San Francisco 664 W a y n e , E d w a r d A., president, Federal Reserve Bank of Richmond-_ 270 in IV CONTENTS Additional d a t a s u b m i t t e d t o t h e subcommittee by— Bopp, Karl R., president. Federal Reserve Bank of Philadelphia: S t a t e m e n t of condition, a t t h e close of business, December 3 1 , Page 1963 424 Federal Reserve note s t a t e m e n t a t the close of business, December 31, 1963 425 Current earnings, 1914-62 426 Profit and loss account, 1914-63 429 S t a t e m e n t on coin shortage 469 Survey of service charges on checking accounts__ Pasters face page 486 F o r t y - N i n t h Annual S t a t e m e n t of t h e Federal Reserve Bank of Philadelphia, d a t e d J a n u a r y 6, 1964 439 Comparison of earnings a n d expenses 439 Comparative s t a t e m e n t of condition 440 Directors and officers 440 List of dealers with whom m a r k e t transactions are conducted 465 Commissions from vending machines a t t h e Federal Reserve Bank a t Philadelphia 480 Federal Reserve Banks and t h e President's Committee on E q u a l Employment Opportunity 494 S t a t e m e n t on family relationships at t h e Federal Reserve Bank of Philadelphia 498 Employee relations 508 Training and education 508 Reserve bank-sponsored meetings in t h e various regions of district 509 Membership dues, etc 509 Traveling expenses to conventions, conferences, meetings, etc 510 Public information 511 Miscellaneous 511 Bryan, Malcolm, president, Federal Reserve B a n k of A t l a n t a : F o r t y - n i n t h Annual S t a t e m e n t , Federal Reserve Bank of A t l a n t a . 447 S t a t e m e n t of condition a t t h e close of business, December 3 1 , 1963 449 Federal Reserve note s t a t e m e n t a t t h e close of business, D e c e m ber 31, 1963 450 Current earnings, 1914-62 451 Profit and loss account, 1914-63 454 List of dealers with whom m a r k e t transactions are conducted 465 Information concerning vending machines a t t h e Federal Reserve Bank of Atlanta 480 Resolution on employment of relatives 499 Reply t o question of Mr. P a t m a n 467 Regular personal checking accounts 481 Employee relations 512 Training a n d education 512 Fees 513 Central b a n k i n g seminar, M a r c h 29-30, 1962 513 Luncheons in various regions of t h e A t l a n t a district 513 Meals served b a n k guests in b a n k dining room or cafeteria. __ 514 Expenses in connection with Federal Reserve System meetings held in A t l a n t a district 514 Membership dues, etc 515 Registration fees for meetings, conventions, etc 515 Travel expenses t o conventions, conferences, meetings, etc__ 516 Public information 517 Miscellaneous 517 Clay, George H., president, Federal Reserve Bank of K a n s a s C i t y : * Expenses, Kansas City 786 S t a t e m e n t of condition a t t h e close of business, December 31, 1963 791 Federal Reserve note s t a t e m e n t a t t h e close of business, December 31, 1963 792 Current earnings 793 Profit and loss account, 1914-63 796 Supplemental s t a t e m e n t 839 CONTENTS V Additional d a t a submitted to t h e subcommittee by—Continued Deming, Frederick L., president, Federal Reserve Bank of Minneapolis: P a S t a t e m e n t of condition a t t h e close of business, December 31, ^ 1963 695 Federal Reserve note s t a t e m e n t a t t h e close of business, December 31, 1963 696 Current earnings 697 Profit a n d loss account, 1914-63 700 Rentable or usable space 710 C o m p a r a t i v e s t a t e m e n t of assets 735 Comparative s t a t e m e n t of liabilities 736 O a t h of office of class A, B, and C director of Federal Reserve bank__ 743 N e t service charges received 746 Earnings a n d capital 747 H a y e s , Alfred, president, Federal Reserve B a n k of New York: S t a t e m e n t before Subcommittee No. 3 of t h e H o u s e Banking a n d Currency Committee, J u n e 10, 1960 533 S t a t e m e n t of condition a t t h e close of business, December 31, 1963 540 Federal Reserve note s t a t e m e n t a t t h e close of business, December 31, 1963 541 Current earnings 542 Profit a n d loss account, 1914-63 545 Fees—Directors a n d others 559 Expenditures during year 1962, foreign guests, etc 585 H i c k m a n , W. Braddock, president, Federal Reserve B a n k of Cleveland: Exhibit. 137 F o r t y - n i n t h a n n u a l statement, letter, d a t e d J a n u a r y 2, 1964 144 Comparative s t a t e m e n t of condition 145 Comparison of earnings and expenses 146 List of directors and officers, Federal Reserve Bank of Cleveland. _ 146 S t a t e m e n t of condition a t t h e close of business, December 31, 1963 148 Federal Reserve note s t a t e m e n t , close of business, December 31, 1963 149 C u r r e n t earnings 150 Profit and loss account, 1914-63 153 Schedule of service charges on checking accounts a n d official checks 169 Service charge survey 173 Regular checking accounts 174 Special checking accounts 178 Miscellaneous service charges 178 Safe deposit boxes 181 Explanation of charts 1 and 2 198 Comparison between bank salary structure and average rates, charts 1 a n d 2 199, 201 Table A.—Supplementary benefits—Salary and nonsalary, 1962_ _ 202 Table B.—Comparison of a n n u a l leave policies for 1964 202 Employee d a t a 206 Expenditures of Federal Reserve b a n k s 212 Justifications N o . 1 t h r o u g h No. 77 230 Irons, Watrous H., president, Federal Reserve B a n k of Dallas: Employee relations 848 S t a t e m e n t of condition a t t h e close of business, December 31, 1963 851 Federal Reserve note s t a t e m e n t a t t h e close of business, December 31, 1963 852 Current earnings 853 Profit and loss account, 1914-63 856 Executive m a n a g e m e n t and policy s t r u c t u r e of selected foreign central b a n k s 889 Martin, William M c C , Federal Reserve Board: Response to question 8 of t h e questionnaire of H o n . Wright Patman 22 VI CONTEISTTS Additional d a t a submitted to t h e subcommittee by—Continued Scanlon, Charles J., President, Federal Reserve Bank of Chicago: Distribution of deposit liabilities and cash assets among all insured commercial b a n k s according t o membership s t a t u s of banks, J u n e 29, 1963 S t a t e m e n t of condition a t t h e close of business, December 31, 1963 Federal Reserve note s t a t e m e n t a t t h e close of business, December 31, 1963 Current earnings Profit and loss account, 1914-63___ Expenditures O a t h of office, Federal Open M a r k e t Committee Oath t a k e n by Board members in their Board capacities Shuford, H a r r y A., President, Federal Reserve Bank of St. Louis: Current earnings Profit a n d loss account, 1914-63 S t a t e m e n t of condition a t t h e close of business, December 31, 1963 Federal Reserve note s t a t e m e n t , a t t h e close of business, December 31, 1963 Swan, Eliot J., President, Federal Reserve Bank of San Francisco: S t a t e m e n t of condition a t t h e close of business, December 31, 1963 Federal Reserve note s t a t e m e n t a t the close of business, December 31, 1963 C u r r e n t earnings Profit a n d loss account, 1914-63 Assessed charges of 2 cents per item for checks a n d drafts Banking schools, a t t e n d a n c e by Federal Reserve b a n k employees Comparative s t a t e m e n t of condition, 1962-63 Earnings and expenses Directors a n d officers, December 31, 1963 Breakdown of office space by functions Operations of Federal Reserve bank Wayne, E d w a r d A., president, Federal Reserve Bank of R i c h m o n d : S t a t e m e n t of condition, a t the close of business, December 3 1 , 1963 Federal Reserve note statement, a t the close of business, December 31, 1963 Current earnings Profit and loss account, 1914-63 General Accounting Office: Purposes a n d objectives of independent audits by t h e General Accounting Office P a t m a n , H o n . Wright: Federal Reserve System, discounts and advances, n u m b e r of member b a n k s accommodated Discounts and advances, 1960-63 Staff m e m o r a n d u m , d a t e d J a n u a r y 5, 1964 Board of Governors of t h e Federal Reserve System, letter, d a t e d March 24, 1948 Federal Reserve System, a n n u a l salaries of Board members a n d officers: Board of Governors Federal Reserve B a n k of Boston Federal Reserve B a n k of New York Federal Reserve B a n k of Philadelphia Federal Reserve B a n k of Cleveland Federal Reserve Bank of Richmond Federal Reserve B a n k of Atlanta Federal Reserve B a n k of Chicago Federal Reserve Bank of St. Louis p a&t 755 759 760 761 764 774 830 830 295 298 308 309 667 668 669 672 712 715 682 683 684 686 746 273 274 275 278 909 310 311 315 323 326 328 329 330 331 332 333 334 335 CONTENTS Additional d a t a submitted to t h e subcommittee by—Continued P a t m a n , Hon. Wright—Continued F e d e r a l Reserve System, etc.—Continued Federal Reserve B a n k of Minneapolis Federal Reserve B a n k of K a n s a s City Federal Reserve B a n k of Dallas Federal Reserve Bank of San Francisco St. Louis account: Employee relations Training a n d education Reserve bank-sponsored dinner a n d luncheon meetings held outside t h e b a n k Membership dues, etc Luncheons in bank dining room or cafeteria Traveling expenses to conventions, conferences, meetings, etc Dinner meetings of various associations Public information Miscellaneous Richmond account: Employee relations Training and education Reserve bank-sponsored dinners held outside t h e b a n k Lunch expense in b a n k dining room or cafeteria Membership dues, etc Traveling expenses to conventions, conferences, meetings, etc Public information Miscellaneous Boston account: Annual meetings of stockholders Central banking seminar Luncheons to stimulate sales of savings bonds Membership dues a n d contributions Miscellaneous Public information and research grants Employee relations Registration fees for meetings, conferences, etc Guests a t luncheons in bank dining room Training and education Travel to conventions, conferences, meetings, etc S t a t e m e n t of condition a t t h e close of business, December 31, 1963 Federal Reserve note s t a t e m e n t a t the close of business, December 3 1 , 1963 C u r r e n t earnings, 1914-62 Profit a n d loss account, 1914-63 Table I.—Basic service charges on checking accounts, banks in selected communities Service charges paid by depositors in relation to processing costs incurred by banks, letter of L. A. Zehner, d a t e d F e b r u a r y 10, 1964 Table II.—Service charges paid b y depositors in relation to processing costs incurred by banks-—regular a n d special accounts, calendar year 1962 Educational p r o g r a m a t Federal Reserve B a n k of B o s t o n . _ T h e Commercial Bank, Andalusia, Ala., letter of E . E . Anthony, Sr., dated J a n u a r y 17, 1964 VII Page 336 337 338 339 348 349 350 350 350 351 352 352 352 355 356 356 356 356 357 358 359 360 361 361 362 362 363 365 366 366 367 368 369 370 371 374 387 390 391 401 418 APPENDIX Annual salaries of t h e principal Federal officials and t h e officials of t h e Federal Reserve System 921 THE FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS TUESDAY, J A N U A R Y 21, 1964 HOUSE OF KEPRESENTATIVES, SUBCOMMITTEE ON DOMESTIC F I N A N C E OF THE COMMITTEE ON BANKING AND CURRENCY, Washington, D.C. The subcommittee met, pursuant to notice, at 11 a.m., in room 1301, Longworth House Office Building, Hon. Wright Patman (chairman) presiding. Present: Representatives Patman, Multer, Reuss, Ashley, Vanik, Minish, Weltner, Wilson, White, Kilburn, Widnall, Bolton, Brock, Taft, and Talcott. (H.R. 3783, H.R. 9631, H.R. 9685, H.R. 9686, H.R. 9687, and H.R. 9749 are as follows:) [H.R. 3783, 88th Cong., 1st sess.] A BILL To provide for the retirement of Federal reserve bank stock, and for other purposes Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled, T h a t ( a ) the last sentence of the first p a r a graph of section 2 of the F e d e r a l Reserve Act (12 U.S.C. 222) is amended by striking out "subscribing a n d paying for stock" and inserting in lieu thereof "obtaining a certificate of membership". (b) The last sentence of the t h i r d p a r a g r a p h of such section 2 (12 U.S.C. 282) is amended by striking out "subscribe to the capital stock of such F e d e r a l reserve bank in a sum equal to six per centum of the paid-up capital a n d surplus of such bank, one-sixth of the subscription to be payable on call of t h e organization committee or of the B o a r d of Governors of the F e d e r a l Reserve System, one-sixth within three months a n d one-sixth within six m o n t h s thereafter, and the remainder of the subscription, or any p a r t thereof, shall be subject to call when deemed necessary by t h e Board of Governors of the F e d e r a l Reserve System, said payments to be in gold or gold certificates." a n d inserting in lieu thereof "obtaining a certificate of membership p u r s u a n t to t h e provisions of this Act." (c) The fourth p a r a g r a p h of such section (2) (12 U.S.C. 502) is hereby repealed. (d) The p a r a g r a p h s which, prior to the repeal m a d e by subsection (c) of this section, w i t h t h e eighth, ninth, tenth, eleventh, a n d twelfth p a r a g r a p h s of such section 2 (12 U.S.C. 283-286) a r e hereby repealed. (e) The first sentence of the last p a r a g r a p h of such section 2 (12 U.S.C. 281) is hereby repealed. SEC. 2. (a) The last sentence of the first p a r a g r a p h of section 4 of t h e F e d e r a l Reserve Act is amended by striking out "a subscription to the capital stock of" and inserting in lieu thereof " a n application for a certificate of membership in". (b) The second p a r a g r a p h of such section is amended (1) by striking out "when the minimum a m o u n t of capital stock prescribed by this Act for the organization of any F e d e r a l reserve bank shall have been subscribed a n d allotted," a n d inserting in lieu thereof "when the organization committee shall deem t h a t a sufficient proportion of eligible banks have applied for membership 1 2 THE FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS in a Federal reserve bank in process of organization,", (2) by striking out "the amount of capital stock and the number of shares into which the same is divided,", (3) by striking out "subscribed to the capital stock of" and inserting in lieu thereof "applied for membership in", (4) by striking out "and the number of shares subscribed by each", and (5) by striking out "subscribed or may thereafter subscribe to the capital stock of" and inserting in lieu thereof "applied or may thereafter apply for membership in". (c) The subparagraph numbered "Eighth" of the fourth paragraph of such section 4 (12 U.S.C. 341) is amended by striking out "stock". (d) The tenth paragraph of such section 4 is amended by striking out "stockholding" and inserting in lieu thereof "member". (e) The second sentence of the twelfth paragraph of such section 4 is amended by striking out "subscriptions to the capital stock" and inserting in lieu thereof "applications for membership." SEC. 3. Section 5 of the Federal Reserve Act (12 U.S.C. 287) is amended to read as follows: "SEC. 5. (a) The Federal reserve banks shall have no capital stock. "(b) A' bank applying for membership in the Federal Reserve System at any time after the date of enactment of the Act entitled 'An Act to provide for the retirement of Federal reserve bank stock, and for other purposes' shall submit such application, in accordance with the regulations of the Board of Governors of the Federal Reserve System, to the Federal reserve bank of its district. Such application shall be accompanied by a membership fee of $10, which shall not be refundable unless such application is disapproved or withdrawn before approval. "(c) Upon the approval of an application submitted pursuant to subsection (b) of this section, the Federal reserve bank shall issue to the applicant a certificate attesting the membership of the applicant in such Federal reserve bank and in the Federal Reserve System. "(d) When a member bank voluntarily liquidates, it shall surrender its certificate of membership and cease to be a member of the Federal reserve bank of its district and of the Federal Reserve System." SEC. 4. (a) The first paragraph (12 U.S.C. 288, first paragraph) of section 6 of the Federal Reserve Act is hereby repealed. (b)i The second sentence of the paragraph which prior to the repeal made by subsection (a) of this section, was the second paragraph (12 U.S.C. 288, second paragraph) of such section 6, is amended to read as follows: "The certificate of membership held by said national bank shall be surrendered to the Federal reserve bank of its district, and said national bank shall cease to be a member of such Federal Reserve bank and of the Federal Reserve System." SEC. 5. (a) The first paragraph (12 U.S.C. 289) of section 7 of the Federal Reserve Act is amended by striking out "the stockholders shall be entitled to receive an annual dividend of 6 per centum on the paid-in capital stock, which dividend shall be cumulative. After the aforesaid dividend claims have been fully met,". (b) The second sentence of the second paragraph (12 U.S.C. 290) of such section 7 is amended by striking out "dividend requirements as hereinbefore provided, and the par value of the stock,". (c) The first paragraph (12 U.S.C. 531) of such section 7 is amended by striking out "capital stock and". SEC. 6. (a) The first paragraph (12 U.S.C. 321, first paragraph) of section 9 of the Federal Reserve Act is amended (1) by striking out, in the first sentence of such paragraph, "the right to subscribe to the stock of" and inserting in lieu thereof "membership in", (2) by striking out the second and third sentences of such paragraph, and (3) by striking out, in the last sentence of such paragraph, "stockholder", and inserting in lieu thereof "member". (b) The first sentence of the second paragraph (12 U.S.C. 321, second paragraph) of such section 9 is amended by striking out "Federal reserve bank stock owned by the national bank shall be cancelled and paid for as provided in section 5 of this Act," and inserting in lieu thereof "membership of such national bank shall be extinguished and the certificate of membership cancelled as provided in section 5 of this Act." (c)> The first sentence of the third paragraph (12 U.S.C. 321, third paragraph) of such section 9 is amended (1)( by striking out "stockholder" and inserting in lieu thereof "member", and (2) by striking out "stock" and inserting in lieu thereof "membership". THE FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS 3 (d) The fifth paragraph (12 U.S.C. 323) of such section 9 is hereby repealed. (e)> The first sentence of the paragraph which, prior to the repeal made by subsection (d) of this section, was the ninth paragraph (12 U.S.C. 327) of such section 9, is amended by striking out ''stock" and inserting in lieu thereof "certificate of membership". (f) The paragraph which, prior to the repeal made by subsection (d) of this section, was the tenth paragraph (12 U.S.C. 328) of such section 9, is amended (1) by striking out, in the first sentence thereof, "all of its holdings of capital stock" and inserting in lieu thereof "certificate of membership", (2) by striking out the second proviso of the first sentence thereof, (3) by striking out, in the last sentence thereof, "stock holdings" and inserting in lieu thereof "certificate of membership", and (4) by striking out, in the last sentence thereof, "a refund of its cash paid subscription with interest at the rate of one-half of one per centum per month from date of last dividend, if earned, the amount refunded in no event to exceed the book value of the stock at that time, and shall likewise be entitled to". (g) The paragraph which, prior to the repeal made by subsection (d) of this section, was the sixteenth paragraph (12 U.S.C. 333) of such section 9, is amended (1) by striking out, in the first sentence thereof, ", except that any such savings bank shall subscribe for capital stock of the Federal reserve bank an amount equal to six-tenths of 1 per centum of its total deposit liabilities as shown by the most recent report of examination of such savings bank preceding its admission to membership", (2) by striking out all the remaining sentences of such paragraph except the last sentence thereof, and (3) by striking out, in the last sentence of such paragraph, ", except as otherwise hereinbefore provided with respect to capital stock". (h) The paragraph which, prior to the repeal made by subsection (d) of this section, was the twenty-second paragraph (12 U.S.C. 337) of such section 9, is amended (1) by striking out, in the second sentence thereof, "stock", and inserting in lieu thereof "certificate of membership", and (2) by striking out, in the last sentence thereof, "stock", and inserting in lieu thereof "certificates of membership". (i) The last paragraph (12 U.S.C. 338) of such section 9 is amended by striking out, in the last sentence thereof, "stock", and inserting in lieu thereof "certificates of membership". SEC. 7. The first sentence of the third paragraph of section 10 of the Federal Reserve Act is amended by striking out "capital stock and surplus" and inserting in lieu thereof "net earnings for the immediately preceding half year period". SEC. 8. The amendments made by the first seven sections of this Act shall take effect on the thirty-first day after the date of enactment of this Act. SEC. 9. (a) Not later than 31 days after the date of enactment of this Act, each holder of stock in any Federal reserve bank shall surrender such stock to such bank, which shall, as of the thirty-first day after the date of enactment of this Act, cancel and retire the same and pay or credit to such former holder the par value thereof, plus interest at the rate of one^half of one per centum per month from the date of the last dividend, less a membership fee of $10, which shall not be refundable. (b) Upon the cancellation and retirement of Federal Reserve bank stock as provided in subsection (a) of this section, each Federal reserve bank shall issue to each such former holder thereof a certificate attesting its membership in such Federal reserve bank and in the Federal Reserve System. SEC. 10. The eleventh paragraph of section 9 of the Federal Reserve Act is amended to read as follows: "Any applying bank shall be eligible for membership if it is an insured bank as defined in subsection (h) of section 3 of the Federal Deposit Insurance Act. The capital stock of a state member bank shall not be reduced except with the prior consent of the Board of Governors of the Federal Reserve System." [H.R. 9631, 88th Cong., 2d sess.] A B I L L To increase to twelve t h e number of members of the F e d e r a l Reserve Board, and for other purposes Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled. That (a) the first and second paragraphs (12 U.S.C. 241 and 242) of section 10 of the Federal Reserve Act are amended to read as follows: 4 THE FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS "The Federal Reserve Board (referred to in this Act as the 'Board') shall be composed of twelve members, one of whom shall be the Secretary of the Treasury, who shall be the chairman, and eleven of whom shall be appointed by the President by and with the advice and consent of the Senate. Each appointive member shall be (appointed for a term expiring on June 30 of one of the first four calendar years succeeding the year in which he is appointed, as designated by the President at the time of nomination, subject to the limitation that not more than three members of the Board may have terms scheduled to expire within the same calendar year. The President may remove any appointive member from office. In selecting the members of the Board, the President shall have due regard to a fair representation of the financial, agricultural, industrial, commercial, labor, and consumer interests, and geographical divisions of the country. The appointive members of the Board shall devote their entire time to the business of the Board. "The appointive members of the Board shall be ineligible during the time they are in office and for two years thereafter to hold any office, position, or employment in any member bank, except that this restriction shall not apply to a member who has served the full term for which he was appointed. The President shall designate one of the appointive members of the Board as Vice Chairman to serve as such for a term of four years, or until the expiration of his term of office as a member, whichever is less. The Vice Chairman of the Board, subject to its supervision, shall be its active executive officer. Each appointive member of the Board shall within fifteen days after notice of appointment make and subscribe to the oath of office. Upon the expiration of their terms of office, appointive members of the Board shall continue to serve until their successors are appointed and have qualified. An appointive member of the Board who has served more than two years shall not be eligible for reappointment for a term beginning earlier than four years after the expiration of his most recent term of office." (b) The Board of Governors of the Federal Reserve System established under authority of the Federal Reserve Act as in effect prior to the effective date of the amendment made by subsection (a) of this section is abolished. Each member of the Board of Governors of the Federal Reserve System in office immediately prior to the taking effect of this subsection shall be paid one year's salary at his then current rate in addition to any other pay and benefits which he may by law be entitled to receive. (c) On and after the effective date of subsection (a) of this section, any reference (other than the reference in subsection (b) of this section) to the Board of Governors of the Federal Reserve System in any law, rule, or regulation of the United States or any department or agency thereof shall be deemed a reference to the Federal Reserve Board. SEC. 2. (a) Section 12 of the Federal Reserve Act (12 U.S.C. 261 and 262) is amended to read as follows : "FEDERAL ADVISORY COMMITTEE "SEC. 12. In order to provide for full representation of the public interest at the highest level in the making of monetary policy, the President shall appoint a Federal Advisory Committee (referred to hereafter in this section as the 'Committee') which shall consist of the Comptroller of the Currency, the Chairman of the Board of Directors of the Federal Deposit Insurance Corporation, and not more than fifty other members who shall serve for a term of one year. Any person appointed to fill a vacancy shall serve for the unexpired portion of the term of his predecessor. The Federal Reserve Board shall pay the members of the Committee a per diem allowance of $50 for each day of their attendance at meetings of the Committee, together with their actual necessary travel expenses to attend such meetings. The meetings of the Committee shall be held at Washington, District of Columbia, at least four times each year, and oftener if called by the Federal Reserve Board. The Committee may in addition to the meetings above provided for hold such other meetings in Washington, District of Columbia, or elsewhere, as it may deem necessary, may select its own officers and adopt its own methods of procedure, and a majority of its members shall constitute a quorum for the transaction of business. THE FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS 5 "The Committee shall have power, by itself or through its officers, (1) to confer directly with the Federal Reserve Board on general business conditions; (2) to make oral or written representations concernings matters within the jurisdiction of said Board; (3) to call for information and to make recommendations in regard to discount rates, rediscount business, note issues, reserve conditions in the various districts, the purchase and sale of gold or escurities by Reserve banks, open-market operations by said banks, and the general affairs of the Reserve banking system." (b) The Federal Advisory Council created by section 12 of the Federal Reserve Act as in effect prior to the amendment made by this section is abolished. SEC. 3. (a) All of the powers, duties, and functions of the Federal Open Market Committee are hereby transferred to the Federal Reserve Board. The Federal Open Market Committee is abolished. (b) All personnel, property, records, and unexpended balances of appropriations of the Federal Open Market Committee are hereby transferred to the Federal Reserve Board. (c) Section 12A of the Federal Reserve Act (12 U.S.C. 263) is amended to read as follows: "OPEN MARKET OPERATIONS "SEC. 12A. (a) No Federal Reserve bank shall engage or decline to engage in open-market operations under section 14 of this Act except in accordance with the direction of and regulations adopted by the Board. The Board shall consider, adopt, and transmit to the several Federal Reserve banks regulations relating to the open-market transactions of such banks. "(b) The time, character, and volume of all purchases and sales of paper described in section 14 of this Act as eligible for open-market operations shall be governed with a view to accommodating commerce and business and with regard to their bearing upon the general credit situation of the country and in coordination with the policy and responsibility of the Federal Government as set forth in section 2 of the Employment Act of 1946." SEC. 4. (a) The Comptroller General shall make, under such rules and regulations as he shall prescribe, an audit for each calendar year of the Federal Reserve Board and the Federal Reserve banks and their branches. (b) In making the audit required by subsection (a), representatives of the General Accounting Office shall have access to all books, financial records, reports, tiles, and other papers, things, or property belonging to or in use by the entities being audited, and they shall be afforded full facilities for verifying transactions with balances or securities held by depositaries, fiscal agents, and custodians of such entities. (c) The Comptroller General shall, at the end of six months after the end of the year, or as soon thereafter as may be practicable, make a report to the Congress on the results of the audit required by subsection (a), and he shall make any special or preliminary reports he deems desirable for the information of the Congress. A copy of each report made under this subsection shall be sent to the President of the United States, the Federal Reserve Board, and the Federal Reserve banks. In addition to other matters, the report shall include such comments and recommendations as the Comptroller General may deem advisable, including recommendations for attaining a more economical and efficient administration of the entities audited, and the report shall specifically show any program, financial transaction, or undertaking observed in the course of the audit which in the opinion of the Comptroller General has been carried on without authority of law. (d) The Comptroller General is authorized to employ such personnel as may be necessary to carry out the audit required by subsection (a), without regard to the civil service and classification laws, including services as authorized by section 15 of the Act of August 2, 1946, as amended (5 U.S.C. 55a), at rates not to exceed $100 per diem. The expenses of the audit shall be paid out of assessments made under section 10 of the Federal Reserve Act. SEC. 5. Subsections (a) and (b) of the first section and sections 2 and 3 shall take effect on the first day of the third calendar month which begins after the date of enactment of this Act. All other provisions of this Act shall be effective upon enactment. 6 THE FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS [H.R. 9685, 88th Cong.,, 2d sess.] A BILL To amend the Federal Reserve Act to provide that interest received by the Federal Reserve banks on obligations of the United States shall be covered into the Treasury as miscellaneous receipts, to authorize appropriations for the expenses of the Federal Reserve banks and the Board of Governors of the Federal Reserve System, and for other purposes Be it enacted by tine Senate and House of Representatives of the United States of America in Congress assembled, That section 7 of the Federal Reserve Act is amended by inserting immediately after the section heading the following new paragraph: "The full amount of all interest and discounts received by Federal Reserve banks on obligations of the United States shall be paid or credited by such banks to the Secretary of the Treasury and covered into the Treasury as miscellaneous receipts. To the extent that the income of such banks from other sources is insufficient for the payment of their expenses, there are hereby authorized to be appropriated such sums as may be necessary." SEC. 2. (a) The third paragraph (12 U.S.C. 243) of section 10 of the Federal Reserve Act is amended to read as follows: "There are hereby authorized to be appropriated such sums as may be necessary to pay the expenses of the Board of Governors of the Federal Reserve System and the salaries of its members and employees. Subject to the availability of appropriations, the Board may maintain, enlarge, or remodel its office building in the District of Columbia and shall have sole control of such building and space therein." (b) The fourth paragraph (12 U.S.C. 244) of section 10 of the Federal Reserve Act is amended by striking out the third sentence. SEC. 3. The first section and section 2 of this Act shall take effect on the first day of the first fiscal year which begins after the date of enactment of this Act. During the period between the date of enactment of this Act and the effective date of the first two sections, the several Federal Reserve banks and the Board of Governors of the Federal Reserve System shall take such steps as may be necessary to change their accounting period from the calendar year to the fiscal year and otherwise to bring their accounting practices and procedures into conformity with those employed by other agencies of the United States operated with appropriated funds. [H.R. 9686, 88th Cong., 2d sess.] A BILL To require the payment of interest on certain funds of the United States held on deposit in commercial banks, to provide for reimbursement of commercial banks for services performed for the United States, and for other purposes Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled, That (a) no deposit exceeding such amount as the Secretary of the Treasury may by regulation prescribe may be maintained in any commercial bank to the credit of the Treasury Department or any bureau or officer thereof unless such bank pays a reasonable rate of interest thereon. (b) The first sentence of the thirteenth paragraph (12 U.S.C. 371a) of the Federal Reserve Act is amended by inserting "(other than a deposit to the credit of the Treasury Department or any bureau or officer thereof)" immediately after "pay any interest on any deposit". (c) The first sentence of section 18(g) of the Federal Deposit Insurance Act (12 U.S.C. 1828(g)) is amended by inserting "(other than deposits to the credit of the Treasury Department or any bureau or officer thereof)" immediately after "the payment of interest on demand deposits". SEC. 2. The Secretary of the Treasury shall pay such compensation for services performed by a commercial bank for the Treasury Department or any bureau or officer thereof as may be justified, taking into consideration both the value of such services and the value of benefits conferred on such bank by the United States, Federal Reserve banks, and any departments or agencies of the United States. THE FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS 7 [H.R. 9687, 88th Cong., 2d sess.] A BILL To amend the Federal Reserve Act and the Federal Deposit Insurance Act by eliminating the prohibition against the payment of interest on demand deposits Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled, That section 19 of the Federal Reserve Act is amended by striking out the following paragraph (12 U.S.C. 371a) : "No member bank shall, directly or indirectly, by any device whatsoever, pay any interest on any deposit which is payable on demand: Provided, That nothing herein contained shall be construed as prohibiting the payment of interest in accordance with the terms of any certificate of deposit or other contract entered into in good faith which is in force on the date on which the bank becomes subject to the provisions of this paragraph; but no such certificate of deposit or other contract shall be renewed or extended unless it shall be modified to conform to this paragraph, and every member bank shall take such action as may be necessary to conform to this paragraph as soon as possible consistently with its contractual obligations: Provided further, That this paragraph shall not apply to any deposit of such bank which is payable only at an office thereof located outside of the States of the United States and the District of Columbia: Provided further, That until the expiration of two years after the date of enactment of the Banking Act of 1935 this paragraph shall not apply (1) to any deposit made by a savings bank as defined in section 12B of this Act, as amended, or by a mutual savings bank, or (2) to any deposit of public funds made by or on behalf of any State, county, school district, or other subdivision or municipality, or to any deposit of trust funds if the payment of interest with respect to such deposit of public funds or of trust funds in required by State law. So much of existing law as requires the payment of interest with respect to any funds deposited by the United States, by any Territory, District, or possession thereof (including the Philippine Islands), or by any public instrumentality, agency, or officer of the foregoing, as is inconsistent with the provisions of this section as amended, is hereby repealed." SEC. 2. Section 18(g) of the Federal Deposit Insurance Act (12 U.S.C. 1828 (g)) is amended by striking out the following sentence: "The Board of Directors shall by regulation prohibit the payment of interest on demand deposits in insured nonmember banks and for such purpose it may define the term 'demand deposits'; but such exceptions from this prohibition shall be made as are now or may hereafter be prescribed with respect to deposits payable on demand in member banks by section 19 of the Federal Reserve Act, as amended, or by regulation of the Board of Governors of the Federal Reserve System." [H.R. 9749, 88th Cong., 2d sess.] A BILL To amend the Federal Reserve Act to provide for Federal Reserve support of Government bonds when market yields equal or exceed 4% percent Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled, That subsection (c) of section 12A of the Federal Reserve Act (12 U.S.C. 263(c)) is amended to read as follows: "(c) The time, character, and volume of all purchases and sales of paper described in section 14 of this Act as eligible for open-market operations shall be so governed as to maintain the market prices of obligations of the United States at such levels, not less than those required to produce a market yield not in excess of 4*4 percent on any such obligation, as may in the discretion of the Committee be appropriate with a view to accommodating commerce and business and with respect to their bearing upon the credit situation of the country." The CHAIRMAN. The committee will please come to order. The Federal Reserve System recently reached its 50th birthday, which I think is a good time for a general checkup. More than SO years have gone by since the Federal Eeserve System received any 8 T H E FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS legislative attention, and a great deal has happened in that time. Ours is a very different economy with different needs, and different relationships than those that existed 30 years ago. Some of the revisions adopted 30 years ago were born in a depression atmosphere. Now we should look at the most powerful banking system on earth, our Federal Reserve, in terms of the conditions of 1964. We have learned a great deal in those 30 years about economic development, interest rates, the money supply, and full employment. I t should be very clearly understood that the primary and fundamental consideration of this committee during these hearings is to assure that our vast Federal Reserve System is serving the needs of the people and their Government to the greatest possible extent. That is the sole consideration. I t should be clearly understood that these hearings will be so handled as to represent at all times the paramount interest of the people of the United States and their Government. We want to make sure that the public interest is the paramount consideration of the Federal Reserve. W e want to make sure the Nation's money system is not governed by or for the private interest of any one group. I n line with this we are vigorously opposed to anything that smacks of unsound money. We want neither inflation or deflation. We seek prosperity and high employment under the terms of the Full Employment Act and we want to be sure that the Federal Reserve System, holding as it does the great monetary powers of the United States, serves that end. I t is no secret that I have long been concerned about the aloofness of the Federal Reserve from both the executive branch and the Congress. Although the Federal Reserve System is a creature of Congress, it is not subject to any of the usual Government budgetary, auditing, and appropriations procedures. Also, the Federal Reserve is not required to obtain congressional approval for its policies, even though its actions have important repercussions for every sector of our economy. This sort of unbridled freedom, whether it is used for good or evil, just isn't compatible with representative democratic government, in my opinion. The will of the people ought to be reflected in monetary policy as well as fiscal policy, foreign affairs, and all other matters affecting the public welfare. These matters of concern on my part are well known, but it should be made absolutely clear that if any longstanding ideas that I hold should be proved erroneous, I will be the first to acknowledge it and change my viewpoint. We are after one major objective in these hearings: the truth. I t is our hope that these hearings will help us first of all to preserve the good that is in the Federal Reserve System; second, to eliminate any undesirable or outmoded features of the existing System; and, third, to improve and strengthen the System to make it more responsive to the needs of our society. We have for consideration by this committee several legislative proposals intended to make revisions in the Federal Reserve System. One, H.R. 3783, would direct the Federal Reserve System to retire the socalled stock now held by the privately owned member banks. A second, H.R. 9631, would bring about several structural changes in the Federal Reserve System—particularly through expanding the Board of Governors to 12 members, including the Secretary of the Treasury, T H E FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS 9 eliminating the Open Market Committee and requiring an annual audit by the General Accounting Office. There are three other bills which I now have in draft form and intend to introduce today. One would eliminate the prohibition on interest payments by commercial banks on demand deposits. A second would require banks to pay the Treasury interest on the Treasury's commercial bank demand deposits and would permit banks to collect for actual services rendered the Government after consideration of the value of services received by them. A third would eliminate the interest income now received by the Federal Reserve from the Treasury on the $30 billion portfolio of Government bonds, and would require the Federal Reserve Board and Federal Reserve banks to obtain annual appropriations from the Congress like other Government agencies. Mr. Bolton, would you like to make any statement? Mr. BOLTON. Not at this time, thank you. The CHAIRMAN. We have as our witness this morning Mr. William McChesney Martin, who is the Chairman of the Federal Reserve Board. H e has with him Mr. C. Canby Balderston, who is Vice Chairman of the Federal Reserve Board. We are glad to have you gentlemen. We expect to have a meeting until noon, when the House meets, and then we expect to ask permission to resume our session in the afternoon, if permission can be obtained to sit while the House is in session during general debate. Mr. Martin, we are glad to have you, sir. Would you like to present a statement, or would you like to just state your views? You may proceed in your own way, sir. STATEMENT OP WILLIAM McCHESNEY MARTIN, CHAIRMAN, FEDERAL RESERVE BOARD; ACCOMPANIED BY C. CANBY BALDERSTON, VICE CHAIRMAN OF THE FEDERAL RESERVE BOARD Mr. MARTIN. Thank you, Mr. Chairman. First I want to concur with the statement you made, the top of page 3 of your statement, that it is your hope that these hearings will help us, first of all, to preserve the good in the Federal Reserve System; second, to eliminate any undesirable or outmoded features in the existing System; and, third, to improve and strengthen the System to make it more responsive to the needs of our society. I heartily concur in those comments, Mr. Chairman. We welcome the inquiries into the Federal Reserve System that are conducted each year by various committees of the Congress, believing as we do that every gain made in knowledge of the System will be beneficial to us all. Your present inquiry is especially timely, coming as it does shortly after the 50th anniversary of President Wilson's signing of the Federal Reserve Act on December 23, 1913. We are pleased on this occasion to join with you again in considering the merits of the present structural arrangement of the System, and to aid in your consideration in any way we can. We do not claim the System is perfect or infallible. Being a human institution, it is neither. I t has made mistakes, and undoubtedly it will make more of them, for the mind of man has not yet managed 28-680—64—vol. 1 2 10 T H E FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS to devise any means of excluding error. I n its half century of existence, encompassing the ordeal of two world-embracing wars and between them the anguish of boom, crash, and depression, the System has experienced failures as well as successes. But it has also learned from experience, and I believe we can find considerable satisfaction today in the extent to which the Federal Reserve System over the years has accomplished the objectives set for it by the Congress. Clearly, the System has achieved the goal uppermost in the minds of its creators, by providing the country with an elastic currency, for which it had vainly sought during most of its earlier history. To be sure, this and other goals were attained by the System only over time, through a process of evolution, innovation and experimentation as experience demonstrated errors in the assumption prevalent 50 years ago that the supply of money and credit could be geared automatically to the needs of the country through adherence to the "real bills" doctrine. Yet the framers of the Federal Reserve Act, like those of the U.S. Constitution, wrought exceedingly well when they created a structure capable of adaptation and development as the economy itself developed—a structure that places trusteeship over the creation of money in a body that is insulated from shortsighted pressures for abuse of that money; one that combines the advantages of regional units with central supervision and coordination; and one that ingeniously engages public and private participation in a democratic effort to serve the interests of the people as a whole. Having 12 regional banks in the System has aided the System greatly in keeping in close touch with developments and trends in credit and business throughout the country. Furthermore, the regional system has enabled us to bring into focus a wide range of views, enhancing flexibility in adapting to economic changes. Perhaps the development of open market operations as a method of supplying or absorbing bank reserves, the base on which bank credits rests in this country, is the most striking example of what has been accomplished by that process. Authorized initially for the chief purpose of enabling investments to make the individual Reserve banks financially selfsupporting, open market operations evolved gradually as a major tool of monetary policy, with the operations of the 12 regional banks coordinated today through a single, broad-based committee that pools in the public behalf the economic and human resources of the entire System. A t present, the System is again breaking new ground in establishing a network of currency interchange arrangements with central banks in other countries as a means of protecting the dollar on the foreign exchanges and contributing in the long run to a stronger international payments mechanism. I believe that a good p a r t of the Federal Reserve's strength is derived from this unique blend of public and private participation, regional initiative, and central supervision. Obviously, the System is open to improvement, and it has been improving as a result of evolution. Change is inevitable, but we should make sure it is change for the better. Change purely for the sake of making the System conform more closely to the structure of the standard Government agency would, in my judgment, slow our progress toward achievement of the goals set forth in the Federal Reserve Act and the Employment Act of 1946. T H E FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS 11 One constructive step that you could take to remove the last vestige of the now-obsolete "real bills" doctrine, to which I referred earlier, would be to pass legislation that the Board recommended last August 21. That legislation would permit the Federal Reserve banks to make discounts or advances on sound collateral without imposing a penalty merely because this collateral does not meet the archaic technical requirements of "eligible paper." According to the "real bills" doctrine, the supply of money and credit would be automatically expanded and contracted in step with the needs of the economy if Reserve bank credit were based on shortterm, self-liquidating "real bills" drawn to finance the production and distribution of the goods the economy produced. I n keeping with this idea, the original Federal Reserve Act provided that member banks could obtain credit from their Reserve banks only by discounting short-term, self-liquidating, agricultural, industrial, or commercial paper arising out of actual transactions. The realization grew that the amount of "real bills" could be blown up disproportionately during times of inflationary bidding for goods, and, conversely, that it could constrict unduly during periods of depressed business conditions. Furthermore, the American economy was developing needs for new and more flexible credit forms—needs which could not be met within the old "real bills" framework. Commercial banking changed to meet these needs. Congress also changed the law to free Federal Reserve credit from being based on "real bills" alone. Today, when member banks borrow from a Federal Reserve bank, they have three choices as to the collateral they may offer: (1) Obligations of the United States, (2) eligible paper, or (3) other paper satisfactory to the Reserve bank. Mr. RETJSS. D O you mean these "real bills," Mr. Martin, by eligible paper? Mr. MARTIN. Well, it has been broadened over the years, Mr. Reuss, as we have tried to adapt to new developments. You remember originally that not even Government bonds were to be eligible for discount. This was broadened as we went along. And we are now talking about the possibility of using municipal securities and other sound paper as collateral for Federal Reserve advances to member banks. If, however, they take the third choice, they must pay a penalty rate of interest, one-half of 1 percent higher than the rate that applies in the other two cases. Member banks have had no difficulty making this choice, and have shown an overwhelming preference for the simpler, less expensive method of offering U.S. dbligations as security for their borrowings. The technical requirements of present law, such as those with respect to maturity and relation to "actual" commercial transactions, exclude large volumes of perfectly sound paper as a basis for Federal Reserve credit, except at a penalty rate of interest. The reasons the Board advocates a change in these provisions are set forth in the following excerpts from our letter of August 21, 1963, to your chairman, transmitting a draft of the proposed bill, which has been introduced in the House by Mr. Kilburn, H.R. 8505, and in the Senate by Senator Robertson, S.2076: As long as member banks hold a large enough volume of Government securities, they need not, of course, be particularly concerned as to the eligibility for discount 12 THE FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS with the Reserve banks of customers' paper held by them. Since World War II, however, there has been a sharp net decline in the aggregate holdings of Government securities by member banks. If any substantial increase in economic activity should cause banks to reduce their holdings of Government securities in order to meet increased credit demands, many banks would be obliged to tender other kinds of collateral if they should seek to obtain Federal Reserve credit. If such a situation should develop, the Reserve banks could accept technically "ineligible" paper as collateral for advances to their member banks only under section 10(b) of the Federal Reserve Act at a rate of interest one-half of 1 percent above the regular discount rate. However, the necessity for distinguishing between "eligible" and "ineligible" paper would give rise to cumbersome administrative procedures that are not warranted by the exigencies of current banking conditions. In order to avoid these problems, it would clearly be preferable to move in advance and to revise and update the law so as to eliminate the existing restrictions with respect to "eligible paper." The Board of Governors and the Federal Reserve banks believe that such a revision of the law would be desirable so that the Reserve banks will always be in a position to perform promptly and efficiently one of their principal responsibilities—the extension of appropriate credit assistance to member banks to enable the latter to meet the legitimate credit needs of the economy. I hope that this legislation will be given favorable consideration by your committee. You have asked for comments on two other bills. One of these, H.R. 9631, would abolish the Board of Governors and the Federal Open Market Committee. I t would establish a new 12-member Federal Reserve Board under the chairmanship of the Secretary of the Treasury. I t would increase the Federal Advisory Council from 12 members to as many as 52 and include among them the Comptroller of the Currency and the Chairman of the Federal Deposit Insurance Corporation. Finally, it would provide for an annual audit of the Federal Reserve System by the General Accounting Office. While time to study this bill has been limited, since it was introduced only 6 days ago, the issues it raises have been studied intensively over the years. As Ave look back today on the 50th anniversary of the signing of the Federal Reserve Act, we are approaching other anniversaries. On J a n u a r y 29, 12 years will have elapsed since I transmitted to your chairman replies by the Board of Governors to an extensive and searching questionnaire he addressed to us in his capacity as chairman of the Subcommittee on General Credit Control and Debt Management of the Joint Committee on the Economic Report, now the Joint Economic Committee. Coincidentally, J a n u a r y 29 will also be the first anniversary of the opening of your committee's first hearing under your present chairman, at which I had the pleasure of introducing to you my fellow Board members and the presidents of the Federal Reserve banks. You may recall that at that time I commended to your attention the comprehensive study of the Federal Reserve that Mr. Patman directed in 1952. I n commenting on the issues before you today, I shall borrow freely from the material developed by that study. A t the outset, H.R. 9631 raises the issue of whether the Secretary of the Treasury should exercise control over the Federal Reserve System. To oversimplify only slightly, the question is whether the principal officer in charge of paying the Government's bills should be entrusted also with the power to create the money to pay them. The Congress concluded in 1935 that Secretaries of the Treasury should THE FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS 13 not be faced with a conflict of interest of this magnitude, and amended the Federal Reserve Act to discontinue their service on the Board of Governors. I n debate on the Banking Act of 1935, the then chairman of the Senate Banking and Currency Committee, Carter Glass, speaking from the experience he had gained from service as chairman of your committee and as Secretary of the Treasury, commented as follows: * * * with respect to the Secretary of the Treasury, it was urged—and I know it to be a fact, because I was once Secretary of the Treasury—that he exercised undue influence over the Board; that he treats it rather as a bureau of the Treasury instead of as a Board independent of the Government, designed to respond primarily and altogether to the requirements of business and industry and agriculture, and not to be used to finance the Federal Government, which was assumed always to be able to finance itself. W i t h reference to your question, Mr. Eeuss, may I interject t h a t immediately after the Federal Reserve-Treasury accord, some of the banks found they didn't have all the Government securities t h a t they needed to discount at the window, and they were very surprised to find that they could use anything else besides Government bonds. I had several delegations come to me at t h a t time on that point. Monetary policy should be directed towTard gearing the supply of money and credit to the needs of the economy as a whole, not the needs of the Treasury. This principle was laid down more precisely in 1950 by the Douglas Subcommittee on Monetary, Credit, and Fiscal Policies, quoted with approval in the 1952 report of the Patman subcommittee, as follows: We recommend that an appropriate, flexible, and vigorous monetary policy, employed in coordination with fiscal and other policies, should be one of the principal methods used to achieve the purposes of the Employment Act. Timely flexibility toward easy credit at some times and credit restriction at other times is an essential characteristic of a monetary policy that will promote economic stability rather than instability. The vigorous use of a restrictive monetary policy as an anti-inflation measure has been inhibited since the war by considerations relating to holding down the yields and supporting the prices of U.S. Government securities. As a longrun matter, we favor interest rates as low as they can be without inducing inflation, for low interest rates stimulate capital investment. But we believe that the advantages of avoiding inflation are so £reat and that a restrictive monetary policy can contribute so much to this end that the freedom of the Federal Reserve to restrict credit and raise interest rates for general stabilization purposes should be restored even if the cost should prove to be a significant increase in service charges on the Federal debt and a greater inconvenience to the Treasury in its sale of securities for new financing and refunding purposes. This is not to say that the Federal Reserve should operate in isolation from the Treasury. On the contrary, we enjoy cordial and close relations with the Secretary and we are working together in harmony to meet our separate responsibilities. Another question thoroughly explored in 1952 was the role of the Federal Open Market Committee. The Board's replies to the Patman subcommittee questionnaire included the following statement on this subject: The present arrangement, however, under which open market operations are placed under the jurisdiction of a committee representing the Reserve banks as well as the Board is consistent with the basic concept of a regional Federal Reserve System. It provides a means whereby the viewpoints of the presidents of the Federal Reserve banks located in various parts of the country, with their technical experience in banking and with their broad contacts with current 14 THE FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS credit and business developments, both indirectly and through their boards of directors, may be brought to bear upon the complex credit problems of the System. It promotes systemwide understanding of these problems and closer relations between the presidents and the Board in the determination of System policies. In practice the open market policies of the Open Market Committee and the credit policies of the Board have been coordinated and the existing arrangement has worked satisfactorily. The 1952 Patman subcommittee report concluded that "the present arrangement serves a useful purpose and there is no reason to disturb it." I concur in that conclusion. I n my judgment, the present arrangement governing membership on the Open Market Committee has produced a body of capable, qualified men, beholden to no group or faction in private or public life, and dedicated exclusively—in accordance with the oath taken by every one of them—to the service of the whole American public. I t pleases me that you will have the opportunity to become better acquainted with them as these hearings progress. And may I interject here, Mr. Chairman, that I hope you will call some of the chairmen and perhaps other class C directors of the Federal Eeserve System throughout the country. We have some very distinguished men serving as chairmen of the banks. We have Mr. Canham, who is chairman of the Boston Federal Eeserve Bank, the editor of the Christian Science Monitor in Boston. We have Mr. Eeed in New York, former head of General Electric. We have Mr. Atherton Bean, in Minneapolis, who is head of the International Milling Co. We have Mr. Whitman, president of the Western Pacific Eailroad in San Francisco, who is chairman of the board. And I could name others. We have Mr. Eebsamen, of Little Eock, Ark., who is chairman of the St. Louis Federal Eeserve Bank. All of these men have had direct experience with this, and contact with it, and are rendering very distinguished service to the System. And I think you would be doing a service to all of us if you asked some of them. The CHAIRMAN. We will seek the best information we can get, Mr. Martin. I am sure those gentlemen can be very helpful. I notice that for some time no class C director had been a class A orB. Mr. MARTIN. He has moved from that to a class C director when in our judgment his experience warranted it. But it has been quite the execption, not the rule. I n many instances, our class C men have been presidents of universities. We had Mr. Killian, the president of M I T serving The CHAIRMAN. There is no attack being made on class C directors. Mr. MARTIN. Eight. I just wanted to point out The CHAIRMAN. Or class A or class B. Mr. MARTIN. I realize that. I just wanted to point out some of the men we have been fortunate enough to have active in the System. The CHAIRMAN. We will draw on them during these hearings, I am sure. Mr. MARTIN. A third issue raised by H . E . 9631 relates to the number of members of the Board, and the length of their terms. I n my judgment, a 12-man Board would be unwieldy—and I might add parenthetically that the same would be true of a 52-member Federal advisory committee, as provided for in section 2 of the bill. If any change is to be made in the size of the Board, I would favor reducing THE FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS 15 it, possibly to five members, rather than enlarging it. I n our reply to the 1952 Patman subcommittee questionnaire, the Board commented as follows concerning terms of members: * * * A considerably shorter term, say a term of 6 years, without any prohibition against reappointment, might be sufficiently long and might be more practicable. The elimination of the prohibition of the law against reappointment of a member at the expiration of his term would permit the maintenance of a Board membership over the years having the requisite knowledge and experience regarding the Board's problems. H.R. 9631 also would provide that the new Federal Reserve Board members be appointed with "due regard to a fair representation of the financial, agricultural, industrial, commercial, labor and consumer interests, and geographical divisions of the country/' This would continue the present provisions regarding qualifications for appointment to the Board of Governors, except that reference to labor and consumer interests would be added, and the present prohibition against appointing more than one member from a Federal Reserve district would be dropped. I would favor dropping from the Federal Reserve Act any reference to representation of particular segments of our society. Our efforts should be bent toward obtaining qualified men who will act in the interest of the Xation as a whole. Repealing the restrictions based on district lines would assist, in my judgment, in this primary goal of appointing the best men available for service on the Board. Another provision of H.R. 9631 would require an annual audit of the Board and the Reserve banks by the General Accounting Office. Until 1933, the GAO audited expenditures by the Board, but not the Reserve banks. The Banking Act of 1933, however, provided that the "Board shall determine and prescribe the manner in which its obligations shall be incurred and its disbursements and expenses allowed and paid * * *." The House and Senate committee reports said the change was made in order to leave "to the Board the determination of its own internal management policies." Thus, Congress in 1933 freed from GAO audit the only part of the System that was ever subject to it. Since 1952, the Board has been audited annually by independent certified public accounting firms, and their audit reports have been submitted to the two Banking and Currency Committees. Topflight auditors have been used; Arthur Andersen & Co., Price Waterhouse & Co., and now Haskins & Sells. The Federal Reserve Act provides that the Board "shall, at least once a year, order an examination of each Federal Reserve bank." The Board maintains a staff of examiners who devote themselves exclusively to this work. The Board's instructions to its examiners require, briefly, that the examination shall determine: (a) Each bank's financial condition through appraisal of its assets and verification of its assets and liabilities; (&) its proper discharge of all its responsibilities; and (c) its compliance with all applicable provisions of law and regulations. Each year, an outside commercial auditor, currently Haskins & Sells, accompanies the Board's examiners on their examination of one of the banks, to review and observe the examination procedures. Also, each bank has a resident auditor, responsible directly to the bank's board of directors, and not dependent on any of the bank's officers for security of position. Throughout the year, he and 16 T H E FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS his staff make comprehensive audits of all phases of the bank's operations, reporting directly to the board of directors of the bank. Copies of these reports are reviewed by the Board of Governors of the Federal Reserve System. I n sum, then, we have in each Reserve bank an internal audit program conducted the year around by the bank's resident auditor and his staff, who, by a deliberately established plan of organization, are directly responsible to the board of directors and independent of the bank's operating management. I n addition, a staff of examiners directly employed by the Board of Governors in Washington examines each bank every year, and reports directly to the Board of Governors. We have the statement of certified public accountants of national repute that the examination procedures employed by the Board's staff fully conform with generally accepted auditing standards. This combination of internal and external scrutiny provides an audit coverage of the Reserve banks that is unexcelled in any other organization, and is as objective and independent in approach as human ingenuity can devise. I t is difficult to perceive how the GAO or any other audit group could achieve a more effective result. You also have asked for comments on H.R. 3783, which would provide for the retirement of Federal Reserve bank stock. As I testified at your hearings on this question in I960, Federal Reserve bank stock, while not an indispensable feature of the System, has served as a means of integrating member banks and bankers into the System. I t has provided a businesslike method for electing two-thirds of the directors of the Reserve banks, and I see no reason to change it. ^The stock is an attractive investment for member banks. Without saying that it is a principal consideration in their attitude toward membership in the System, I feel that in view of the fact that most smaller State banks are not members and a number of smaller national banks are pressing for release from membership, it w^ould be unwise to tip the scales further in the direction of making membership unattractive. Admittedly, other methods could be found for electing directors and retirement of the stock would increase the payments from Federal Reserve earnings into the Treasury, by roughly the amount of the dividend payments, $29 million in 1963. B u t I would earnestly advise against making this change, not only because of its potentially disruptive effect on relations with member banks but also because inevitably some observers would view it as a step toward nationalization of the banking system while others would read into it some other significant portent of basic monetary changes. Fear of public misunderstanding should not deter us from making changes for which there is a demonstrated need or prospect of real benefit, but, in my judgment, those conditions are not met by this proposal. The purpose of the Federal Reserve System is to contribute, to the maximum extent that monetary policy can contribute, to the achievement of sustained high employment, stable values, and a rising standard of living for all Americans. I t cannot, of course, achieve those goals alone, but it can contribute, and I can assure you that it is unreservedly dedicated to that end today. I n the last analysis, whether an institution renders good or bad public service will always depend more upon the character of the hu T H E FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS 17 man beings engaged in its operations than upon its organizational form and structure. The solution of difficult and complex problems depends upon the ability of conscientious men to reconcile differences of opinion and come to a meeting of the minds on what best serves the public's good rather than upon the forms of institutional organization. I n his first inaugural address as President, Woodrow Wilson gave us some counsel about dealing with our economic system that I believe applies as well to the Federal Eeserve itself. These are his words, as they are inscribed below his plaque in the Federal Reserve Building—1 am glad, incidentally, Mr. Chairman, that your committee came down and visited us last year and saw this plaque in our building. The CHAIRMAN. We were disappointed. We saw a plaque for Senator Glass, but we did not see any plaque for Senator Owen. You know, Senator Owen was chairman of the Banking and Currency Committee of the Senate, and was coauthor of the bill. And he favored Federal deposit insurance, and a lot of things that would help just the plain people of the country. And evidently they didn't look with favor on that. You don't even have his picture in the Federal Reserve Building. Mr. MARTIN. Senator Owen deserves recognition, Mr. Patman, but I would like to close with President Wilson's statement, as inscribed: We shall deal with our economic system as it is and as it may be modified, not as it might be if we had a clean sheet of paper to write upon; and step by step we shall make it what it should be, in the spirit of those who question their own wisdom and seek counsel and knowledge, not shallow self-satisfaction or the excitement of excursions whither they cannot tell. I am very glad to recognize Senator Owen's part in this. The CHAIRMAN. I am glad that you are. But I don't see any recognition around the Federal Reserve Board. Mr. MARTIN. There is limited space, Mr. Chairman, for quotations. But I am sure we have Senator Owen's writings in great detail. The CHAIRMAN. H e was one of the most brilliant men I ever knew. And I think he knew more about the banking system than any other one man in Congress at the time. And I was disappointed that he was not recognized at all in the Federal Eeserve System. Mr. Martin, I appreciate your statement. I am sure the members of the committee do. You seem to think that the Congress gave you a sort of an indenture or a trust agreement to operate the monetary policies of the Nation. Now, you recognize that the Constitution of the United States says that Congress shall coin money, which has been construed by the Supreme Court to mean print money, and regulate its value, which, of course, would include interest rates. Now, the Constitution says that Congress shall do that. Do you believe that Congress has a right to establish an agency of the Government, to delegate power to that agency, and leave that agency wholly independent from the Government? Do you believe that that would be constitutional ? Mr. MARTIN. I assume that the Congress knew what it was doing when it enacted the Federal Eeserve Act. And I don't think there has been any question of the constitutionality of the Federal Eeserve Act. 18 T H E FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS The CHAIRMAN. Well, I think there is a great difference between what Congress did and what the Federal Reserve has done. I think that is something that there is a difference of opinion about. I don't think some of the things the Federal Reserve has done were contemplated at all. I think if the Federal Reserve had carried out what was anticipated by Congress, the commercial banks, for instance, would pay for clearing their checks—section 16 mentioned that. Instead of that, the Federal Reserve, over the years, has commenced paying for those expenses, and now you pay out about $140 million, $150 million of money that would go into the Treasury, to clear the checks of the member banks. I don't think that was ever anticipated. I know that a central bank was not anticipated under Mr. Wilson in 1913. And I don't think a central bank existed in this country until the act of 1935, when the Open Market Committee was legalized. I say "legalized" deliberately, because during that time, 1913 to 1935, the 12 banks, through their governors, were operating an unofficial open market committee—I lmow that. B u t they had no legal power to do so. Because t h a t was the decision by Congress under Woodrow Wilson. Some people wanted a board that the bankers were represented on to fix the volume of money and the cost of the money. Wilson said he would not permit that at all, that he wanted 12 banks, they would be separate and independent, and have no central bank. Well, 22 years after Mr. Wilson was gone, we passed the 1935 act which did just exactly that, gave us a central bank. Now, I notice my friends on the Republican side have a different view of this, and have given out a statement to that effect, which makes it important and germane that I mention just a little bit about the history of the Federal Reserve bank. I n 1913, afer the committees had been appointed under preceding administrations to study the monetary subjects, they made reports, and Congress considered them in 1913—but those reports didn't want a central bank. They wanted a separate and independent agency, just like you claim to have now—to run the monetary affairs. A n d they were disappointed when the House and Senate passed bills that denied them t h a t privilege. Therefore, the Republicans fought against the Federal Reserve Act. There were only four Republicans in the Senate that voted for it, including one progressive—Senator Norris. So there were just three, really. And in the House it was about the same ratio—the Republicans, because we would not allow them to have a central bank that was operated really for the banks themselves, to run the people's monetary affairs—they were against it. Now, in 1935, when the Glass-Steagall bill was here—that was, of course, that great change in the Federal Reserve advocated at that time—when that bill passed here, this committee, and when it passed the House, they didn't have any open market committee that bankers representatives could sit on. Therefore, the Republicans voted against it again here in the House—by an overwhelming vote—they didn't want any part of it. But when it went to the Senate, it was fixed up so that the Open Market Committee was legal and banker representatives would be on the Open Market Committee, and they would have it in control in a THE FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS 19 way like you claim that you have it now, then the Republicans came in and voted for it. And the House adopted the report almost without objection. This shows t h a t our Republican friends have always been against any part of the Federal Reserve System except the central banking part, where their bankers would have a great deal of voice in it. That is our fight right here now, Mr. Martin, if I understand it right—if there is a fight. You contend that you are kind of off from the Government, that the President cannot tell you what to do. That is your contention, is it not—he cannot tell you what to do. You are disassociated from the executive branch of the Government, and from the legislative branch. The only way we could speak to you is by a law that is passed and apnroved by the President, which is a rather indirect way, and a very difficult way—in a democracy especially—where there are so many people in a democracy, any one of whom can say no and make it stick. Now sometimes, Congress passes a law that gives some people a lot of power. And then the people who have that power take even more power. Now on March 4,1951, when you made that so-called accord, you actually seceded from the Government—if I view your contention right, you actually seceded from the Government. Mr. MARTIN. That is not correct, Mr. Patman. The CHAIRMAN. I n one hearing I asked Mr. Sproul, who was then the president of the New York Federal Reserve Bank—I said, "Isn't it a fact that you were waiting for a time when Mr. Truman would be kind of low in popularity, where you could sort of defy him and get by with i t ? " He said, "Oh, no. We decided August 1950 to go our way, to go our own way." I n other words, you were getting away from the Government. Now, then, that is what we are trying to find out here*—we have created an agency that has the power to create money on the credit of the Nation, it is a mortgage on all our incomes, all of our property— and we want to know if that agency has gone over to itself and doesn't feel obligated to its master, the Congress of the United States. We want to look into it, and see something about it, and see what is being done. I t is my contention, Mr. Martin, that if we had had the Federal Reserve System operating in the people's interest and the Government's interest the last 40 years we would not have any $300 billion debt today, we might not even have any debt. But instead of that, you have permitted the commercial banks to use the credit of the Nation freely, to obtain Government bonds, and they have been getting interest on the bonds, and our debt has been piling up. We not only would not have that $300 billion debt, but our budget would be tens of billions of dollars less than it is. So I think we would be in a lot better shape if the Federal Reserve had operated in the people's interest. And I think they could have done this without any sort of inflation or deflation. That is how serious I think it is. You bring up the matter of eligible paper. I just want to say that in my view, eligible paper is an important and very valuable idea. 20 THE FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS You know, Woodrow Wilson insisted on that. H e said, fix it so that when a banker has got farmers and small businessmen waiting in the outer office to see him, the banker will want to see them, because the paper that they give him will be eligible as a reserve in the Federal Reserve bank upon which the bank can issue money, and the banking system can issue about $10 to $1, and get interest on about $10 to $1. Therefore, they were anxious to see the small businessmen, and anxious to see the farmer. But the law was changed, and they could use Government bonds to get the reserves, and the farmers and little businessmen could not get an appointment with the bankers any more, they didn't want to see them—they had to see too many of them, do business with too many of them before it would amount to anything. So I think the eligible paper being taken off, I think was a terrible thing. You take back in the 1930s, when the hometown merchant was being inundated by the absentee owners. If the commercial banks had come to the aid and rescue of that hometown merchant, he could have whipped the socks off of these outside people, these absentee owners. I have never known a case when a good merchant, given adequate credit, couldn't hold his own and meet competition with the outside people, and even lick them at their owTn game. I can give you lots of instances of it. But the banks were not interested in making these small local loans, evidently. I think a lot of these ghost towns all over America today can be charged to the failure of many of the banks—not all of them—to come to the aid and rescue of their own local people, when it would have been to their interest and benefit to do it. When an outside concern comes into town, the money, the profits, go out of town that night. They go to New York, California, Chicago; the profits don't stay in the locality at all. One of the main things that kept our little towns strong was the reserves in the local bank that were used for local credit by local people. But I think the banks did a great disservice, not only to the hometown merchant and the local community, but to the entire Nation, when they abandoned their local people. And today it looks like we are going to have about 12 big cities in the country with practically all the population—little towns dried up, the countryside bleak. And I think the banks, and the Federal Reserve System in particular, in failing to see these things, have contributed greatly to that devastating condition. Therefore, I feel that we should look into this thing, Mr. Martin, and see if any mistakes have been made, not so much to punish people who have made them, but to make reasonably certain that they are not made in the future, and that the System is operated for the benefit of the Government and for the people. I am taking more time than I should, and I want all the members to have an opportunity. And we will have that opportunity—even if we have to have longer meetings and more of them. But I do want to invite your attention to the fact that when the System first started, it made money. It charged the banks for the clearance T H E FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS 21 of checks, it charged them for the use of the discount window. But the discount window is practically closed today. These monumental buildings all over the country—what is in 1 here ? What do they do for the Government ? You could do it in a room half or one-fourth of the size of this room—what is being done, what was contemplated under the original Federal Reserve Act. But other things have been done. And these things are not in accordance, in the way I view it, with the act. Now for instance, a large part of the earnings of the 12 Federal Reserve banks used to come from what they themselves did, right there in their offices. There was the discount window, and so forth. But now about 99 percent of the earnings of the 12 banks comes entirely from the portfolio of the Open Market Committee, and that portfolio is entirely in New York—about $33 billion, isn't it? Mr. MARTIN. $33 billion. The CHAIRMAN. About $33 billion. And on that $33 billion the New York bank collects about a billion dollars interest each year, and the New York bank parcels that out among the other 11 Federal Reserve banks. I t comes to about 99 percent of their earnings, and it is paid by the Government, the taxpayers. Only 1 percent comes from discounts, advances, and foreign currencies. Now, the reason I introduced the bill to make you account for that is because you take that billion dollars and you spend as much of it as you want to, and then, of course, the balance goes into the Treasury. But I feel we ought to have some audit on that, some Government audit, just like all other Federal agencies. That is the reason I introduced that bill. Now, I have taken more time than I would like to take at this time. But I would like to say that we will go into all these things thoroughly and impartially. And we are not trying to destroy anyone. We are not out for anything except trying to serve the public interest, I assure you of that, Mr. Martin. And anything that is good in the System—and lots of things are good in the System—we want to keep them, don't want to harm them, don't want to hurt them in any way. But things that should be changed, we will endeavor to get them changed—at least we will try through the legislative process to get them considered at least. Mr. MARTIN. Could I have just a minute to make a comment on this, of a broad general nature ? The CHAIRMAN. Yes, sir. Just a minute—until I have an agreement with Mr. Widnall. Would it be all right if we got permission to sit this afternoon during general debate ? Mr. TAFT. Mr. Chairman, I have a bill on the floor. The CHAIRMAN. Shall we meet immediately after the Congress adj ourns ? Will that be all right ? Mr. BOLTON. Mr. Chairman, with all due respect, I cannot attend after 3:30. I have made plans sometime ago on that basis. Mr. WIDNALL. Mr. Chairman, what is the situation tomorrow? The CHAIRMAN. I don't know what it is. Would you be willing Mr. WIDNALL. Could Mr. Martin return tomorrow ? The CHAIRMAN. Yes, A t 10 o'clock. 22 T H E FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS Mr. WIDNALL. W h a t about the schedule for the afternoon ? The CHAIRMAN. I don't know about that. Mr. WIDNALL. I know on the particular bill before the House this afternoon, there is a great deal of interest on our side. A number of Members have bills; and a number wish to offer amendments. This is the Library Services Act; and back within our own congressional districts there is a great deal of interest. The CHAIRMAN. Well, I won't do anything now. Mr. TALCOTT. Why don't we just start meeting at night and be done with it ? The CHAIRMAN. Well, I think we would have some problems there. Mr. WILSON. Mr. Chairman, I t seems when we held our meetings to set these hearings up, Mr. Vanik made a suggestion that I thought we were going to follow—that wTas that the prepared statements would be given to us in advance, in order that we could spend more time interrogating witnesses, and not have to take so much time listening to the prepared statements. I n that way—it seemed satisfactory to everyone. Do you recall that procedure ? The CHAIRMAN. I am glad you mentioned that. I am in full accord with that. I doubt that the staff received these in time. Hereafter, I want to ask the staff to make doubly sure that the witnesses who have prepared statements to give them to us in plenty of time, so we can distribute them to the members, and then they can more intelligently ask questions about them. So I guess it is 12 o'clock Mr. MARTIN. Could I just make one comment in response The CHAIRMAN. Yes—if they don't object while the House is sitting. Mr. MARTIN. This won't take but a minute. You and I don't read economic history the same way, Mr. Chairman, as you know. W e have discussed this many times. We have in our response to the Patman questionnaire I referred to— and I would like to put it in the record, if you would be agreeable to this—the answer to question 8, "Are (a) the Board of Governors; and (b) the Federal Open Market Committee parts of the executive branch of the U.S. Government? If not, what is their status? Discuss with respect to the constitutional issues involved." We have a very lengthy answer to that. The CHAIRMAN. Just what question is that ? Mr. MARTIN. I said "a"—the question you asked us at that time was, "Are (a) the Board of Governors and (b) the Federal Open Market Committee parts of the executive branch of the U.S. Government?" The CHAIRMAN. All right. I think that is very important. Without objection, you may insert it at this point in the record. Mr. MARTIN. I would like to put this into the record. The CHAIRMAN. I think it is important. (The documents referred to follow:) 8. Are (a) the Board of Governors and (b) the Federal Open Market Committee parts of the executive branch of the U.S. Government? If not, w h a t i s their status? Discuss with respect to the constitutional issues involved as you understand them. The courts have not had occasion to determine in which of the three branches of the U.S. Government the Board of Governors and the T H E FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS 23 Federal Open Market Committee should be classified. Irrespective of the branch of Government in which they may be deemed to fall, however, these agencies have been established by Congress to exercise important and unique functions of Government—generally described as reserve banking functions—which relate to the regulation in the public interest of the volume, availability, and cost of money; and, recognizing the need for independence of judgment in the exercise of these functions, Congress has indicated its intent that the Board and the Committee shall act according to their own best judgment and discretion, subject always to the limitations and policy directives prescribed by the law. Credit and monetary functions, like the functions of the judiciary, depend for their effective performance upon impartial and objective judgment. The country cannot prosper without a sound basic economy and sound credit conditions. To maintain such conditions, it is essential that money—the "medium of exchange" by which goods and services change hands—must adequately and flexibly serve its purpose in a complex economy. To this end, some Government agency must be given the responsibility, under appropriate congressional authority, for influencing the volume and availability of money in the public interest; and it is this responsibility which is vested in reserve banking authorities. Through instruments of credit policy, such as the fixing of discount rates, open market operations, and the determination of bank reserve requirements, these authorities can, within limits set by law, restrict credit during inflationary periods and conversely make it more readily available during periods of depression. Because money so vitally affects all people in all walks of life as well as the financing of the Government, the task of credit and monetary management has unique characteristics. Policy decisions of an agency performing this task are often the subject of controversy and frequently of a restrictive nature; consequently, they are often unpopular, at least temporarily, with some groups. The general public in a democracy, however, is more apt to accept or tolerate restrictive monetary and credit policies if they are decided by public officials who, like the members of the judiciary, are removed from immediate pressures. Historical background There is a long-established tradition both in this country and in other democracies 3 that the proper exercise of reserve banking functions requires that it be insulated against private or public pressures whose immediate interests may not coincide with the best long-run interests of the country. When the First Bank of the United States was chartered by Congress in February 1791,4 it was placed under private management, except for ownership of some of its stock by the Government and for the furnishing of periodic statements to the Secretary of the Treasury. Hamilton expressed the view that "it would, indeed, be little less than a miracle should the credit of the bank be at the disposal of the Govs For a treatment of the current relationships of central banks to foreign governments, see4 the answer to question G-51. 1 Stat. 191. 24 THE FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS eminent, if, in a long series of time, there was not experienced a calamitous abuse of it." 5 The First Bank's charter expired in 1811, and a new charter was granted by statute to the Second Bank of the United States in 1816. A certain element of Executive influence was provided for in the charter of the new bank by a provision authorizing the President to appoint 5 of the 25 directors of the bank, but otherwise the Second Bank, like its predecessor, was not subject to Executive direction. Even with respect to the limited authority of the President to appoint directors, both those who favored and those who opposed that right recognized the need for maintaining the independence of the Bank. Thus, J o h n Randolph, who objected to the proposal, stated: 6 The objection was vital; that it would be an agency of irresistible power in the hands of any administration; that it would be in politics and finance what the celebrated proposition of Archimedes was in physios—a place, the fulcrum from which, at the will of the Executive, the whole Nation could be hurled to destruction, or managed in any way at his will and discretion. One of the principal proponents of the proposal was Secretary of the Treasury Dallas; even he, however, took pains to point out that his proposal would not inject undue Executive influence into the administration of the bank. 7 When a proposal for the establishment of a Treasury Bank was advanced in 1830, the House Ways and Means Committee felt that such a Government Bank would invest the executive branch of the Government "with a weight of moneyed influence more dangerous in character, and more powerful in its operation, than the entire mass of its present patronage." 8 The committee felt also that such a Bank "would have scarcely any faculty of resistance when appeals for indulgence should come from all quarters of the Union, sustained by the strong plea of public distress and embarrassment," and that "the temptation to supply the Federal Treasury by the easy process of bank issues, rather than resort to the unpopular process of internal taxation, would be too fascinating to be resisted." 9 Intent of the Federal Reserve Act The f ramers of the Federal Reserve Act in 1913 clearly had in mind the same principles regarding the independent exercise of credit and monetary functions as those which had motivated Congress in the early days of the Republic. This is indicated by the legislative history of the act. 5 6 7 Hamilton's report on a national bank, 2 Annals of Congress 2051. 29 Annals of Congress 1111 (1816). In a letter to Calhoun, then chairman of the House Committee on a National Currency, Secretary Dallas stated : "An apprehension has sometimes been expressed, lest the power of the Government, thus inserted into the administration of the affairs of the bank, should be employed eventually to alienate the funds and destroy the credit of the institution. * * * there can be no reasonable cause for the apprehension here. * * * Whatever accommodation the Treasury may have occasion to ask from the bank, can only be asked under the licence of a law; and whatever accommodation shall be obtained, must be obtained from the voluntary assent of the directors, acting under the responsibility of their trust." (Clark and Hall, Bank of the United States, p. 616.) Again, in answer to Webster's statement "that to be useful a bank must be independent of Government," Grosvenor insisted that "the power of appointing directors could not give to Government the influence which Mr. Webster apprehended. * * * He should deprecate as much as Mr. Webster a real Government Bank." (29 Annals of Congress 1213.) 8 6 Register of Debates in Congress, pt. II, appendix, p. 132. 9 Ibid., p. 131. Ex-President Monroe expressed views to the same effect: "A bank thus instituted, being under the control of the Executive, by the appointment of its directors, and in all its operations, might, in the hands of a bad administration, be wielded as an instrument to sap the foundation of the Government itself." (Niles' Register, XLI, 82.) THE FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS 25 I n the report of the House Banking and Currency Committee on the original act, Chairman Carter Glass stated: 1 0 It cannot be too emphatically stated that the committee regards the Federal Reserve Board as a distinctly nonpartisan organization whose functions are to be wholly divorced from politics. Commenting upon the importance of the Board's functions, Senator Owen, who was the chief sponsor of the Federal Eeserve Act in the Senate, stated during the debates: 1 X I need not say, Mr. President, that no one can have any doubt that the members of the Federal Reserve Board should be men of the most distinguished attainments, men who should rank favorably in comparison with members of the Supreme Court of the United States, because in reality this Federal Reserve Board will be a supreme court of American finance, safeguarding the commercial interests of this Nation, protecting our gold reserve, protecting our banking system, protecting our commercial system, protecting the individual credit of the private citizen, and giving him a fair deal in the struggle of commercial and business life, and seeing to it that every citizen shall receive the just amount of credit to which he is entitled by character and by resources. I n the course of the debates, there was much discussion of the suggestion that the bankers of the country should have a part in selecting the members of the Board. This suggestion was definitely rejected on the theory that the members of the Board should not be chosen by those whom it would be expected to regulate and supervise.12 There was also considerable discussion of the possible influence which the President might have upon the exercise of the Board's functions. Denying t h a t the President would have such influence, Mr. Barkley stated on the floor of the H o u s e : 1 3 There is no Board until the President appoints one, and the act of appointment and the manner of appointment are not similar nor coextensive with the acts of the Board after they are appointed. The President does not control the action of the Federal Reserve Board after they are appointed any more than he controls the action of the Interstate Commerce Commission after he appoints its members. S p e a k i n g of t h e p r o v i s i o n g i v i n g m e m b e r s of t h e B o a r d s t a g gered terms, Representative Temple pointed out t h a t an incoming President— will be 3 years in office before he will appoint four out of the seven members, and unless he should appoint a Comptroller of the Currency he will appoint during his whole term only three out of the seven members. This change in the bill practically takes the Federal Reserve System out of politics.14 During the debates it was emphasized that the Board should be a nonpartisan agency which would represent and be responsible to the people of the United States. Thus, Mr. Borland stated: 1 5 * * * The Glass plan provides for a central Board of public officials, who have no private interests to serve, but whose sole duty is to represent the people 10 H . Rept. 69, p. 4 3 , 63d Cong. A t a n o t h e r point i n t h e report Mr. Glass observed t h a t for "obvious reasons i t is deemed best t h a t t h e Board shall annually r e p o r t to t h e House of Representatives, thereby establishing a direct relationship between t h e Board a n d t h e Congress." ( P . 44.) "12 Cong. Rec. vol. 50, p. 5998, Nov. 2 4 , 1 9 1 3 . I t w a s pointed o u t t h a t t h e r e w a s no more reason for bankers to choose members of t h e Board t h a n for t h e lawyers t o choose members of t h e Supreme Court or railroad officials to select t h e I n t e r s t a t e Commerce Commissioners. (Congressional Record, vol. 50, p. 4843.) 13 Congressional Record, vol. 50, p . 4789, Sept. 1 2 , 1 9 1 3 . 14 Congressional Record, vol. 5 1 , p. 1459. 15 Congressional Record, vol. 50, p . 4730, Sept. 1 1 , 1913. Similarly, Mr. P h e l a n s t a t e d : "The supreme oversight a n d control of t h e whole system * * * is vested in a board representing t h e public." (Congressional Record, vol. 50, p. 4673.) 28-680—64—vol. 1- 26 THE FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS of the United States in enforcing the law and preserving equality, soundness, and solvency in commercial banking. The provisions of the original Federal Reserve Act obviously contemplated a high degree of independence for members of the Board. Thus, in addition to the requirement that they shall be appointed only with the consent of the Senate, it gave them 10-year terms, 16 provided for the staggered expiration of terms so that there would be occasion for the appointment of a new member only once every 2 years, and made them removable by the President only "for cause." The length of the term of office was extended to 12 years by the Banking Act of 1933, and was further extended to 14 years by the Banking Act of 1935. Constitutional considerations As the result of early decisions of the Supreme Court of the United States upholding the power of Congress to establish the Bank of the United States as "a convenient, a useful, and essential instrument in the prosecution of its fiscal operation," 17 it is now well settled that Congress has constitutional authority to employ any means appropriate for carrying out its credit and monetary powers—its powers "to coin money" and "regulate the value thereof," "to borrow money on the credit of the United States," and "to lay and collect taxes." I n 1913, in order "to furnish an elastic currency" and for other monetary purposes, Congress enacted the Federal Reserve Act. Instead of utilizing one of the executive departments as it might have done or a single central bank as had been done in foreign countries, Congress established the Federal Reserve System, consisting of 12 regional banks operated for public purposes and subject to the overall supervision of a governing board which was described by the Attorney General shortly after the passage of the law as "an independent board or government establishment." 18 I n considering the question whether this or any other Government establishment created by Congress should be placed in the legislative, executive, or judicial branch of the Government, it should be borne in mind that the constitutional doctrine of separation of powers as between the three branches of the Federal Government is not a rigid but a flexible and qualified doctrine which is often difficult to apply to particular cases. Chief Justice Marshall in an early case observed that "the difference between the departments undoubtedly is, that the legislature makes, the executive executes, and the judiciary construes the law." 19 Frequently, however, these powers merge into one another and it is not always possible to say definitely whether a particular power is executive, legislative, or judicial. Moreover, even if the nature of a particular power can be determined, it is clear that the separation of powers doctrine does not demand the drawing of sharp lines of demarcation between the powers of the three branches of 36 I t is of interest here t h a t when t h e Comptroller General's office was set up i n 1921 and consideration was being given to his term of office, one Member of Congress compared t h a t office w i t h membership on the Federal Reserve Board in t h a t "both classes of officials have i m p o r t a n t duties to perform, which are strictly nonpolitical, and they should be entirely removed from politics." (Congressional Record, vol. 6 1 , p. 1081.) 17 McCulloch v. Maryland, 4 Wheat. 316, 422 (1819). See also Osoorn v. Bank of the United States, 9 Wheat. 738 (1824). 18 30 Op. Atty. Gen. 308, 311 ( 1 9 1 4 ) . 19 Wayman v. Southard, 23 U.S. 1, 44 (1825). THE FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS 27 Government, but recognizes that these powers may be blended and interconnected. 20 I n some cases, Congress has created Government agencies which perform rulemaking functions as agents of the legislative authority and which also exercise functions quasi-judicial in nature. The Board of Governors of the Federal Reserve System is such an agency. The most important functions of the Board are those affecting the money supply. Among these are the Board's authority to review and determine the discount rates established by the Eeserve banks with a view to accommodating commerce and business; to change the reserve requirements of member banks in order to prevent injurious credit expansion or contraction; and to prescribe such margin requirements with respect to securities as it deems appropriate for the accommodation of commerce and industry "having clue regard to the general credit situation of the country." I n the same category are the responsibilities imposed upon the Federal Open Market Committee for directing the open market operations of the Federal Eeserve banks with a view to accommodating commerce and business and with regard to their bearing upon the general credit situation of the country. I n these and other respects, the Board and the Open Market Committee prescribe rules and determine policies as agents and on behalf of the legislative branch. On the other hand, certain of the Board's functions are quasi-judicial in nature, such as those which it has in connection with administrative hearings and decisions. On the basis of the nature of its functions it may be that for certain purposes the Board can be regarded as an agency of one branch of the Government and for other purposes as an agency of another branch. The power of Congress to establish agencies to perform quasi judicial or quasi-legislative functions is unquestioned. It is also clear that Congress may constitutionally vest such agencies with authority to exercise independent judgment in discharging their duties. In the case of Humphrey's Executor v. United States,21 holding that Congress could constitutionally restrict the Presidential power of removal as to members of the Federal Trade Commission, the Supreme Court of the United States expressly declared that "the authority of Congress, in creating quasi-legislative or quasi-judicial agencies, to require them to act in discharge of their duties independently of Executive control cannot well be doubted. v 22 I n this connection, the Supreme Court stated: 2 3 The Federal Trade Commission is an administrative body created by Congress to carry into effect legislative policies embodied in the statute in accordance with the legislative standard therein prescribed, and to perform other specified duties as a legislative or as a judicial aid. Such a body cannot in any proper sense be characterized as an arm or an eye of the Executive. Its duties are performed without Executive leave and, in the contemplation of the statute, must be free from Executive control. * * * [Italics supplied.] 20 As stated in the Federalist P a p e r s , unless the t h r e e branches of t h e Government "be so far connected and blended as to give to ach a constitutional control over t h e others, t h e degree of separation which the maxim requires, a s essential to a free Government, can never in practice be duly m a i n t a i n e d . " (Essay No. 48.) 2*295 U.S. 602 (1935). 22 295 U.S. 629. 23 295 U.S. 602, 628. 28 T H E FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS Regarding the intent of Congress in enacting the Trade Commission Act, the Supreme Court declared: 2 4 Thus, the language of the act, the legislative reports, and the general purposes of the legislation as reflected by the debates, all combine to demonstrate the congressional intent to create a body of experts who shall gain experience by length of service—a body which shall be independent of Executive authority, except in its selection, and free to exercise its judgment, without the hindrance of any other official or any department of the Government * * * [Italics in original.] The Board of Governors, of course, operates in a different field from that of the Trade Commission and with respect to different subject matters. As previously indicated, however, in performing many of its most important functions, the Board exercises rulemaking powers as the agent of the legislative authority; and in certain other respects the Board performs quasi-judicial functions. The Federal Keserve Act and its legislative history show the intent of Congress that the Board shall exercise its own judgment and discretion in performing its duties. Consequently, if occasion should ever arise for judicial determination of the status of the Board, it would appear that, if the principle of the Humphrey's case is followed, the courts would hold that the Board is authorized to carry out its important reserve banking functions in accordance with its own independent judgment, "free from Executive control." I n any event, irrespective of the branch of Government in wThich judicial determination might place the Board and the Open Market Committee, such determination would not affect their authority to exercise the discretion vested in them by Congress. Where officials of the Government, including those in the executive branch, are charged by law with the performance of duties involving the exercise of discretion, the courts have held that the decisions of such officials are not subject to review or revision by the President. While it is the President's duty under the Constitution to "take care that the laws be faithfully executed," nevertheless, as stated by the Supreme Court in an early case, * * * it by no means follows [from the President's duty to "take care," etc.] that every officer in every branch of that [executive] department is under the exclusive direction of the President. * * * * * * * * * * * * * it would be an alarming doctrine that Congress cannot impose upon any executive officer any duty they may think proper, which is not repugnant to any right secured and protected by the Constitution; and in such cases the duty and responsibility grow out of and are subject to the control of the law, and not to the direction of the President.25 Conclusion I n the absence of an authoritative court decision on the subject, no definitive answer can be given to the question submitted as to the particular branch of Government in which the Board and the Open Market Committee may fall. Regarless of what answer may be given 24 295 U.S. at p. 625. ^Kendall v. United States, 12 Peters 610 (1838). This principle has often been recognized by the courts, the Attorneys General, and the Presidents themselves. As early as 1823, Attorney General Wirt stated: "But the requisition of the Constitution is, that he [the President] shall take care that the laws be executed. If the laws, then, require a particular officer by name to perform a duty, not only is that officer bound to perform it, but no other officer can perform it without a violation of the law; and were the President to perform it, he would not only be not taking care that the laws were faithfully executed, but he would be violating them himself." 1 Op. Atty. Gen. 624, 625 [Italics in original.] T H E FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS 29 to this question, however, it would not affect the authority and duty of the Board and the Committee to exercise their own best judgment and discretion, subject to the statutory restrictions and mandates imposed by Congress, in performing their responsibilities under the law. This is not to say, of course, that the Board and the Open Market Committee are not parts of the Federal Government or that they are intended to function entirely apart from and without regard to other agencies of the Government. On the contrary, they seek always to consider the policies of agencies functioning in related fields, as well as the programs and policies of the President, to the end that the policies of the Federal Reserve System and other Government agencies may be integrated to the greatest extent practicable. They also endeavor to cooperate with other agencies in considering common problems and in exchanging helpful information. W h a t has been said above as to the independent status of the Board and the Committee should not be interpreted as implying that the Federal Reserve System is a static or immutable organization. The System should be, and it is believed that it has been, a flexible institution with capacity for growth and adaptation to newT developments. I t has been and should be modified by Congress from time to time to conform to changing conditions. In this respect Chief Justice Marshall's words that the Constitution was intended "to be adapted to the various crises of human affairs" might well be applied to the Federal Reserve System. In whatever ways it may be modified or adapted to changing conditions, it is essential to the effective performance of the System's unique functions that the independence of judgment reposed by Congress in the Board and the Open Market Committee be preserved (S. Doc. 123, pt. 1, 82d Cong. 2d sess., pp. 242-248). JOINT STATEMENT OF THE FOLLOWING REPUBLICAN MEMBERS OF THE HOUSE BANKING AND CURRENCY COMMITTEE ON PROPOSALS AFFECTING THE FEDERAL RESERVE SYSTEM Clarence E. Kilburn, New York William B. Widnall, New Jersey Eugene Siler, Kentucky Florence P . Dwyer, New Jersey James Harvey, Michigan Oliver P . Bolton, Ohio W. E. (Bill) Brock, Tennessee Robert Taft, Jr., Ohio Joseph M. McDade, Pennsylvania Sherman P . Lloyd, Utah Burt L. Talcott, California Del Clawson, California PROPOSALS AFFECTING THE FEDERAL RESERVE SYSTEM The people of the United States might well be concerned about the value of their dollars as revealed by a series of moves by Democratic Members of the House of Representatives. First, Representative Patman introduced a bill on January 15 (H.R. 9631) designed to destroy the independence of the Federal Reserve System by making it subordinate to the Treasury. The bill would make the Secretary of the Treasury the Chairman of the 30 T H E FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS Board of Governors and the Chairman of the committee having responsibilities related to money and credit conditions. I t also provides that any member of the Board of Governors may be removed by the President at any time. Other provisions of the bill would materially change the organization of a system which has earned the respect of the world. Now comes a House resolution by Representative Rains dictating a course of action to the Federal Reserve that it should follow after the passage of the tax bill. This series of pronouncements makes adequately clear that certain members of the administration are embarking on a path of attempted domination of the monetary authority by the Congress and of inflation to try to cure the economic ills of the Nation both real and imaginary. I t seems imperative that President Johnson promptly disavow this course which time and again has robbed the worker of the fruits of his labor. I t is necessary that the other nations of the world who hold large amounts of dollars and who could demand delivery of our gold for these claims be given assurance that a perversion of our central bank and that inflation shall not be a policy of this Nation. A complete rejection of these proposals would give this assurance. S U G G E S T E D COMMENT F O R MR. P A T M A N ON R E P U B L I CAN P R E S S R E L E x i S E I n all my years in the House I have seen no more remarkable statement than the press release issued today by a number of minority members of the Committee on Banking and Currency. That statement objected to the hearings just begun which will represent the first thoroughgoing study of the Federal Reserve System in 50 years. T h a t statement said that the Banking Committee has no business investigating the keystone of our banking system, the Federal Reserve Board and the Federal Open Market Committee. The Constitution places in the Congress the responsibility for the creation and control of money and the rules of the House place on my committee the heavy responsibility of supervising the banking system and recommending legislation. The fact is, we would be most derelict In our duties if we failed to make this study. The minority members who signed this statement are apparently fearful of the facts we may uncover and presume to predict the course of our investigation. This is the first time I have heard of a pig squealing before it is stuck. The minority members will have every opportunity to voice their views in the course of these hearings, and I believe that any sense of fairplay dictates that they await the results to see whether or not they still feel there are any grounds for objecting. Mr. MARTIN. Let me make one final comment on the hearings in general. You know, you and I have exactly the same objectives. We both w^ant to reduce unemployment and raise the standard of living, and bring about equilibrium in the balance of payments. The CHAIRMAN. YOU leave off one phrase. T H E FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS 31 You know, I was the author of the Full Employment Act in the House. And we put in there, "and maximum purchasing power." You never mentioned that. Mr. MARTIN. I would be glad to mention it. I have mentioned it many times. The CHAIRMAN. I have never noticed it. I notice you mention the others. Mr. MARTIN. Maximum production, maximum employment, and maximum purchasing power, I have mentioned a number of times. The CHAIRMAN. That is good. I hope you keep it up that way. Mr. MARTIN. I just want to say that our objectives are exactly the same. The methods by which we get them seem to be entirely different. And I don't think that the Federal Reserve System has been the bane on the body politic that you think it has been. But if it has, I agree with you that we ought to do something about it. And I also think that if I am violating the law, which the Congress has given, that the quicker I am put in jail the better off we will be. The CHAIRMAN. N O , you cannot be put in jail for it. But I will tell you where you violate the law, if you want me to tell you so. Let me just make this one comment on where you do violate the law. The law says that the Open Market Committee shall be composed of seven members of the Federal Reserve Board and five presidents of Federal Reserve banks. But you bring in not only the 7 members of the Board, and the 5 presidents of the Federal Reserve banks, but you bring in the 7 other presidents of Federal Reserve banks, and you have 50 people in that room, the Open Market Committee room, helping to fix the volume of money and the cost of money. Mr. MARTIN. Well, we have been over this one many times before, as you know. Only the statutory members vote on issues brought before the Open Market Committee. Mr. MULTER. Mr. Chairman, may I make one observation—even though I am not a member of the subcommittee ? I n view of what has been said about the differences between the Republicans and Democrats—and we have not yet heard the Republican view of it as a party view—on the proposed legislation before us in these hearings—may I suggest there is no Republican P a r t y way and no Democratic P a r t y way of running a central bank. And I am sure that wrhen we get into executive session, after we get through these hearings, we are going to approach this from the viewpoint of what is good for the country, and not try to make a political issue or a political football of the Federal Reserve System. The CHAIRMAN. H a s the gentleman seen the statement the Republican members put out? Mr. MULTER. I did see it, sir, and that is one of the reasons I am making my comments. The CHAIRMAN. All right. We will expect you in the morning at 10. (Whereupon, at 12:05 p.m., the subcommittee recessed, to reconvene at 10 a.m. Wednesday, January 22,1964.) THE FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS WEDNESDAY, JANUARY 22, 1964 HOUSE OF REPRESENTATIVES, SUBCOMMITTEE ON DOMESTIC F I N A N C E OF THE COMMITTEE ON BANKING AND CURRENCY, Washington, D.O. The subcommittee met, pursuant to recess, at 10 a.m., in room 1301, Longworth House Office Building, Hon. Wright Patman (chairman) presiding. Present: Eepresentatives Patman, Multer, Reuss, Ashley, Vanik, Minish, Weltner, Wilson, Kilburn, Widnall, Bolton, and Brock. The CHAIRMAN. The committee will please come to order. Mr. Widnall? Mr. WIDNALL. Mr. Chairman, I would like to ask permission to insert in the record, just prior to your own remarks yesterday, a statement that was issued by the Republican members of this committee, together with the names of those who signed the statement. The CHAIRMAN. Without objection, it is so ordered. I also ask permission to include immediately after Mr. Widnall's statement a statement of my own. Without objection, it is so ordered. That will be preceding my statement yesterday interrogating or commenting on Mr. Martin's statement. I think I took all the time I should yesterday. So this morning I suggest that we have 10 minutes for each member of the subcommittee, so as to get a little more time. And then after we go around, we will have unlimited time for the subcommittee members, which will give an opportunity to fully explore the subject matter. At this time, I will recognize Mr. Widnall. (The statements referred to above may be found on pp. 29-30.) Mr. WIDNALL. Mr. Chairman—I had hoped, and I believe other members of the committee had hoped, when there was preliminary discussion about the hearings with respect to the 50 years the Federal Reserve System has existed, that we would surely hold these hearings to evaluate the 50 years of service of the System. I am inclined to feel, from some of the statements that have been made by the chairman, that already there has been an evaluation of the System, without giving us the benefit of the various views of the witnesses who will appear before the committee. I hope that we can dispassionately consider all of the presentations that will be made, because I am sure that those on the minority side, as well as those on the majority side, would like to have the opportunity to fully evaluate what has gone on during those 50 years. The CHAIRMAN. Mr. Widnall, would you yield to me briefly, please ? 33 34 T H E FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS Mr. WIDNALL. I would; yes, sir. The CHAIRMAN. NOW, yesterday morning, when the committee met, there was before each member, on the desk, a statement signed by the Republican members, which you inserted in this record this morning, to go in the record of yesterday, which I think was pretty partisan and made it somewhat of a political issue, right in the beginning. And any partisanship that has been exhibited, I think, was provoked at least in part by this particular statement, which I referred to yesterday. Mr. WIDNALL. Mr. Chairman, and the other members of the committee, I would like to say this: xln allegation has been made by one of the gentlemen on this committee that our statement showed a callous disregard for the unemployed in America. I don't think there can be any more callous disregard of unemployed than to allow the forces of inflation to work and to have monetary policies that would encourage inflation, and take away any gains that labor obtains, either through legislation, negotiation, bargaining, or what-haveyou. And we are deeply concerned that the American public will not know, unless we point it up, that there are inherent dangers in some of the proposals, as to change, with respect to the Federal Reserve System. Now, Mr. Martin, I think you made a very lucid statement yesterday, as you always do in your presentations before this committee. I would like to first ask you this: Has any President to date, to your knowledge, recommended changes in the Federal Reserve System that have not been accepted by the Congress and put into effect by changes in the law ? STATEMENT OF WILLIAM McCHESNEY MARTIN, JR., CHAIRMAN, FEDERAL RESERVE BOARD; ACCOMPANIED BY C. CANBY BALDERSTON, VICE CHAIRMAN OF THE FEDERAL RESERVE BOARD Mr. MARTIN. I am not sure, Mr. Widnall, whether there are any recommendations that any President—I think President Roosevelt did recommend the changes that are in the Banking Act of 1933 and the Banking Act of 1935, and those were enacted by the Congress. I don't believe there have been any other recommendations, with the possible exception of President Kennedy a year ago recommending a bill with respect to the salaries of the Chairman and the other members of the Board, and also to make the term of office of the Chairman and Vice Chairman coterminus with that of the President. That was contained in his message to the Congress. So far as I know, there have been no hearings on that bill. Those are all I can think of at the moment. Mr. WIDNALL. SO that to your knowledge actually the Presidential recommendations have been largely accepted with that one exception, as long as the Federal Reserve System has been in existence? Mr. MARTIN. That is correct. Mr. WIDNALL. I would just like to have this repeated again for the record. What do you see as the function of the Open Market Committee with respect to the matter ? T H E FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS 35 I have in mind now its application to unemployment, to our balance-of-payments problem, and to other features that were incorporated in the Employment Act when that was enunciated by the Congress. I am sure that the Federal Reserve System, through its Open Market Committee, has not just been interested in changing interest rates. What do you feel is the basic problem that you have to attack through the use of the Open Market Committee ? Mr. MARTIN. I think that could be stated in a good many different ways. But in terms of my discussion with Mr. Patman yesterday, I would subscribe fully to the view that the Open Market Committee is concerned with maximum production, maximum employment, and maximum purchasing power—that those are its objectives and purposes. Another way of saying that would be that it wants orderly economic growth, and it does not want inflation, because inflation does not lead to orderly economic growth. Mr. WIDNALL. And in order to make your best judgment on these matters, you have a permanent staff of economists who work with you, keeping check on all of the various factors that go into our economy, is that right ? Mr. MARTIN. We do, indeed. As Mr. Patman has pointed out, at the meetings of the Open Market Committee, because of the fact that under the law there is rotation of the presidents, year by year— there is only one president, the president of the New York Bank, that stays permanently on the Committee—all of the 12 presidents of the Reserve banks, have been attending the meetings although only those permitted by statute to vote, vote. And we have had the best economists and staff assistants that we can obtain participate in those meetings. We think this has contributed to bringing the best brains that we have in the System to bear on the problem. Mr. W I D N A I X . I think a point was raised yesterday about the meeting of the Open Market Committee, about many others who w^ere present at the time of those meetings, and perhaps should not have been present because they did not perform any function by w^ay of voting. What is the function of those who participate in the meetings but actually do not have any part in the decisions? Mr. MARTIN. Well, they are there to advise or to render advice to any of the principals at any time. We have the best economists in the System there. We ordinarily open the meeting of the Committee by having a presentation of current economic conditions by one of our top staff economists. Then we have a presentation of credit conditions. Then we follow^ that with the review of the balance of payments. Then we give each president around the table an opportunity, for 5 or 10 minutes, just as you operate here in the committee, to speak to the problems of his district, and to make any comments that he would like to make witli respect to current money market conditions. And after that go around is completed, we then are at liberty to ask questions. And I might say that when these economic reviews are made, anyone there at the meeting may be recognized by the chair 36 THE FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS at any time to make any comment that he wishes to make. We are trying to bring the best brains that we have in the System to bear on this problem. Nobody is there that has not been carefully screened and authorized by the secretariat of the Committee, working with the Chairman and the Vice Chairman of the Committee. Mr. WIDNALL. So that the information that you obtain from those people is absolutely necessary for you to have in order to make your basic decisions. Mr. MARTIN. I n our judgment. And we believe that this means of bringing in the other seven presidents and their top assistants has contributed greatly to the changeover that occurs once a year when we have rotation by law in the voting members of the Committee. We think that this has broadened knowledge of the activities of the System, and that this has been an effective clearinghouse within the System for our operations. I might just say in passing—because I discussed this a number of times with Mr. Patman before—that at the time that we decided to include the other seven presidents. I did speak to the chairmen of the House and Senate Banking and Currency Committees, informally, and told them this is what I was planning to do. The CHAIRMAN. Would you yield briefly, Mr. Widnall? Mr. WIDNALL. Yes. The CHAIRMAN. Wasn't that at a time when we had criticized you so much for having a five-member executive committee—three governors and two presidents—that was looking after all open market transactions, and the full Open Market Committee was only meeting about four times a year? You were having a transition about then. You were eliminating the five-man deal, and having the whole Committee meet every 3 weeks. Isn't that corect ? Mr. MARTIN. That is correct, Mr. Patman. Let me say that I don't remember that coming as a result of criticism. That change was made during my tenure as Chairman of the Board. I t required getting my feet on the ground to know what was the best way to operate in the System. And I took the initiative in making that change. But I just wanted to point out that I did discuss it with the chairman of the Senate Banking and Currency Committee, and with the chairman of the House Banking and Currency Committee, in order to get their views, and both of them were pleased with this move. Mr. WIDNALL. Mr. Chairman, when we visited the Federal Reserve Building, as I recall something was said about telephone communications that took place, too, at the time of the Open Market Committee meeting. Is that not so % Mr. MARTIN. We can have a telephone meeting. We have on occasion had a setup with which you are all familiar, where we have the presidents from around the country, without being here in Washington, in an emergency come in on the loudspeaker, so that we may exchange ideas with them. We have had no telephone hookup within the meeting, when the Committee is actually meeting in the Board room of the Federal Reserve. T H E FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS 37 Mr. WIDNALL. So that you have the means of quick communication in order to meet any sudden emergency that might confront the country ? Mr. MARTIN. We have, indeed. And we have exercised that on a number of occasions. We did it just recently at the time of President Kennedy's assassination. Mr. WIDNALL. My time is up, Mr. Chairman. The CHAIRMAN. Mr. Eeuss? Mr. KEUSS. Mr. Chairman—Governor Martin, you say on page 3 of your report that the Federal Reserve System is open to improvement. I want to record my agreement with that statement. However, when specific recommendations for improvement are made, you seem to be against them. I would like to explore one that you opposed, because to me it seems a constructive suggestion. As things are, the most important monetary function of the United States of America; namely, the credit arrangements that are handled by the Open Market Committee, are handled by a committee made up of the seven public officials, the members of the Board, plus five essentially private persons who are not publicly appointed, the presidents of five of the regional Reserve banks. I think this is an improper way to conduct public business for the reason that it is quite possible that the judgment and decision of the majority of the public officials, members of the Board of Governors, might be overruled by essentially private people—that is to say, a four-man majority of the Board of Governors might feel that credit should be tightened, let us say at a particular time, but it would be subject to being overruled if the private people on the Committee, the presidents of the banks, felt otherwise. I was happy to see the important Commission on Money and Credit 2y2 years ago recommend very forthrightly that this system be changed—on page 90 of the CMC report you recall there is the blackfaced type recommendation: The determination of open m a r k e t policies should be vested in the Board. I n establishing its open m a r k e t policy t h e Board should be required to consult with t h e 12 F e d e r a l Reserve b a n k presidents. And when shortly after that, on August 14,1961, the Joint Economic Committee had former Federal Reserve Board Chairman Mariner Eccles before it, he very strongly endorsed that position. So I am disappointed to find you opposing what seems to me a necessary reform. And since I find your reasons as set forth in your paper here inadequate, I would like to find out what other reasons you may have that are not set forth in your paper. I say they are inadequate to me because the only reason you set forth in your testimony is that you want liaison with the 12 banks. I am all for liaison, and it is great to have them in the room there and keep them current on what the Open Market Committee does. But I would like you to address yourself to the proposition I am making—that this is essentially a governmental function, and should not be exercised by private people—any more than, let us say, we should take tax policy away from Congress and the Secretary of the Treasury and give it to, let us say, the president of the American Bankers Association, which I don't think you or anybody else would advocate. 38 THE FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS Mr. MARTIN. N O . I think this is one of the basic and cardinal points in the development of the System right from the start. If you look at the original hearings, we didn't have an Open Market Committee until the Banking Act of 1935. You had this struggle between banker domination or other private domination, and political domination. And I think that the present Open Market Committee has been a compromise between these two concepts, the intention being not to have either private bankers or political leadership influence the decisions of the Committee, but to get a broadly based combination of private and public judgment. Mr. REUSS. Well, that is not really a fair description of what happens, is it ? I n fact, the private interests can overrule the public interests. And that is a pretty poor compromise, it seems to me. Mr. MARTIN. Let me say, Mr. Reuss, that I don't concede that the presidents of the 12 Federal Reserve banks are private individuals. This is what I was talking about—the ingenious development of the System. The Board appoints three of nine directors, six directors are elected by the member banks. And those directors, as you know, are class A, B, and C directors. Mr. REUSS. That is right. Therefore, the Board's participation in the directorship is a siple one-third minority participation. Mr. MARTIN. Not quite—because we appoint the chairman and the deputy chairman. And we have been in a position and have appointed presidents of universities and very distinguished scientists and others as class C directors. Mr. REUSS. Yes; I think your appointments are all bishops or better. But my question is, "Is it not a fact that the presidents of these banks, the men who sit on the Open Market Committee, are in fact the creatures of private power rather than public power" ? Mr. MARTIN. The initiative on the appointment comes from the board of directors of the individual Reserve bank. But the Congress has given the Federal Reserve Board the authority on the president and first vice president. We can disapprove them. We have complete authority on the president and the first vice president of the banks. So, to that extent, they are public officials. Mr. REUSS. What do you mean complete authority over them? Mr. MARTIN. Well, I am talking about the approval or disapproval of them. When the name comes up to the Board—the seven members of the Federal Reserve Board—there is no participation by the board of the individual bank. Mr. REUSS. Yes. But you cannot appoint a president who is not appointed by the majority of private bankers on the board of the particular Reserve bank, can you ? Mr. MARTIN. We certainly have a good bit of influence. If the chairman and the deputy chairman are in disagreement with the other six board members, you have a situation that is not likely to be tolerated. The point I am trying to make, Mr. Reuss, is that this is a very ingenious blending of public and private activity. Mr. REUSS. I don't doubt its ingenuity. What I question is whether it is based on the public interest. W h a t is wrong, Mr. Martin, with the idea of having open market policy decided by the same seven public servants wrho decide rediscount policy and bank reserve policy—the other two instruments of mon T H E FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS 39 etary policy—namely, the seven members of the Board—and keep your liaison with the 12 banks by having them in the room, consulting them, and so on ? What is wrong with that ? Mr. MARTIN. Well, the first thing that is wrong with it is that it would be a change at the present time without giving any Mr. REUSS. YOU say in your statement change is inevitable, and you are for change. So what is wrong with this'? Mr. MARTIN. W h a t is wrong with it is that I don't see that it achieves anything, and it narrows the participation in the process of making these decisions. Now, I think we have benefited greatly from bringing them together—and I say quite openly here, without changing the law, we have discussed everything from margin requirements on down, which are exclusively the prerogatives of the Board. We have discussed these things at the open market meetings. We have used this as a clearinghouse for credit policy, trying to get the biggest and broadest intelligence that we can on it. Mr. REUSS. Well, would you favor that this country's tax laws be written by a board which included, let us say, the president of the NAM? Mr. MARTIN. I don't think there is any comparison between the tax laws and monetary policy, Mr. Reuss. That is purely a matter of judgment. But I don't see the connection, really. Mr. REUSS. They both deeply affect the economy of the country, do they not? Mr. MARTIN. They both affect the economy of the country, but in a different way. The flow of funds and tax policy are, of course, interrelated. But the adjustment of equilibrium between savings and investment through interest rates or through changes in reserve requirements or through margin requirements is an entirely different procedural process than taxation. Mr. REUSS. What about you, Governor Balderston ? Do you oppose the recommendation of the Commission on Money and Credit like wise, the recommendation that open market policy should be vested in the Board? Mr. BALDERSTON. Yes, Congressman Reuss; I do. The question you have asked is, to me, a very fundamental one. Maynard Keynes once observed, about Hitler Germany, that Hitler had so concentrated the decisionmaking of the Germany of his day that the only mistakes he could make were major ones. You can see that I believe in a philosophy of decentralized responsibility and authority, with just enough coordination to insure consistency of action and policy. The implication of your question is that the presidents of the 12 Reserve banks are captives of the banking industry. Mr. REUSS. N O ; I would not suggest that. I am simply saying that they are not the appointed servants of the people of the United States of America, because they are not appointed by the public appointing authority, as you members of the Board are. Mr. BALDERSTON. But I would like to point out that when they come to the Open Market Committee, the five who are serving for that particular year take an oath of office which makes them public servants for that period of time. 40 T H E FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS Mr. EEUSS. They are public servants in whose selection the President of the United States and other U.S. authorities played no part, except the very remote, indirect role that Chairman Martin has described. Mr. BALDERSTON. Which is a very direct role. Seven members of the Board play a very significant part and very direct role in the selection of those presidents. And as to whether they represent themselves and vote in accordance with their own consciences, or at the behest of private bankers, I would like to suggest that you ask the bankers in any one of the districts whether the president of their Federal Eeserve bank obeys their suggestions and intimations as to what they would like. I t would be an interesting survey. Mr. EEUSS. Fine—I will ask them that. One more question. Wouldn't it be a good idea, if your logic is right, to do away with the Federal Eeserve Board itself, and just have all our monetary problems handled by the 12 presidents of the banks ? If your oath of office theory is correct, this would seem to work there, too. Mr. MARTIN. I t could be done that way, Mr. Eeuss. And it has been considered on a good many occasions. We have used the Open Market Committee meeting every 3 weeks as a clearinghouse to discuss the implications and interrelationship of reserve requirements and discount rate changes and open market operations in as broad a way as possible. Now, you could change the reserve requirement authority—instead of having it only in the Board, you could have it in the Open Market Committee. I think the reason for that is obvious, and you have touched on it— that reserve requirements apply directly to banks, and that this has been put specifically in the hands of the Board, so that there could be no indication that the six members that you are talking about as being elected through the banker process could in any way even indirectly dominate that decision. That was one of the reasons. Now, the history of the Federal Eeserve and the debates around it are extremely interesting, and they reveal a constant interplay of trying to balance private and public interests in an effective way so as to accomplish the very thing that you are talking about, a system completely insulated from banker domination. And I think it has been fairly well done. I don't say that it could not be done in different ways. But I want to emphasize the fact that by and large the Federal Eeserve Board as such has the control—we have had a decentralized central bank. I t has been the wonder of a good many of our foreign friends, and to their amazement it has worked surprisingly well despite its cumbersome nature. B u t we have had it by having boards of directors of these banks, many of whom think they don't have enough authority nowT, because actually the controlling authority is in the Board of Governors in Washington. I n other words, there is sufficient coordination in the Board of Governors in Washington so that you maintain decentralization and get the benefit of it without making it ineffective through making it possible for individual banks around the country to take a stand that would be contrary to the broad interpretation of the whole Federal Eeserve System as such. T H E FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS 41 Therefore, I think this coordinating process has been surprisingly well maintained and developed, and meeting every 3 weeks in Washington it has made it easier for us, now that we have the airplane, than it was 15 or 20 years ago, when it was difficult to get all these people together. Mr. RETJSS. My time is up. The CHAIRMAN. Mr. Bolton? Mr. BOLTON. Thank you, Mr. Chairman. As always, Mr. Martin, it is a great pleasure to see you up here. I appreciated very much your statement. One question did occur to me, sir. On page 10 you took the position, and I quote, that you would favor dropping from the Federal Reserve Act, "any reference to representation of particular segments of our society." And you indicated there at least to me, that you would also favor dropping the geographical representation on the Board. Would you feel—would you not feel that this would hold the possibility of getting a concentration of members from one particular area of the country only ? Mr. MARTIN. Yes; I think it does raise that possibility, Mr. Bolton. But in making that suggestion, having thought about it a great deal, I would assume that any President who was making appointments to the Federal Eeserve Board would be very certain in his own mind if he had two from the same district, that the men were so outstanding that it would overcome that geographic disadvantage. Mr. BOLTON. I n other words, rather than removing the requirement completely, you would relax it, but you would keep the implication in the law? Mr. MARTIN. I would think that any President facing up practically to this problem would recognize that he would like to have on the Federal Reserve Board the west coast, the center of the United States, and the East. Now, I think it is too bad at times, because it is difficult to get men who will disassociate themselves from private enterprise and come into the Board and work conscientiously over a period of time— it is difficult to get the type of man that has training and knowledge and experience and the will and desire to do this thing. I found it like searching for a needle in the haystack at times. Sometimes it just happens that on the Pacific coast, which is a very large area, there may be someone in Los Angeles who would be ideal, and there may be someone equally ideal in Seattle. Yet by law now there is no chance of getting those two men, even though their circumstances may be such that they would be available under these conditions, and it would not unduly imbalance the Board to do that. I think it is very important that we try to get the highest grade, most capable men we can get- And that is what we are after, I think it is conceivable, particularly where we are dealing with the securities market—I happen to come out of the securities market, appointed from New York. That means that no one in the New York area, regardless of how qualified he may be, is eligible for service on the Federal Reserve Board until my term is completed. Mr. BOLTON. Thank you, sir. One other aspect of the activity of the System I would like to have you comment on. 28-680—64—vol. 1 4 42 T H E FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS One of the great problems of our fiscal and monetary systems today is our balance-of-payments problem, and our whole international relationships in the economic field. I wonder if you would care to comment on the position of the Federal Reserve System and the Board, particularly, and its activity in comparison, for example, to the setup which exists in other countries and other central banks. Mr. MARTIN. I think the simplest way of stating it is that we do have a regional system with active participation by the regional banks, whereas the Bank of England has one central bank with branches. That is true of the Bank of France, that is true of virtually all of the European central banks. They are central banks in the real sense of central. We are a central banking system. I have frequently emphasized the fact that the most important word in our title is not Federal Reserve, but "System." And that is where we have a unique setup that I think has been peculiarly adapted to this broad country of ours. It is important that we have coordination in the Federal Reserve Board so that this does not become disjointed and unwieldly. But we can have effective management through the centralization of a coordinating board that takes unto itself only what is essential to see that management is effective. Mr. BOLTON. Well, maybe I did not make myself clear. Are the activities of the Federal Reserve System, disregarding the setup—in the field of international economics, the same—and the flow of the international monetary system—the same as the central bank functions of, say, England or France? Mr. MARTIN. Yes; I would say essentially so. Mr. BOLTON. They are essentially the same, with essentially the same powers ? Mr. MARTIN. Essentially the same. We have a slightly different change in the System there. You know, under the Bretton Woods Agreements Act, there was set up a National Advisory Council on International Monetary and Financial Problems. The Chairman of the Federal Reserve Board sits on that group. That group consists of the Secretary of State, the Secretary of the Treasury, the Secretary of Commerce, the Foreign Aid Administrator, and the Chairman of the Federal Reserve Board. I t is through that means that we do the coordinating of our activities and the activities of the International Bank and the International Monetary Fund. I n England, they have a council which is somewhat similar, and the Bank of England, of course, is essentially a p a r t of the Treasury there, since the nationalization of the Bank of England that occurred in 1946. But I dont' think the powers and functions are any different. Mr. BOLTON. Thank you, sir. I have no further questions at this time. The CHAIRMAN. Mr. Vanik ? Mr. V A N I K . Mr. Chairman, I want to say at the outset I think this dialog on the Federal Reserve is probably the most important thing Congress is considering right now. I am certainly glad it is going on. Somewhere between these two expressed positions there must be need for some legislative action. T H E FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS 43 I regret that you have taken the position to deny the validity of any legislative improvement—substantially any legislative improvement to our banking system. F o r example, the question has been raised as to whether the Fed is responsive to the public interest, and your opposition to having the General Accounting Office, which is the arm of the Congress and the arm of the people, go over your audit seems to me a great mistake. I think that a General Accounting review of what you are doing at the Fed would have a great deal to do with assuring public confidence in the bookkeeping. The highest quality of private bookkeeping does not satisfy the great desire that these things be publicly audited. Now, are you so strongly opposed to the General Accounting audit as indicated by your statement ? Mr. MARTIN. Yes, I am, Mr. Vanik. I think that when Congress in the Banking Act of 1933 did away with GAO audit of the Federal Reserve Board it was to free the monetary authorities from the risk of being deprived of the use of funds, which they deemed important to carry out their function, because of actions or decisions by any other branch of the Government. Now, I simply want to reiterate my conviction. I happen to think, having had some experience in business and government, that the auditing procedures of the Federal Reserve are excellent. I used the word "unexcelled" in my statement yesterday. Maybe that was a little bit too strong. I was implying there perhaps they are the best in the world. I don't mean that. But they are excellent. We not only have a staff of examiners that are trained to go out into the banks—and let me point out here that the General Accounting Office would have to build up a staff of specialized examiners. Mr. V A N I K . We are willing to pay for that. Congress is willing to develop anything that is necessary to provide a proper audit by the General Accounting Office. But the fact is that you deny the validity of a public review of what transpires in the Fed. And this runs contrary, I think, to the public thinking—that if this agency can audit everybody else, why should the Federal Reserve be an exemption ? Mr. BOLTON. Will the gentleman yield at that point ? Mr. V A N I K . I don't want to yield on my time. Go ahead. Mr. BOLTON. I would just say there are many auspices of the Congress, including the committees of the Congress, which are not under the auditing of the GAO. Mr. V A N I K . I agree that all public spending ought to be under audit of the GAO. I would support the gentleman's position on that. Mr. WIDNALL. Would the gentleman yield further ? Mr. V A N I K . Let me get one more question—if I have any more time, I will be pleased to yield. My other point is this: I believe—I have a sincere fear of the disregard of the usury laws of the country. And I think that these laws have foundation in the basic morality of our democracy. I would like to have some assurances that there are ways that can be found to regulate credit without increasing the interest rates that are tacked on to both the Government itself and to the consuming public. And I would like to say to the Chairman that unless I am 44 THE FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS satisfied that the Federal Reserve System as now constituted can come up with some approach to this problem which can take care of the credit needs of the country without resorting to raising the prices of credit, which I consider immoral above certain levels. If the rising cost of credit cannot be contained, I think I would be inclined to support some of these other methods to assure that the public interest in lower interest rates is going to be served. I am concerned from this sole standpoint, the cost to the public and to the Government of the money that is needed to carry on business. Unless I receive some assurance that there is some way that the Fed can approach this problem without raising interest rates, I am going to be inclined to support some of these methods for other solutions to this problem. Mr. MARTIN. I will make my usual comment at this juncture, Mr. Vanik—that I have always testified and have always indicated that I favor as low interest rates as it is possible to have without having inflation. I really think that you will have the largest capital formation that Mr. V A N I K . And in your opinion, the rise in the interest rate through the discount activities of the Fed were the only alternative at the times they were proposed ? Mr. MARTIN. That is correct. Mr. V A N I K . And that there are no other avenues or approaches to be explored in which credit expansion, or in which credit can be regulated without resorting to raising the cost of it in a so-called free market ? Mr. MARTIN. These are the only methods we have had, short of direct controls. If you want to go into the area of price and wage controls, allocations Mr. V A N I K . Those are outside of the scope of the Fed. Mr. MARTIN. That is right. Mr. V A N I K . And property so—unless you want to have the Federal act amended to include jurisdiction over those areas, in which case you might have to have an expanded board to only the other areas of activity. Mr. MARTIN. Yes. And I just want to reiterate what I put in my statement—taken from the Douglas subcommittee. This is essentially our position here. I just quote this from the Douglas comments: But we believe that the advantages of avoiding inflation are so great and that a restrictive monetary policy can contribute so much to this end that the freedom of the Federal Reserve to restrict credit and raise interest rates for general stabilization purposes should be restored even if the cost should prove to be a significant increase in service charges on the Federal debt and a greater inconvenience to the Treasury in its sale of securities for new financing and refunding purposes. Mr. V A N I K . Yes, I have that statement. If I have time, I will yield to my coleague. Mr. WIDNALL. I just wanted you to yield for a brief comment on the GAO. I have found in the time I have been in Congress that many recommendations of the GAO to a department or to the Congress have been ignored by the Congress, and they paid no attention to those T H E FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS 45 recommendations. So I don't know that the GAO report would have any more value than the type of audit taking place at the present time. Mr. V A N I K . The gentleman didn't find fault with the report. Mr. WIDNALL. No. Mr. V A N I K . That is the point. As long as the report is valid and correct, I think the GAO has performed its function. I t is up to the Congress or to the executive agencies involved to take such action as they deem necessary in view of the report. Mr. WIDNALL. I don't think there has been any fault found in connection with the reports made by the private auditors employed. Mr. V A N I K . Excepting that I think the Congress has come to rely on the General Accounting Office. I t is an arm of the Congress. I t is the public auditor. I think it is very, very well established in this role. I think that in this role its activities should be expanded, rather than shortcutted. Mr. WIDNALL. Well, the failure of Congress to rely on their recommendations certainly doesn't show they have as much confidence in the GAO as they should have. Mr. V A N I K . I think the fact that Congress acts or doesn't act on the GAO report is a separate consideration. I don't think it detracts from the validity of the report or the authenticity of it, or the quality of the work that has been performed by this Office. I think most Members of Congress most of the time have come to rely rather solidly on the work of the General Accounting Office. The CHAIRMAN. Will the gentleman yield ? I t is possible if corrections were made, it would be unnecessary for Congress to legislate. Mr. V A N I K . There has been a host of changes in Executive policy that have come about as a result of GAO reports. Mr. MULTER. As a matter of fact, many of the committees of Congress do review the GAO report, and a subcommittee of this very committee, the Housing Subcommittee, is now reviewing a GAO report with reference to the activities of H H F A . Congressional committees do it many times. Mr. V A N I K . Our Housing Subcommittee is currently reviewing a GAO report. Perhaps not to the extent in the particular matter the gentleman from New Jersey might like. But it is certainly reviewing it. Mr. BOLTON. Will the gentleman yield ? I fully and heartily understand the gentleman's position about the need for a public audit of any public body. But I think an evaluation in the terms of the audit of the Federal Reserve System we must keep in mind that in actuality the audit of the System, as I understand it, is an audit conducted by auditors who are hired by the Board, and the report of those audits are made to both Banking and Currency Committees of the House and the other body. Is that correct ? Mr. MARTIN. That is correct. Mr. BOLTON. SO, in effect, it is a public audit, though it is not made by the public auditor. Mr. ASHLEY. Who pays for it ? Mr. BOLTON. I believe the System pays for it. 46 THE FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS Mr. ASHLEY. Then it is really not as public as it might be; is it ? Mr. BOLTON. The only point I was trying to make is that it is an audit and a public audit, though not in the sense—and I understand Mr. ASHLEY. I don't mean to quarrel with the gentleman. I think it is a private audit, the results of which are made public. But I think that is a very different thing from a public audit as performed bytheGAO. Mr. V A N I K . I might point out to my colleague—after all, that when the audit is ordered by the Federal Reserve System, the format, the procedure, audit procedure, is pretty much ordered and dictated and set forth by the people who are ordering the audit to be done. And right in this method you have the key to the validity of the audit. I n other words, when the instructions are made to the contract auditor, the instruction is set forth in the way the audit shall be conducted. And the very validity of the audit and its value might be very substantially affected by the instructions that are made by the contractor on how its business is supposed to be audited. Mr. MARTIN. Mr. Vanik, I must correct that. The certified public accountants are given no instructions by the Board, and their letter will indicate that they have not been told in any way how they should proceed. They are given carte blanche. They have their reputation at stake—Haskins & Sells, Arthur Andersen, have their reputation at stake. They are given no instructions by the Board. Mr. MULTER. I wish somebody would clarify whether or not this is a complete audit or just a review of an audit. Mr. MARTIN. Mr. Multer, as I have pointed out, we have independent auditors that are continuously auditing in each of the 12 banks that are subject only to the direction of the board of directors, not to the officers of the bank. Mr. MULTER. I am referring now to the independent audit by Haskins & Sells, or Price Waterhouse, or whoever you are using for the system. Is that a complete audit ? Mr. MARTIN. NO. That is only of the Board. But they go in with our examiners. We have a field force. They are very dedicated individuals, because they are on the road most of the time, and it is hard to get people to Mr. MULTER. I wasn't questioning that. I am trying to find out what they do. And you leave the impression with me Price Waterhouse or Haskins & Sells looks over the shoulder of your auditors and examiners, rather than doing the work themselves. Mr. MARTIN. That is correct. You are right. The CHAIRMAN. Mr. Brock ? Mr. BROCK. Thank you, Mr. Chairman. Mr. Martin, I want to say I am very grateful for your testimony. I think it is clear and to the point. I appreciate it. Yesterday, some questions were raised regarding eligible paper, both in vour testimony and also by the chairman. Would you briefly summarize to me wThat in your mind would be the effects, first, of an expansion of the definition of "eligible papers," as you have recommended, and then, secondly, what would be the effect on the other hand of a restriction back to the old use of the word ? Mr. MARTIN. Well, my point, Mr. Brock, is—and this is, I think, fundamental—that there have been a lot of changes in the 50 years of T H E FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS 47 the System, and what we considered originally, that we would have an automatic expansion or contraction of credit based on short-term self-liquidating commercial paper, met its first test—first overwhelming test in the recession days, wrhen many of the Federal Eeserve banks wanted to extend credit to worthy borrowers, borrowers in whom they had confidence, but they were restricted by lawT to this definition of "short-term self-liquidating commercial paper." And even Government bonds were not at that time eligible as collateral for advances. Now, in recent days, just to illustrate this quickly, with the increase in the maximum permissible rates prescribed by regulation Q, and the rise in time and savings deposits in a good many savings banks—we have seen them make additions to their portfolio of State and municipal securities, and a good many mortgages that they didn't have before, and those mortgages may be just as good for discounting purposes as anything else. Now, the reason we brought up last August this bill, and want to broaden the definition of eligible paper, is that we think we should be able to lend on some of this paper, without having to charge a penalty rate of a half a point percent, as we must do now. We feel now is the time, when the economy is doing reasonably well, to prepare for possible future emergencies. I don't mean to say that there is not more unemployment than we would like to have. But the economy is doing reasonably well, and we should be preparing for a time when we might be in difficulties again. And it seems to me that a broadening of this discount function, keeping the discretion, as to how it is exercised—because I don't think you can spell out all the types of paper—in the Federal Eeserve, is most appropriate at this time, with the changes that have occurred throughout the country. I have advanced this bill primarily as a precautionary measure— not that we need at the moment. But we have noticed a tendency for short-term paper to multiply in times of expansion and for it to disappear in times of contraction, which is just contrary to our general purpose of having an elastic currency. Mr. BROCK. In effect, if you did restrict the use of eligible paper to a greater degree than you have it today, what you are saying, if I may put it in my words, it would be in effect, hurting the very people you are trying to help, the smalltown merchants, and so forth, who would have a restriction on the total amount of credit available. Mr. MARTIN. That is exactly it. Mr. BALDERSTON. Mr. Chairman, may I add a comment to that ? I have been struck by the change in financing: procedures since 1914. At that time, about half of total loans were eligible for rediscounting with the Federal Eeserve banks. But the commercial banks held less than a billion dollars of Governments. Now, we think that less than a quarter of total loans are eligible for rediscounting. The Governments held by commercial banks are 80 times as large as in 1914. Consequently, the convenient thing for banks to offer is of course Governments. And that has been the procedure in recent times. But we are fearful that in time of crisis individual b a n t s having no Governments left would need the liberalized provision. Mr. BROCK. I yield. 48 THE FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS Mr. V A N I K . I was thinking of some areas in which credit expansion could be controlled. And one of the things that comes to my attention is the liberal credit rules applying to some of the futures that we have read about recently. You limit margin requirements on stocks that have considerably higher status on the stock exchange, and you have no limitations on the over-the-counter issues. I t seems to me rather strange that a buyer of stock should put 70 percent of the money up for a good blue chip, and have no restriction on what he has to put up on the X YZ Electronics Expansion, an over-thecounter issue. I n other words, we have the futures and over-thecounter issues that are completely unregulated. We studied those in New York a short time ago and found that in the area of futures, a person can seem to get all kinds of credit. I t is an area in which—Mr. Chairman—in which there was the greatest leverage. The investor could go in with a tiny little bit and get bank credit to support the great risk of his purchase. And it would seem to me that these areas are every bit worthy of consideration for credit control as are the stocks on the New York exchanges. Now, what about it? Why have we been discriminatory in these restrictions ? Mr. MARTIN. I agree with you. Commodity trading is slightly different than stock trading. But the Commodity Exchange Authority ought to be going into that, and ought to have some authority in this area, at least on a standby basis. This recent salad oil scandal, as we call it, points that up. I think you have made a very good point, Mr. Vanik. I agree with you. Mr. V A N I K . Well, then, this is an area in which we could consider instead of increasing the cost—instead of increasing the cost of money. This is a possible credit control that might, if carried through along with some others—might make it less necessary for the Fed to rely on increasing the discount rate. Mr. MARTIN. I don't think it would have very much influence on that. But I think it certainly is a factor in it. I t is something that ought to be carefully studied and evaluated. The CHAIRMAN- Would the gentleman yield? Mr. BROCK. Yes. The CHAIRMAN. On this question of expanding the eligible paper, isn't that due to the fact that you realize that you must have more and more money in circulation all the time? I n other words, the volume of money must be increased month by month and almost day by day. Therefore, you would have to have additional eligible paper in order to make that volume of money possible. Is that correct? Mr. MARTIN. We want to regulate the money supply, to be sure. And, as you say, Mr. Patman, the volume of money, we like to see it increase, to use my simile of the stream, as the river bed can absorb it and handle it. But this matter of eligible paper is when you are in time of need. I t is not a case of T H E FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS 49 The CHAIRMAN- With the permission of the gentleman from Tennessee, Mr. Brock, I would just like to suggest that our monetary system is based on debt, which, of course, you recognize, Mr. Martin, and no debt, no money. I t makes it very profitable to people who can create money, because we have got to have more money. And it occurs to me that the Federal Reserve Board could render a great public service if they would give consideration to an alternative— rather than have just an inflexible rule they will not have any money unless somebody will go in debt. And that is the only way we can increase our money supply—that you should come up with some alternative that would enable us to do something else besides requiring people to go into debt and pay interest. Don't you think you could give consideration to that? Mr. MARTIN. I think there is an inconsistency here, Mr. Patman, if I can mention it. Yesterday you wanted us to get rid of debt entirely, and today you are telling me that without debt we cannot have any expansion of money. The CHAIRMAN. I am not endorsing it. I am asking you to study an alternative. You did not understand me. Mr. MARTIN. Oh, yes; I understood you perfectly. We just don't have a meeting of the minds. The CHAIRMAN. N O ; you do not understand me. I am just saying that the way you have it now, if there is no debt there is no money. I am not convinced that is how it should be. I don't think people should be required to go into debt and have to pay interest just to have enough money to do business on. Mr. MARTIN. The development of money and credit really goes back, as I have said a number of times, to our use of gold as a medium of exchange, and then goldsmith certificates, because people were not going to need all the gold all the time, and then from goldsmith certificates you went to Government paper and to bank deposits. That is really the history. The CHAIRMAN. That is right, and you are keeping the reserves for the banks, just like the old goldsmiths. Mr. MARTIN. I am indeed. And to use my favorite illustration here, it is a very real responsibility to let this credit be stretched, which is proper, but not to be stretched so far that it is like the rubberband that breaks. And that is the sword of Damocles that hangs over the head of the Federal Keserve Board all the time. Mr. BROCK. One other quick question, Mr. Martin, if I may. Yesterday, the point was raised that perhaps the banks should pay for the clearing of their checks. This would yield $140 to $150 million to the Treasury. Now, in view of our expressed desire to lower interest rates, is it nottrue, if the banks had an increased cost of $140 to $150 million in the cost of clearing their checks, this would be reflected in higher interest charges to the people ? Mr. MARTIN. They would have to make up for it in some way. They would have to. Now, we have performed these services because we thought it was in the public interest, generally speaking, and that we could do it 50 THE FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS effectively and be helpful to the public. I t is the public that really would have to pay for it, if we don't do it. Mr. BROCK. That is correct. And is it not true that the banks as contributing members to the Federal Reserve System do pay for the clearing of their checks, indirectly, at least ? Mr. MARTIN. They do; in the sense that if they are members of the System they have higher reserve requirements than some States would let them have if they were outside the System. And in that sense, they are making a contribution. Now, how you evaluate all these charges and expenses is a very difficult business in operation. I think, by and large, we have tried to see that we don't in any way squander money in this process, but that we only do what can be done most effectively and firmly through the System as a benefit to the community as a whole, without specifically benefiting the bankers. Mr. V A N I K . Would the gentleman yield on that very point ? I wonder if the Chairman could tell us whether or not in his opinion the commercial banks have passed on to the consumer, the person who has the checking account, some of the tremendous advantages that have resulted from the development of electronic and data processing systems? I understand, for example, that RCA and other data processing equipment manufacturers are currently offering banks the privilege of doing the entire check-handling job for about a penny and a half an item. And this doesn't seem to fit in with the charge that is made to the people who use the accounts. I think in many banks it runs as high as 10 cents a check. Are the banks collectively or as an industry passing on to the consumer any of the advantages of the development of processing systems which can handle these checks at a very, very low cost per item? Mr. MARTIN. I think some of them are, Mr. Vanik. I am not too well versed in this field. But I think some of them are. And I think competition between banks is tending to move in the direction of having them pass on as much in the way of these benefits as they can. But they are like industry, you know. They hold onto it as long as they can. Mr. V A N I K . Hold onto what ? Mr. MARTIN. Their profits. Mr. V A N I K . I am glad you put it that way. I think it pretty clearly establishes what they are doing. Frankly, I would like to see the Fed make available to this committee some of the research results as to what they are doing in the development of computer systems. I think this would be very interesting to this committee, if we had an idea of what it really costs the average institution today to process and handle the checks that are cleared through the individual commercial banks. Mr. MARTIN. YOU are pointing up a very important thing. The progress that is being made in this area is so rapid that it is difficult to keep up with it. I t is moving from month to month. We have at the Board a very able individual in the computer field who has made remarkable savings in our own activities. The CHAIRMAN. Mr. Minish ? Mr. M I N I S H . Thank you, Mr. Chairman. T H E FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS 51 Mr. Martin, I have one question. Regarding representation on the Board, have labor and consumer groups ever been represented specifically on the Board? Mr. MARTIN. N O ; I don't think they have been specifically as such. There have been individuals who have had some contact with both groups. But I don't think there has been a specific representative. And the point I was trying to make in my statment, Mr. Minish, was that if I were writing it myself, I don't think we ought to have any segment as such represented. We ought to be trying to get the best men available who will be dedicated to the public interest as a whole. Mr. M I N I S H . I agree with that. Would you recommend it ? Mr. MARTIN. Yes. That is really what I was indicating here. I t would be my approach to it. Mr. M I N I S H . Thank you. The CHAIRMAN. Mr. Weltner? Mr. WELTNER. Mr. Chairman, what is the total outstanding stock of the Reserve banks % Mr. MARTIN. Each member bank pays in—we can call 6 percent of their capital and surplus. And we have only called 3 percent of that amount. The actual stock outstanding runs about $500 million. Now, we have built up a surplus that is twice the paid in stock. Mr. WELTNER. And the paid in stock is one-half of the amount that is subject to call, is that correct ? Mr. MARTEN. That is correct. Mr. WELTNER. S O the surplus is almost half a billion dollars, is that correct ? Mr. MARTIN. I t is a little larger than that. It is nearer $900 million. You see, it is twice the paid in Mr. WELTNER. I n this booklet called "The Federal Reserve at Work," it states that in 1961 dividends totaled $26 million. I n your statement, you stated that in 1963 dividends were $29 million. That is about a 10 percent increase in dividends paid to member banks, is that correct ? Mr. MARTIN. That is right. You see, the stock increases when the capital and surplus of the bank increases. Mr. WELTNER. I S the dividend fixed at a level of 6 percent, or is it variable by action of the Board ? Mr. MARTIN. N O , it is fixed at 6 percent. I t has been at 6 percent ever since the System Mr. WELTNER. Who fixed it at 6 percent ? Mr. MARTIN. I think it is in the law. Mr. WELTNER. I t is set by the statute ? Mr. MARTIN. Yes, I think it is set by the statute. Mr. WELTNER. I am also interested, in view of the increase in the stock held in the banks, in your statement that you feel that members, smaller members, are pressing for release from membership. Would you give us some further information on just how this is evidenced ? Mr. MARTIN. I pointed out that in a number of States they don't have reserve requirements by State law that are as high as the reserve requirements that the Federal Reserve System has set. Therefore, the 52 THE FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS national banks, which are compelled by law to be members of the Federal Reserve System, wish that they could get the same treatment on reserves that the State banks get. I don't think that we want to see the banking system move to the lowest common denominator. Maybe our reserve requirements are too high. We have considered lowering them from time to time. But there are some members of this committee and of the Senate committee that don't want reserve requirements lowered at all. One of the reasons the System has been as effective as it is is because all national banks have been compelled by law to be members of the System. Eighty-five percent, roughly, of our banking assets are in the Federal Reserve System. I t is incomprehensible to me that this country could get along without a strong central banking system. The point I wasn't trying to make too dramatically there was that with this pressure of some small national banks to get out of the System because they think they are paying too high a charge to be in it— that if we remove this stock which they do get 6 percent dividends on, the part that is paid in, we are just making membership in the System that much less attractive. Mr. WELTNER. YOU consider the 6-percent return on that stock as an attractive feature of membership in the System ? Mr. MARTIN. I n a limited way, yes. I mean it is a good investment. I don't want to overplay that. But it is a good investment that they can count on. Mr. WELTNER. Can the dividends ever be less than 6 percent ? Mr. MARTIN. I think the law would have to be changed on that. Mr. WELTNER. I t is not a maximum of 6 percent, but a required 6 percent ? Mr. MARTIN. A required 6 percent, that is correct. Mr. WELTNER. I have no further questions. The CHAIRMAN. Mr. Wilson ? Mr. WILSON. Mr. Martin, I am still a little concerned about the opposition you hold for the proposal to have the General Accounting Office do the auditing. I t doesn't seem to me you have come up with a real good reason yet for not being willing to accept this type of an audit. I wonder if there is something further you could add to help us here, other than the fact that you are satisfied with the way things are being done now, and it seems for your purposes they are satisfactory. Mr. MARTIN. I don't think I can come up with anything additional, Mr. Wilson. And I can understand your questioning this—because, offhand, it looks like the GAO perhaps—and I certainly don't intend in any way to reflect on the GAO as a competent Mr. WILSON. I t is not a lack of confidence you have in them, or their ability to perform a capable job ? Mr. MARTIN. N O , not at all. I simply say—we were talking about European central banks the other day—if you go to the two leading central banks, the Bank of France and the Bank of England, they have no government accounting over them—despite the fact that both of them have been nationalized. T H E FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS The CHAIRMAN. Will the Mr. WILSON. Yes. The CHAIRMAN. Isn't it 53 gentleman yield ? a fact that they are Government institutions? Mr. MARTIN. Both of them have been nationalized. But they have been left complete discretion with respect to their expenditures. The CHAIRMAN. But they are Government, Mr. Martin. France is Government, England is Government, West Germany is Government. Mr. MARTIN. We are a Government, too, Mr. Patman. The CHAIRMAN. That is what we think you are—what we insist you must be. Mr. MARTIN. And what we are talking about here has always been, as I have repeatedly said, independence within the Government, not independence of the Government. And it has been a very valuable adjunct of our operations for many years, so much so that in the Banking Act of 1935 they made a basic change. The CHAIRMAN. Isn't it a fact that every major country in the world has a central bank that is Government-owned and controlled ? Mr. MARTIN. N O , that is not a fact. The CHAIRMAN. All right; name those that are not. I t is true in England, isn't it ? Mr. MARTIN. We can give you a list of them. I cannot name them. The CHAIRMAN. I t is true as to England, it is true as to France, it is true as to West Germany, it is true as to Italy. Mr. MARTIN. That is no reason for us to go to that. The CHAIRMAN. W h y should we be an exception ? Mr. MARTIN. Because I think we have a stronger economic system and a stronger country. The CHAIRMAN. Well, one time you say it is the Government and another time you say it is outside of Government. Now you are insisting it is outside the Government. Mr. MARTIN. N O , I am not insisting it is outside of Government. I am insisting there are real advantages in the system that we are operating under. Mr. WILSON. Well, in the absence of any real strong objection, or firm reason for not agreeing to have the GAO do the auditing, could we assume, then, this won't be a big bone of contention—that you won't be too disappointed if it is decided to have this type of audit? Mr. MARTIN. I will be very disappointed. I am just trying to make the point to you, Mr. Wilson, that I really think this is a change that will accomplish nothing and will not improve our auditing function, and could be abused at some point by Government to put pressure on the central bank. Mr. WILSON. NOW, you are getting the problem down to your real reason. You think that there will be political pressure used if GAO is given the accounting function, and you don't have confidence that they would do a job, as you see it. Mr. MARTIN. A S I pointed out in my statement the Banking Act of 1933 provided that the— Board shall determine and prescribe the manner in which its obligations shall be incurred and its disbursements and expenses allowed and paid * * *. 54 THE FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS The House and Senate committee reports said the change was made m order to leave— to the Board the determination of its own internal management policies. Thus, Congress in 1933 freed from GAO audit the only part of the System that was ever subject to it. Now, I have the greatest respect for the General Accounting Office. The current head of it is a very good personal friend of mine. I know that in their work they would have to develop an entirely new staff, to replace to a large extent, the field force that we send out. This matter of auditing and checking up and verifying is not the simple process that some people think it is. One of our presidents described it aptly—if you want to find your rabbit, you have to know what a rabbit looks like when you go after it, and you have to know what the characteristics of a rabbit are. Now, 1 am not for a moment trying to say that the Federal Reserve banks are not amenable, that you cannot find out what the things are. But I do say it is a specialized operation. Our staff are by no means perfect, but I think they have done a very good job. And from my experience with business organizations—and I have had a little experience with it—I am very proud generally of the current auditing procedure. Now, if in your judgment you come to the point where you think this ought to be changed, I think you are making a mistake. But it is only for me to tell you Mr. WILSON. Many of us would like to feel we are not bound by what happened in 1933. And I think there are probably differences of opinion as to whether the gentleman recognized as a great banking expert in those days was the greatest banking expert. Mr. MARTIN. There is indeed. And there will be in every period. I could not agree with you more. Mr. BOLTON. Will the gentleman yield for one brief question ? Mr. WILSON. Mr. BOLTON. Yes. Would the Board feel, Mr. Chairman, if the GAO did audit, that it would have to continue its own auditing procedures as it now does, despite the audit of the GAO ? Mr. MARTIN. Well, I would think we would try to mesh some of our activities in with theirs. But we would certainly want to have some people looking at w^hat they were doing, also. Mr. BOLTON. In other words, in the contemplation of what we have, it would not be a transfer, for example, of the auditing field staff that you have over to the GAO and a continual ion under GAO of what is now going on under the Board ? Mr. MARTIN. NO, it would not. We have a responsibility here that we discharge to the best of our ability. AVe would want to continue a great part of that. The CHAIRMAN. Mr. Martin, you have meetings every 3 weeks of the Open Market Committee. Mr. MARTIN. I do—we do. The CHAIRMAN. YOU have complete minutes of these meetings? Mr. MARTIN. We have generally kept a running record. You have seen the records for 1 year, Mr. Pat man. You are familiar with our feeling that, by and large, these are documents that have some privilege and that ought not to be T H E FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS 55 The CHAIRMAN. I know. But you say within the Government— you say not outside of the Government but within the Government— you would expect other governmental agencies to have access to it. Mr. MARTIN. T O these minutes ? I don't see any reason why they should. We are glad to let anybody come and read them, if they have a direct interest. The CHAIRMAN. Have you the 1963 minutes, Mr. Martin? Mr. MARTIN. We are in the process of finishing them. The CHAIRMAN. What about 1962? You have them, don't you? Mr. MARTIN. Yes, we have them. The CHAIRMAN. I think the committee would like to see those. Mr. MARTIN. Well, I will take it up with the Open Market Committee. The CHAIRMAN. We are asking you. You are Chairman of the Board, Mr. Martin. Mr. MARTIN. I have no authority as Chairman of the Board. This Federal Reserve System, Mr. Patman, as you know^, was set up where the Chairman of the Board has no more vote than any other member of the Board. The CHAIRMAN. Well, you have discussed it recently, I imagine. May I request, just to make it formal—I request you to furnish this committee with the Open Market Committee minutes for the years 1963, 1962, 1961, and 1960. Will you furnish them or deny them? Mr. MARTIN. I would not be in a position this morning to say yes or no on it. I simply say we will be glad to consider your request. The CHAIRMAN. Can I state for the Committee that is a request of the committee ? Any obj ection ? The Chair hears none. I t is unanimously agreed to that we request it. Mr. WIDNALL. Mr. Chairman, I am not agreeing to it. The CHAIRMAN. We will have a vote on it, then. Mr. WIDNALL. I would like to see the answer of • Mr. MULTER. Mr. Chairman, may I ask—is there anything confidential in these minutes that cannot be made public ? The CHAIRMAN. Wait a minute, Mr. Multer. Mr. BOLTON. Mr. Chairman—may I inquire for what purpose we are asking for the minutes ? The CHAIRMAN. Because we want to see what the Open Market Committee has been doing. That is where everything happens—in the Open Market Committee. The rest of it doesn't amount to anything. Nobody has any powder except the Open Market Committee in the Federal Eeserve System. Mr. BOLTON. Pursuing my point of inquiry, Mr. Chairman, if I may, what the Open Market Committee has done or on what basis ? The CHAIRMAN. We want to see how they operate. We want to evaluate their actions. And this is the only way we can evaluate their actions. I don't think anyone can object to that, but if you do, then, of course, I don't propose to do it. Now if there is anything in them that should not be made public, wTe don't propose to make them public, unless it is in the public interest. Mr. WIDNALL. Mr. Chairman 56 THE FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS Mr. MARTIN. I cannot speak for the Committee. I merely want to point out to you that we have our foreign currency transactions in these records. And whether this should be—whether foreign governments would want the comments that are made in those minutes disclosed The CHAIRMAN. We will consider anything you say about it, Mr. Martin. But I think the Congress has and should have power over monetary matters, and you say this power has been farmed out—you didn't use the phrase "farmed out"—but you say Congress gave you an "indenture trust" to carry it on. So you certainly should not object to making reports to the people who gave you that permission, and who are charged under the Constitution Mr. MARTIN. We give you reports, Mr. Patman. All of the decisions and actions are reported to you. You have pointed out on occasion that we should give you fuller reports. And we are trying to give you fuller reports all the time. But this matter of minutes is an entirely different thing from reports. We can, of course, as I have pointed out on a number of occasions, get the Committee to just not say things, just not talk, or we can give up keeping this sort of verbatim record. The CHAIRMAN. Oh, you wouldn't do that. The law requires it. Mr. MARTIN. N O , the law does not require it. The CHAIRMAN. I t requires to put it in your report. Mr. MARTIN. We put in a record, but there is no law requiring us to have a verbatim transcript of everything that is said. The CHAIRMAN. Well, I know there is no law requiring verbatim reports. B u t I believe the spirit of the law requires you to keep an account of your proceedings and a record of them, and to report to Congress. Mr. MARTIN. W e do that. The CHAIRMAN. Yes, sir. But the report you make is rather skimpy. Mr. MARTIN. W e are trying to make it larger The CHAIRMAN. I n 1936, I think it was pretty good, or 1935—a pretty good report. B u t it got smaller and smaller and smaller. Mr. MARTIN. Well, that is a matter of judgment. I think it was better in 1938 and 1939 than it was in 1935 and 1936. The CHAIRMAN. Well, let's leave it to a vote, then. Mr. WIDNALL. Mr. Chairman? The CHAIRMAN. Mr. Widnall. Mr. WIDNALL. I would just like to make one point. Mr. Martin has not refused to furnish these reports. I think he has clearly stated he is only one of a number that would have to vote on whether or not they would furnish these to the committee. The CHAIRMAN. This is just a request. Mr. WIDNALL. The second point that has been made, too, is something that I think is highly sensitive and highly critical, affecting our relations with other nations. We did not ask the State Department to report to the Congress every word that is discussed with respect to foreign nations, and our attitude toward foreign nations, and make it a matter of public record. I think current transactions in the balance-of-payments situation is such that it is sensitive, and it is something that we have to give due T H E FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS 57 consideration to before we try to spread everything on the public record. Mr. REUSS. Mr. Chairman? The CHAIRMAN. Mr. Eeuss. Mr. REUSS. I think the way to handle that, if I may suggest it, is as follows: If in presenting to this committee the Open Market Committee's minutes for the years requested, the Federal Reserve System feels that there is any material, any sentence, any figure or anything else, which should be kept secret because of its international character, I think that the request as made by the Chair indicates that the Federal Reserve would be in a position to make such a request. And speaking for mvself, I would certainly, if that request was made, and the material bore out the Fed's contention, I would be inclined to honor it. The CHAIRMAN. Yes, I would, too. Mr. BOLTON. Mr. Chairman, may I direct myself to further discussion of the motion ? The CHAIRMAN. Certainly. Mr. BOLTON. I am in complete harmony with the chairman in wanting to see any information which is pertinent to the investigation and discussion of the bills before us. But I think this matter does deserve some consideration. F o r example, you mentioned the year 1963. This is sufficiently close to us that I wonder whether some of the discussions which took place in the Open Market Committee could have information therein, which, if that information became general knowledge, would have an effect upon the economic planning and thinking of other people. And I would respectfully suggest to the chairman that in the motion we agree that the minutes as submitted by the System would be held strictly confidential by members of the committee. The CHAIRMAN. Unless the committee wanted to make certain parts of it public. Mr. BOLTON. I think that should be done after further consultation with the Fed, and if they have any reason why they should not be made pubUc Mr. MTILTER. Mav I make a suggestion, Mr. Chairman ? Mr. REUSS. Don't you think the presumption should be the other way around, why doesn't the Fed give us this material with no strings attached, except for such part of the material, large, small, negligible, that they feel should be kept secret.? Mr. BOLTON. Well, there are two easy answers on the part of the Fed to that. One is to take the answer that the State Department and others use, which is to stamp "Secret" on the outside of everything, and turn it over. The other is the answer that I have no idea how voluminous these minutes are. I have never been privileged, as the chairman has, to see them. And for someone in the Fed to go through and delete and consider each statement that they feel should be held confidential, I think is a whale of a job. I would certainly hate myself to be in the position of the member of the Board who was doing this on behalf of the Board. Mr. MULTER. Would the gentleman yield ? Mr. REUSS. Mr. Chairman, I would like to move that the Federal Reserve System be requested to furnish to this subcommittee the minutes of the Open Market Committee for the years 1960,1961,1962, and 1963, and that the Federal Reserve System is requested to, further, 28-680—64—vol. 1 5 58 THE FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS notify the subcommittee, in making available these materials, whether it recommends that any portion of them be kept secret. The CHAIRMAN. That is the question. Are we ready for the question ? Mr. MULTER. Mr. Chairman, may I make a suggestion ? The CHAIRMAN. NOW, you are not a member of the subcommittee. Mr. MTJLTER. May I be heard on the motion ? The CHAIRMAN. N O , not now, because you are not a member of the subcommittee. Mr. MULTER. I t will be too late to hear me after the motion. I am a member of the full committee. I have a right to sit at the foot of the subcommittee and be heard, although I have no vote. The CHAIRMAN. G O ahead and be heard. Mr. MULTER. I am trying to make a suggestion that might clarify the matter and get you what you want, and at the same time not put the Federal Reserve Board or its Chairman in a false position. He has not refused to give us anything. H e has indicated he is merely Chairman of the Board with one vote. H e has asked for the opportunity to discuss the matter with the other members of the Committee. I suggest you take no action on this matter until Mr. Martin has had an opportunity to discuss the matter with the other members of the Board and the members of the Committee, and that you appoint a subcommittee of three to consult with Mr. Martin and the members of the Board and Committee, and I think you can work this out without the necessity of a motion, which puts them in the position of being recalcitrant. They are not. The CHAIRMAN. This is a very mild motion, just a request. Mr. Martin can take the request any way he wants to, and make a report. Mr. V A N I K . Mr. Chairman, I would rather have the conversations that preceded the minutes, myself. But I don't suppose there is any way of getting those. I move the previous question. The CHAIRMAN. A S many as favor the motion say "aye." (Chorus of "Aye.") The CHAIRMAN. Opposed, "no." (Chorus of "No.") The CHAIRMAN. The ayes clearly have it. Mr. WIDNALL. I am voting "present." The CHAIRMAN. Let's see. How many voted "aye ?" Hold up your hands. Six. And how many voted "no ?" One. And one "present." The motion is carried. Mr. WILSON. We have already passed the motion. But we are talking about complete minutes now, are we not ? The CHAIRMAN. Yes, sir; complete minutes. Mr. Martin knows what we are talking about. W e went over this one time. Mr. MARTIN. Y O U have had the minutes for the year 1960, Mr. Patman, which was brought up at the Joint Economic Committee. And I gave you a letter—a letter approved by the full Open Market THE FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS 59 Committee at that time, which is now in the hands of the Joint Economic Committee. W h a t they are going to do with it is your problem, not mine. The CHAIRMAN. Well, we had an unfortunate experience with that, Mr. Martin. You see, it was at the end of the session, when it was brought up. And some of our friends who opposed it made a point of no quorum. And it is hard to get a quorum at the end of a session. And Senator Bush was one of the principals who was against publishing anything about it. And he is very active and aggressive. H e attended every meeting there at the least. H e was going out, too, incidentally. But he kept us from publishing those minutes. And so they never did serve any public purpose. So I think it is proper that we continue here. Mr. BOLTON. Mr. Chairman, I trust by your reference to "he was going out, too" you are not predicting anything for any members of the committee present. The CHAIRMAN. N O : I meant the session was ending, and also Senator Bush—Senator Bush—I don't want to say anything against him. He is a very fine man, a wonderful Senator. H e just believed differently, lie didn't want anything published about the Federal Reserve. Mr. BOLTON. May I merely make a comment regarding my vote? I in no way was trying to protect the Fed from any disclosures, except the information which I think can be difficult, if it is published. The CHAIRMAN. Well, we are not going to be hard to deal with, I know, with the Fed. We will discuss these things, and I feel sure we will come to the right conclusion. Now, Mr. Martin, I wanted to ask you about these directors. Now, you mentioned about us having the directors here as witnesses. Personally, I don't see any reason to have them, because I don't think the directors know much about the Federal Reserve System. I think they know a lot about the bookkeeping operations of their respective banks, and they have a lot to do with that. B u t I don't think they know anything about operating the System. Mr. WIDNALL. Will the gentleman yield ? The CHAIRMAN. Yes. Mr. WIDNALL. I think it would be a wonderful opportunity to find out whether or not they do know something about the System. The CHAIRMAN. NOW, the class A directors, of course, they are elected by the banks—the big banks, are they not—class A ? Mr. MARTIN. Class A are divided into three groups—large banks, medium banks, and small banks. The CHAIRMAN. That is right. And they vote, not according to their stock. The amount of stock has nothing to do with their votes, does it? Mr. MARTIN. Yes, indeed. The amount of stock is used in a pooled way to determine who will vote on A and B directors. The CHAIRMAN. A S a pool, not as an individual bank ? Mr. MARTIN. Oh, yes. They vote as individuals on it. The CHAIRMAN. But that stock is not voted, Mr. Martin. Mr. MARTIN. N O ; not the stock. But the stock gives them The CHAIRMAN. Membership. Mr. MARTIN. Gives them the right to vote. 60 T H E FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS The CHAIRMAN. But anyway, those six directors are elected by the private banks. They nominate them, they submit them to the banks, and the banks all vote. And six out of the nine are elected by the private banks. There is no dispute about that, is there ? Mr. MARTIN. That is correct. The CHAIRMAN. NOW, the A directors, they can even be officers of banks, and officials of banks, as well as stockholders? Mr. MARTIN. That is right. The CHAIRMAN. The B directors, they cannot be officers of the bank, but they can be stockholders ? Mr. MARTIN. They can, but only a limited number of them have been. The CHAIRMAN. Mr. Martin, may I remind you one time you made that statement, and I asked you to poll them, to find out how many of them owned stock, and a majority of them owned stock. Now, I can get you the record and show you that, if you have forgotten about it. Mr. MARTIN. I can show you the record on that, Mr. Patman. The CHAIRMAN. The majority owned stock, did they not ? Mr. MARTIN. That I don't know. I would have to check. The CHAIRMAN. YOU remembered at the time, because you told me so. And we had a record of it. Anyway, they can own stock ? Mr. MARTIN. They can own stock. The CHAIRMAN. And, naturally, they are very close to the banks, or they would not be selected by the banks. They are very close friends of the particular bank, or they would not vote for them. Anyway, there are 6 of those directors, at each of the 12 banks, that are selected by the private banks. Mr. MARTIN. That is right. The CHAIRMAN. NOW, the Board selects these class C. Mr. MARTIN. Eight. The CHAIRMAN. I mean directors. Mr. MARTIN. Eight. The CHAIRMAN. Well, six are the majority. The directors select the President of the bank, don't they ? Mr. MARTIN. They do, subject to our concurrence. The CHAIRMAN. That is right. Of course, you have to make sure he is a good man, that he hasn't been in the penitentiary or something. Mr. MARTIN. Oh, no. We have the control. The CHAIRMAN. I know—you have the veto. But you have to approve somebody that they recommend, if he is a good man, don't you? Mr. MARTIN. N O ; we don't have to. The CHAIRMAN. YOU have to have a president. Mr. MARTIN. We have to have a president; yes. The CHAIRMAN. Well, as long as they submit names, and they submit one that is all right, you approve him, don't you ? Mr. MARTIN. We could suggest people, also, if we wanted to. The CHAIRMAN. Well, now, you have never turned down but one, have you? Mr. MARTIN. Oh, we have The CHAIRMAN. Well, just answer that question, please. THE FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS 61 You have only turned down one, have you not ? Mr. MARTIN. NO. The CHAIRMAN. I n the Mr. MARTIN. N O ; Mr. 50 years of the Federal Eeserve's existence?' Patman. I would have to go through the records. The CHAIRMAN. YOU can think of one, though, can you not ? Mr. MARTIN. I can think of more than one. The CHAIRMAN. YOU can think of more than one ? Mr. MARTIN. I can indeed. The CHAIRMAN. Well, I never heard of but one. Maybe you are right. Anyway, whoever they recommended as a good man, he has got to be accepted. You have to have a President. Mr. MARTIN. If the two of us—if the board of the bank and the Federal Eeserve Board agree that he is a suitable man to run the bank The CHAIRMAN. That is right—a suitable man to run the bank. That is good. Mr. MARTIN. Eight. The CHAIRMAN. Well, now, this fellow, the President, he is selected for 5 years. And he is naturally obligated to the directors, is he not? They elect him. Mr. MARTIN. Three of the directors are directly appointed by us. All of the directors are responsible to us The CHAIRMAN. I am talking about the six. Let us say that there was a controversy, and six of them wanted him, and three didn't, and he is elected. Now, it is his duty to serve all the directors, is it not? Mr. MARTIN. Let me get this straight. There are six to three. Now, it comes up to us. Do you think we would approve it ? The CHAIRMAN. Well, I am talking about something after he was all approved and everything. That question of approving; Mr. Martin, I think you are emphasizing that a little bit too much, because it seldom, if ever, comes up, as you know. And that hasn't been a major issue in the Federal Eeserve System. But I am talking about when you have a President who has been selected, he has been approved, everything. Now, what is his duty? His duty is to work with the Board that selected him, is it not? He works with them, and carries out their will, doesn't he? Mr. MARTIN. Quite frequently he leads the Board, and shows them— takes the leadership in the System, and the Board doesn't contribute as much as it should to the management of the bank. The CHAIRMAN. That doesn't exactly answer my question, Mr. Martin. I t is his duty—in other words, he is a sort of a servant of the board of directors, is he not ? Mr. MARTIN. H e is elected by the board of directors. The CHAIRMAN. And he is under obligation to carry out their will and wishes, is he not ? Mr. MARTIN. Well The CHAIRMAN. When he knows their will. Mr. MARTIN. Well, to show you how complicated this is, Mr. Patman, in the case of open market operations, the board of the bank 62 THE FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS cannot be told what—I have often wondered why some of the boards accept the responsibility. But the responsibility is back here, and the knowledge is back here. The President comes on to the Open Market Committee, and he is not at liberty to reveal the Committee's deliberations on the policy, even to his board of directors. The CHAIRMAN. There is no violation of the law for him to tell, is there, Mr. Martin ? Mr. MARTIN. Well, we cannot put all of this on a legal basis, Mr. Patman. The CHAIRMAN. I know. But from all Mr. MARTIN. We are talking about responsible people who are trying to do a good job. The CHAIRMAN. Dealing with human nature, as we know it is Mr. MARTIN. And by and large The CHAIRMAN. The 108 directors of the 12 Federal Reserve banks know pretty soon after you have an Open Market Committee meeting what has happened, don't they ? Mr. MARTIN. N O ; they frequently never know. The CHAIRMAN. Frequently never know ? Mr. MARTIN. Frequently never know. Only when it affects some action that they are going to take. The CHAIRMAN. Well, it is Mr. MARTIN. NOW, individual Presidents report in more or less detail. We have tried to bring this thing together in this new Open Market Committee concept that I have exposed here a good many times, so that there will be more integration of information that ought to be known throughout the System. But we have had a good record, as you yourself have indicated, on leaks. The CHAIRMAN. On leaks ? Mr. MARTIN. Yes. You indicated that The CHAIRMAN. Certainly—you keep it on the inside. Nobody but the insiders know. There are 30 or 40 or 50 people there that know what goes on. And they go outside. Now, normally those 30 or 40 or 50 people tell somebody. Around Congress here, if as many as two people know it, it gets out, and it, gets in the paper. Mr. BOLTON. Mr. Chairman, that is the very reason I took the position I did on your earlier motion on the minutes. The CHAIRMAN. About the leaks? Mr. BOLTON. Yes, sir. Mr. BALDERSTON. Chairman Patman Mr. V A N I K . I want to say that the public interest is more often served by the disclosure of information than by the concealment. I think the American people are capable of receiving and properly handling any information that they get. To think that all these things have to be in the realm of secrecy is a disturbing thing to me. Frankly, I like to walk off when secret matters are submitted to a committee, because I can read about it the next day in the paper, and I am not bound by the committee secrecy. The CHAIRMAN. On the political part, I don't like the idea to say always "politicians." The politicians have responsibility. If they don't carry out the will and wishes of the people, they are defeated. They have a great responsibility. THE FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS 63 Now; if you have a Federal Reserve System set off by itself, a sort of a kind of dictatorship, and you are not responsive to the people at all, they have no way of reaching you. That is the reason I wanted it into the Government some way, so that some way somebody can be reached who operates the Federal Reserve System against the public interest. If you just have 12 men with 14-year terms set off to themselves, and doing everything they want to do, make a report to nobody, and claim the main things are secret, the people don't know what is going on. The Members of Congress don't know what is going on, the President doesn't know what is going on, and there is no way to reach them. They cannot vote against you. You don't run for office. But we run for office. And we are responsible for your deeds and your acts. We are responsible for the fact that during the last 40 years the debt has been increased to $300 billion. We are responsible for that—Congress is. The Federal Reserve caused a good part of it, but we are responsible for it. Mr. WIDNALL. Mr. Chairman, has any President of the United States ever complained to you about the fact he doesn't know what is going on? Mr. MARTIN. None. Mr. WIDNALL. I would like to ask that of the chairman. Has any President of the United States ever complained to you about the fact he doesn't know what is going on in the Federal Reserve System? The CHAIRMAN. Well, that question should be directed to any Member of Congress. You don't see the President much. You are not talking about everything clear across the waterfront about what goes on in the Federal Reserve. A President, I think, can remove every member of the Board if he wants to under the law. That is what I believe. Of course the Presidents don't agree to that. But I think under the law it is very plain—that the President has control of this Board, and can remove any one of them any time he wanted to. But the President never discussed this with me. And I would have to answer your question, no. I don't know. Yes, I do. I will have to say two Presidents told me that they complained about that. I will have to change that. Mr. BALDERSTOX. Chairman Patman, may I revert to a point raised by Congressman Reuss before you put the motion for a vote? Since we turned over the I960 minutes to your committee, there has come into the activity of the Open Market Committee a radical change that perhaps Congressman Reuss had in mind. I refer to the swap arrangements that have been worked out between the Federal Reserve System of this country and the central banks of other countries. Those discussions are highly sensitive—to use the word that some of you have used already. If Open Market minutes which, contrary to what Congressman Vanik has said, do reveal the actual points made in almost the language used by members of the committee—if those minutes should somehow, by accident, reach public view, it would, in my judgment, do great harm to the relations between this country and others that are trying to help protect the dollar against the inroads of speculators. 64 THE FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS And so I would like to suggest to you, even at this belated point, that Congressman Eeuss was touching on something that is of great concern to me personally, and I am sure must be of great concern to each member of this committee—the protection of the dollar, and the stoppage of the resultant outflow of gold when the dollar is subject to raids by speculators. This is something that is of concern to every American. But it is especially the responsibility of the Congress, of this committee, and of the Fed. Mr. EEUSS. Mr. Chairman The CHAIRMAN. Mr. Eeuss. Mr. EEUSS. On that point, certainly the members of this committee are no less devoted to the protection of the dollar than members of the Federal Eeserve System. And I think that the format of the motion which was adopted by this subcommittee enables due protection of anything in the minutes which should be kept secret. And I hope that the Federal Eeserve, when it reports back to us on the request made in the motion, will point out any parts of the minutes the public disclosure of which it feels would be damaging to our world payments position. And, again, I think that very member of this subcommittee would agree with the statement which I made for myself—that I will be just as zealous to protect such critical information from improper disclosure as members of the Federal Eeserve System itself. Mr. V A N I K . I might say, Mr. Chairman, that if the dollar depends on this high degree of secrecy, we must be indeed in greater peril than I suspected. I believe in having a good forthright dollar that doesn't have to cloak behind anything. The dollar should be a good, solid piece of monetary exchange that has high regard because of considerations other than those that may be developed in secrecy. I fear that the secrecy argument might be used to shield things just as the security argument was always brought up when the Department of Defense was involved in many mistakes, in order to protect them from public scrutiny. The shield of secrecy would be drawn over mistakes, to protect those people who may have erred in making decisions in the Pentagon. I think, frankly, that the action that we have taken provides adequate safeguards to whatever there may be for this item. I think, at the same time, the denial of this information to the committees of Congress may keep us from legislating in an area where we might deal legislatively with these very problems that Mr. Balderston thinks ought to be protected through the secrecy of the minutes. I think if we know about these things, maybe we can provide legislation in some way. There ought to be some legislative approach, or executive approach, to the problem of the manipulators in the money market and the effect of their actions on the stability of the dollar. Mr. EEUSS. Mr. Chairman, I have a brief question. Mr. Martin, we in the Congress this week have received the President's budget message and his economic message, the total sense of which seems to be that by virtue of the tax cut that the administration T H E FEDERAL RESERVE SYSTEM AFTER F I F T T YEARS 65 hopes for, it anticipates that it may be able to bring down even unemployment by the end of this year to somewhat over 5 percent of the work force. My question to you is this: Does the Federal Reserve System intend to cancel out any part of the stimulus of this tax reduction by tightening money in 1964 over its present level ? Mr. MARTIN. Mr. Reuss, I cannot predict what the Federal Reserve System will do. Mr. REUSS. What about your own views, as Chairman ? Mr. MARTIN. My own views are that, as to Mr. Rains' resolution, or any resolution that might be introduced saying that money was already too loose, and that the Federal Reserve had a responsibility to tighten it up, that we should consider these points actively and intelligently and come to our own conclusions on what is required with respect to the flow of the economy. Mr. REUSS. The question was, do you intend, as Chairman, to cancel out any of the stimulus of the tax reduction by tightening money in 1964? Mr. MARTIN. I cannot answer that question, because that is not the sort of question you can give a yes or no answer to, because it depends on the flow of funds. When you say cancel out Mr. REUSS. Then your answer is Mr. MARTIN (continuing). The Federal Reserve is just as interested as you are, Mr. Reuss, in seeing the economy expand, and unemployment reduced. Now, it means Mr. REUSS. Your answer is that you, then, might want to cancel p a r t of the stimulus of the tax reduction by tightening Mr. MARTIN. "Cancel" is the wrong word. That is why I say you ^re dealing in words that do not permit of a yes or no answer. Mr. REUSS. I dealt with it because President Johnson, in his economic report, page 11 says, " I t would be self-defeating to cancel the stimulus of tax reduction by tightening money." Now, your answer to that proposition is you don't know whether you go along with President Johnson or not? Mr. MARTIN. I don't know what the developments will be in the next few months. Mr. WIDNALL. Mr. Chairman Mr. MARTIN. Let me just make this comment: I think that President Johnson's handling of the budget has made our problem considerably easier than it would have been if we were going to have twice the budget deficit that was being projected some time ago. Mr. WIDNALL. The quotation that Mr. Reuss used from the President's budget message was correct. But he pointedly left out what followed, two sentences later: "But monetary policy must remain flexible, so that it can quickly shift to the defense if unexpectedly inflation threatens or the balance of payments worsens." There is no intent by the first part of that statement to say there shouldn't be any flexibility in Federal Reserve action. Mr. REUSS. Well, if I may reclaim the floor for another question: Do you anticipate grave inflationary dangers in this country while unemployment remains over 5 percent in 1964? 66 T H E FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS Mr. MARTIN. I think there may be, yes. I won't rule that out. Mr. V A N I K . Will the gentleman yield ? I s it possible that in these efforts to keep the economy on an even keel, that you may have to recommend an increase in the interest rates, or policies which will lead to an increase in the interest rates? Mr. MARTIN. Yes, it is possible, Mr. Vanik. I would not want to be up here and say anything different. But I don't know. And I don't want it. Let me make it very clear. I am not anxious for that. This is a matter of judgment that has to be exercised by the members of the Board. And I will simply do the most conscientious thing that I can as an individual, and my fellow Board members will do the same. And we would hope, as I said earlier, that we could have as low interest rates as is possible to have. But if the alternative is inflation, I think that that would undermine things and would do more to harm the employment problem than help it. Mr. V A N I K . Couldn't you solve this problem a little bit by somehow increasing the reserves required by banks—this is another way—without raising interest rates ? Mr. MARTIN. That is something considered at each of these meetings, Mr. Vanik. Mr. V A N I K . When did you last consider increasing reserves during the threat of an inflationary spiral ? Mr. MARTIN. We did it largely in the accord period. Mr. V A N I K . I n the what? Mr. MARTIN. I n the accord period—1951-52, when we had a headon inflation. We found one of the problems with reserve requirements was you put them up, and if you are supporting the Government securities market at the same time, the banks just dump the Government securities. Mr. REUSS, Just that I may be sure of what I thought I heard as your answer, Mr. Martin, it is your view that you may feel called upon, while unemployment is still in excess of 5 percent, to tighten the money supply this year ? Mr. MARTIN. Market forces may produce this without any action by the Fed. But a better way of putting it is the Fed may not feel it should interfere with those market forces to prevent interest rates from rising. Mr. REUSS. Well, it comes to the same thing, because you interfere every day with market forces—that is what open-market policy is, is it not? Mr. MARTIN. But this is the big difference. You cannot manipulate interest rates indefinitely against the forces of the market. There are a great many people who think you can. Mr. REUSS. But you can change the money supply, can you not? Mr. MARTIN. YOU influence them, and we have influenced them. I made the point that there are people today in the country who think that money is too loose. I don't happen to agree with them. But there are a surprising number of people who do. Mr. RETJSS. Yes. T H E FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS 67 But what, of course, is of interest to us and the country is what you think, because you are the man who more than any other single person governs whether money is too loose, too tight, or just about right. And to conclude, then, I do have Mr. MARTIN. As one man. Mr. EEUSS. That is right. I do have it as your testimony that this year, though unemployment does not get below the 5-percent figure, you nevertheless envisage the possibility of your tightening the money supply over what it now is. Mr. MARTIN. I envisage the possibility that the money supply may tighten. If we should have a boom or have an upsurge in the economy, yes. And I don't think that necessarily means that you have a certain level of unemployment. The process of inflation goes on, Mr. Eeuss, through the creation of money. And at some point it takes hold. And if you are sound asleep until it takes hold, and then the prices are way up—and prices have been tending up recently—then you are talking about something that has gone. You are after the fact. Mr. EEUSS. I do see what your position is, and in lieu of our annual Joint Economic Committee session, which I guess we are not going to have this year, I want to register my view with you, Mr. Martin, that Mr. MARTIN. And I always welcome it, Mr. Eeuss. Mr. EEUSS. That you and your colleague on the Federal Eeserve should not tighten the money supply at least until unemployment gets lower than 5 percent, because I don't think that the danger of inflation with 5 percent unemployment, at least demand inflation, is a very grave one. Mr. MARTIN. I always welcome your view. I can assure you we will take it into account. Mr. V A N I K . Maybe the Fed ought to have the flexibility to push up the reserve margins to 100 percent, and then when the banks dump the Government securities the reserve ratio could be pushed up to check inflation. How about that ? Mr. MARTIN. I don't know—I don't quite follow you on that. You are thinking about stock market margins now? Mr. V A N I K . N O , I am talking about the reserve margins. Mr. MARTIN. Well, I could not visualize very well 100 percent reserve requirement. I t would be a very drastic change in the structure of the money market. The CHAIRMAN. This is off the record. (Discussion off the record.) The CHAIRMAN. Back on the record. Mr. BOLTON. Mr. Chairman, in view of the fact, because of the opening of the Ohio Development Office this afternoon, I may not be able to be here at 2:30, may I just ask a question ? The CHAIRMAN. Yes, sir. Mr. BOLTON. Mr. Martin, in this whole discussion of your position, and the position of the Fed on interest rates, vis-a-vis, the expected results from the tax reduction bill, what you are, in effect, saying is that the effect of the tax bill cannot be accurately predicted at this point, that the effect on the money market, on the balance-of-payments 68 THE FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS problem, on the supply and demand of cash—these are all things which you have to take into consideration, and you cannot commit the Federal Reserve Board at any time for the action that will be required a month or two or three hence. Is that true ? Mr. MARTIN. That is correct. Mr. BOLTON. And that that action will depend not just on one factor of unemployment, or one factor of under or overemployment, or one factor of overdemand, but that it is a judgment which is based on the sum total of a great many influencing factors on the economy. Mr. MARTIN. That is correct. Mr. BOLTON. Thank you. The CHAIRMAN. We will recess, then, until 2:30. (Whereupon, at 12:10 p.m., the subcommittee recessed, to reconvene at 2:30 p.m., the same day.) A F T E R N O O N SESSION Present: Representatives Patman (presiding), Reuss, Widnall, and Bolton. The CHAIRMAN. The committee will please come to order. STATEMENT OF WILLIAM McCHESNEY MARTIN, JR.—Resumed The CHAIRMAN. Mr. Chairman, I will not take much time. I want the committee members who desire to ask questions, to be allowed to do so. But I wanted to go over these particular bills with you briefly. Xow, I will ask the members who have questions they would like to ask to submit them to me in writing, or to the clerk, and we will make sure that we don't duplicate, and will reconcile them as far as possible before submitting them to you, to make it as easy as possible. And then we will ask you to answer them for the record. Will that be satisfactory ? Mr. MARTIN. That will be satisfactory. The CHAIRMAN. NOW, we have this bill here to retire the Federal Reserve bank stock. That is one of the bills we are considering in connection with an overall study of the matter. (H.R. 3783, referred to, follows:) [H.R. 3783, 88th Cong., 1st sess.] A BILL To provide for the retirement of Federal reserve bank stock, and for other purposes Be it enacted "by the Senate and House of Representatives of the United States of America in Congress assembled, That (a) the last sentence of the first paragraph of section 2 of the Federal Reserve Act (12 U.S.C. 222) is amended by striking out "subscribing and paying for stock" and inserting in lieu thereof "obtaining a certificate of membership". (b) The last sentence of the third paragraph of such section 2 (12 U.S.C. 282) is amended by striking out "subscribe to the capital stock of such Federal reserve bank in a sum equal to six per centum of the paid-up capital and surplus of such bank, one-sixth of the subscription to be payable on call of the organization committee or of the Board of Governors of the Federal Reserve System, one-sixth within three months and one-sixth within six months thereafter, and the remainder of the subscription, or any part thereof, shall be subject to call when deemed necessary by the Board of Governors of the Federal Reserve System, said payments to be in gold or gold certificates." and inserting in lieu thereof "obtaining a certificate of membership pursuant to the provisions of this Act." (c) The fourth paragraph of such section (2) (12 U.S.C 502) is hereby repealed. THE FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS 69 (d) The paragraphs which, prior to the repeal made by subsection (c) of this section, were the eighth, ninth, tenth, eleventh, and twelfth paragraphs of such section 2 (12 U.S.C. 283-286) are hereby repealed. (e) The first sentence of the last paragraph of such section 2 (12 U.S.C. 281) is hereby repealed. SEC. 2. (a) The last sentence of the first paragraph of section 4 of the Federal Reserve Act is amended by striking out "a subscription to the capital stock of" and inserting in lieu thereof "an application for a certificate of membership in". (b) The second paragraph of such section is amended (1) by striking out "when the minimum amount of capital stock prescribed by this Act for the organization of any Federal reserve bank shall have been subscribed and allotted," and inserting in lieu thereof "when the organization committee shall deem that a sufficient proportion of eligible banks have applied for membership in a Federal reserve bank in process of organization,", (2) by striking out "the amount of capital stock and the number of shares into which the same is divided,", (3) by striking out "subscribed to the capital stock of" and inserting in lieu thereof "applied for membership in", (4) by striking out "and the number of shares subscribed by each", and (5) by striking out "subscribed or may thereafter subscribe to the capital stock of" and inserting in lieu thereof "applied or may thereafter apply for membership in". (c) The subparagraph numbered "Eighth" of the fourth paragraph of such section 4 (12 U.S.C. 341) is amended by striking out "stock". (d) The tenth paragraph of such section 4 is amended by striking out "stockholding" and inserting in lieu thereof "member". (e) The second sentence of the twelfth paragraph of such section 4 is amended by striking out "subscriptions to the capital stock" and inserting in lieu thereof "applications for membership." SEC. 3. Section 5 of the Federal Reserve Act (12 U.S.C. 287) is amended to read as follows: "SEC. 5. (a) The Federal reserve banks shall have no capital stock. "(b) A bank applying for membership in the Federal Reserve System at any time after the date of enactment of the Act entitled "An Act to provide for the retirement of Federal reserve bank stock, and for other purposes" shall submit such application, in accordance with the regulations of the Board of Governors of the Federal Reserve System, to the Federal reserve bank of its district. Such application shall be accompanied by a membership fee of $10, which shall not be refundable unless such application is disapproved or withdrawn bbefore approval. "(c) Upon the approval of an application submitted pursuant to subsection (b) of this section, the Federal reserve bank shall issue to the applicant a certificate attesting the membership of the applicant in such Federal reserve bank and in the Federal Reserve System. "(d) When a member bank voluntarily liquidates, it shall surrender its certificate of membership and cease to be a member of the Federal reserve bank of its district and of the Federal Reserve System." SEC. 4. (a) The first paragraph (12 U.S.C. 288, first paragraph) of section 6 of the Federal Reserve Act is hereby repealed. (b) The second sentence of the paragraph which, prior to the repeal made by subsection (a) of this section, was the second paragraph (12 U.S.C. 288, second paragraph) of such section 0, is amended to read as follows: "The certificate of membership held by said national bank shall be surrendered to the Federal reserve bank of its district, and said national bank shall cease to be a member of such Federal Reserve bank and of the Federal Reserve System." SEC. 5. (a) The first paragraph (12 U.S.C. 289) of section 7 of the Federal Reserve Act is amended by striking out "the stockholders shall be entitled to receive an annual dividend of 6 per centum on the paid-in capital stock, which dividend shall be cumulative. After the aforesaid dividend claims have been fully met,". (b) The second sentence of the second paragraph (12 U.S.C. 290) of such section 7 is amended by striking out "dividend requirements as hereinbefore provided, and the par value of the stock,". (c) The third paragraph (12 U.S.C. 531) of such section 7 is amended by striking out "capital stock and". SEC. 6. (a) The first paragraph (12 U.S.C. 321, first paragraph) of section 9 of the Federal Reserve Act is amended (1) by striking out, in the first sentence of such paragraph, "the right to subscribe to the stock of" and inserting in lieu 70 THE FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS thereof "membership in", (2) by striking out the second and third sentences of such paragraph, and (3) by striking out, in the last sentence of such paragraph, "stockholder", and inserting in lieu thereof "member". (b) The first sentence of the second paragraph (12 U.S.C. 321, second paragraph) of such section 9 is amended by striking out ''Federal reserve bank stock owned by the national bank shall be cancelled and paid for as provided in section 5 of this Act." and inserting in lieu thereof "membership of such national bank shall be extinguished and the certificate of membership cancelled as provided in section 5 of this Act." (c) The first sentence of the third paragraph (12 U.S.C. 321, third paragraph) of such section 9 is amended (1) by striking out "stockholder" and inserting in lieu thereof "member", and (2) by striking out "stock" and inserting in lieu thereof "membership". (d) The fifth paragraph (12 U.S.C. 323) of such section 9 is hereby repealed. (e) The first sentence of the paragraph which, prior to the repeal made by subsection (d) of this section, was the ninth paragraph (12 U.S.C. 327) of such section 9, is amended by striking out "stock" and inserting in lieu thereof "certificate of membership". (f) The paragraph which, prior to the repeal made by subsection (d) of this section, was the tenth paragraph (12 U.S.C. 328) of such section 9, is amended (1) by striking out, in the first sentence thereof, "all of its holdings of capital out the second proviso of the first sentence thereof, (3) by striking out, in the last sentence thereof, "stock holdings" and inserting in lieu thereof "certificate of membership", and (4) by striking out, in the last sentence thereof, "a refund of its cash paid subscription with interest at the rate of one-half of one per centum per month from date of last dividend, if earned, the amount refunded in no event to exceed the book value of the stock at that time, and shall likewise be entitled to". (g) The paragraph which, prior to the repeal made by subsection (d) of this section, was the sixteenth paragraph (12 U.S.C. 333) of such section 9, is amended (1) by striking out, in the first sentence thereof, ", except that any such savings bank shall subscribe for capital stock of the Federal reserve bank an amount equal to six-tenths of 1 per centum of its total deposit liabilities as shown by the most recent report of examination of such savings bank preceding its admission to membership", (2) by striking out all of the remaining sentences of such paragraph except the last sentence thereof, and (3) by striking out, in the last sentence of such paragraphs. ", except as otherwise hereinbefore provided with respect to capital stock". (h) The paragraph which, prior to the repeal made by subsection (d) of this section, was the twenty-second paragraph (12 U.S.C. 337) of such section 9, is amended (1) by striking out, in the second sentence thereof, "stock", and inserting in lieu thereof "certificate of membership", and (2) by striking out, in the last sentence thereof, "stock", and inserting in lieu thereof "certificates of membership". (i) The last paragraph (12 U.S.C. 338) of such section 9 is amended by striking out, in the last sentence thereof, "stock", and inserting in lieu thereof "certificates of membership". SEC. 7. The first sentence of the third paragraph of section 10 of the Federal Reserve Act is amended by striking out "capital stock and surplus" and inserting in lieu thereof "net earnings for the immediately preceding half year period". SEC. 8. The amendments made by the first seven sections of this Act shall take effect on the thirty-first day after the date of enactment of this Act. SEC. 9. (a) Not later than 31 days after the date of enactment of this Act, each holder of stock in any Federal reserve bank shall surrender such stock to such bank, which shall, as of the thirty-first day after the date of enactment of this Act, cancel and retire the same and pay or credit to such former holder the par value thereof, plus interest at the rate of one-half of one per centum per month from the date of the last dividend, less a membership fee of $10, which shall not be refundable. (b) Upon the cancellation and retirement of Federal Reserve bank stock as provided in subsection (a) of this section, each Federal reserve bank shall issue to each such former holder thereof a certificate attesting its membership in such Federal reserve bank and in the Federal Reserve System. SEC. 10. The eleventh paragraph of section 9 of the Federal Reserve Act is amended to read as follows : THE FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS 71 "Any applying bank shall be eligible for membership if it is an insured bank as defined in subsection (h) of section 3 of the Federal Deposit Insurance Act. The capital stock of a state member bank shall not be reduced except with the prior consent of the Board of Governors of the Federal Reserve System." The CHAIRMAN. And, of course, our point here is that the stock doesn't serve any purpose. I t doesn't give the banks even the privilege to vote by reason of their stock. The stock cannot be mortgaged, it cannot be hypothecated, it cannot be sold. I t is something that is rigid in the law, going up and down according to the capital and surplus of the bank. That is correct; is it not ? Mr. MARTIN. Yes, that is correct, Mr. Patman, except that the stock does not fluctuate in value. The CHAIRMAN. N O , it goes up and down according to the 3 percent that is required. Mr. MARTIN. According to the capital and surplus of the banks. The CHAIRMAN. That is right. I meant to say according to the 3 percent of the capital and surplus. As capital and surplus goes up, the amount of stock goes up. But the stock carries no proprietary interest. Mr. MARTIN. N O proprietary interest—that is a very good statement. The CHAIRMAN. And, for that reason, we feel that the stock should be repaid, because a lot of bankers think they own the Federal Reserve System. And some of them write in that they ought to have a cut on the interest that is paid in on the $33 billion of the portfolio. They are honest in that belief. Of course, if they did that, they would get a 200-percent dividend practically every year. And, of course, it was intended they get 6 percent, as the law sets out, as you outlined this morning. The stock business—I don't think there is too much controversy about that. You believe one way, the Board believes one way, and I believe another, and some of the committee believe like I do and some believe probably the other way. But where is that stock listed in this annual report? You have one there with you, don't you—an annual report? Mr. MARTIN. N O , I don't, Mr. Patman. I am sorry. But it is listed in the back. The CHAIRMAN. Here it is—earnings and expenses in Federal Reserve banks. Now, where in there—will someone hand this report to Chairman Martin ? Where in there would the stock, say, of the New York bank be listed, or where—what figure there would include the stock in the New York bank ? Mr. MARTIN. Paid in capital accounts, on page 145, would show $466,926,000. The CHAIRMAN. That is the total amount of all Mr. MARTIN. T h a t is the total. And the surplus would be $933,851,000. The CHAIRMAN. All right. Now, then, where is that stock now ? Where is that money for that stock? Where is it located? I s it in the 12 Federal Eeserve banks? I s it in some commercial bank ? Where is it ? 72 THE FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS Mr. MARTIN. The stock certificate is held by the member bank. The CHAIRMAN. But the money that they got for the stock certificate, where is that money ? Mr. MARTIN. That is on deposit as a part of their reserve balance. The CHAIRMAN. P a r t of their reserve balance. But I think if you will consider that reserve balance, that was all acquired by reason of interest on Government securities and earnings of the bank; was it not ? Mr. MARTIN. Yes; that is correct. The CHAIRMAN. I know. B u t that doesn't include the stock, then, does it ? I don't understand that. Mr. MARTIN. The earnings on the stock are included in the earnings of the member bank. The CHAIRMAN. I know. B u t I don't think you understand me. I just have not made myself plain. I have made the statement, Mr. Martin, that the stock, this $466 million, is idle and unused. I t has never been invested. I t is idle and unused now. And, therefore, it ought to be paid back to the banks. And then this $933 million ought to be paid into the Treasury on the theory that the Federal Reserve banks will never need any surplus. You know, we went over that in 1957, I think, over at the House Small Business Committee. Mr. MARTIN. W e did indeed. The CHAIRMAN. W h a t is that ? Mr. MARTIN. I said we did indeed. The CHAIRMAN. Yes, sir. And all the members of the Board, I think, were there at different times. And every one of them admitted they could not conceive of any circumstances that would ever require them to need any part of that surplus or capital that there could never be a need for it because you get your money when you need it by creation. You don't need to take the surplus, you don't need to take stock. You create your money. The law gives you that right. T h a t is correct, is it not ? Mr. MARTIN. I didn't concede that we would under no circumstances need it. One of the items is self-insurance that we can engage in. Now, we lost a million and a half dollars in this bank robbery so widely publicized. The CHAIRMAN. YOU mean that $7y2 mililon—you mean up in Boston? Mr. MARTIN. U p in Boston. The CHAIRMAN. YOU lost $7% million out in San Francisco, too. Mr. MARTIN. NO ; we have not lost that. The CHAIRMAN. Well, you have not found it. Mr. MARTIN. I feel confident from the course of events that we will. The CHAIRMAN. That is good. I hope you find it in this country. Mr. MARTIN. Well, I have grave question whether it is in a numbered account in Switzerland. The CHAIRMAN. Don't overlook the fact there are numbered accounts in New York. You realize that, don't you, Mr. Martin ? Mr. MARTIN. I don't have any contact with any numbered accounts in New York, Mr. Patman. T H E FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS 73 The CHAIRMAN. Well, that is another thing. I object to what is going on. That a State like New York can make what is tantamount to agreements with Switzerland, and tell the officials of Switzerland, "You can establish a bank here in New York State, and we will give the permit, we have the right to do it. We don't have to go to Mr. Martin of the Federal Reserve, we don't have to go to the Treasury, the Comptroller of the Currency, the F D I C . We don't have to go to anybody. We will let you have a bank here, if you let us have one in Switzerland." They are doing that all the time; are they not ? Mr. MARTIN. Not to my knowledge, on that basis. The CHAIRMAN. Well, you have knowledge in California, where in Tokyo, Japan, they have several banks there. You have knowledge of that, don't you ? Mr. MARTIN. All of those have come before us. The CHAIRMAN. All of them have ? They were national ? Mr. MARTIN. Yes. The CnAIRMAN. NOW, then, some of them are owned exclusively by Tokyo banks; are they not ? Mr. MARTIN. They must come before a State authority. If they don't come before us, they come before a State authority. The CHAIRMAN. Just like in New York they came before a State authority. Mr. MARTIN. That is right. The CHAIRMAN. That is the part I object to. The Federal Government has the power over money. Why should a State have the right to license a foreign bank, and then iet that foreign bank have the benefit of the fractional reserve system here in the United States, which is equal to using the credit of this Nation free of charge ? You don't agree to that, do you ? Mr. MARTIN. N O ; I don't agree. But I don't agree that it is using the fractional The CHAIRMAN. Why? You don't deny that they are using it. Of course they are using it, all the time. Mr. MARTIN. Well, the Royal Bank of Canada, for example, that comes in here—what are they doing with respect to these reserves ? The CHAIRMAN. The Royal Bank of Canada, I don't know about that. But any bank that is established in New York, they have everything that they have here if they want it, the way I understand it—even a secret account, like Switzerland—they have a numbered account in New York. Mr. BOLTON. Mr. Chairman, will you yield for a question? Is the chairman making a point that he doesn't believe in the fact that foreign banks should be able to establish here? The CHAIRMAN. Without the authority of the Federal Government. 1 am protesting the States being allowed, the 50 States, each of them> being allowed to contact foreign countries and make trades with foreign countries to establish branches or banks or units in the State, provided that State can let some bank have a branch in their State, or another unit. Mr. BOLTON. Does the gentleman then, in effect, say he does not believe in the dual banking system ? The CHAIRMAN. Oh, certainly I do. Mr. BOLTON. But because it is in the international field 28-680—64—vol. 1 6 74 T H E FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS The CHAIRMAN. I don't believe in the States dealing with foreign governments. I think that is a matter for the Federal Government of the United States of America to do. Mr. BOLTON. And, therefore, because the banks are national banks abroad The CHAIRMAN. Well, the National and State bank doesn't make too much difference. I object to a State being allowed the privilege of making deals with foreign governments—specifically in Switzerland's case. Now, they have a bank in New York that accepts deposits. And they have the fractional reserve system. They issue money on the credit of our Nation. They do everything that a bank in New York does—for the reason that the Swiss bank and Switzerland agreed to let the New York bank have units or branches over there. T h a t is the part I object to. And if one State can do it, and California can do it, 50 States can do it. And where would we be? I think it is in a mess, myself. And I think Mr. Martin ought to begin to look into it, and make recommendations to Congress on it. Mr. MARTIN. Mr. Patman, I am sure if the State authorities in New York approve a foreign branch that does not come through the Federal orbit, that they check with the State Department at the time that they do it. The CHAIRMAN. I know. But the State Department is not the monetary part. We are talking about that part of the Constitution which says that Congress shall have the power to coin money and regulate its value. That comes under that. Mr. MARTIN. We keep in close touch with the State Department on this type of thing. The CHAIRMAN. The State Department has nothing to do with it. Now, of course, I think where it is national you should. But what I mean—so far as New York is concerned, making a deal with Switzerland, the State Department has nothing to do w^ith that, the way I see it. Mr. MARTIN. I think they have the foreign policy aspect of it. The CHAIRMAN. Certainly. But that is Federal, you know. That is the reason you do business with the Federal Government, because this is a Federal proposition. I t is not a State deal. Anyway, I will not take up too much time on that. But I will ask you some questions about this bill. You said you didn't state—and I am not sure that you did—I think you are correct—that you are one of the ones that did not state that it was inconceivable to you that there would ever be an occasion arise that you would need any part of the surplus. But some members of the Board did state it. Now, then, under what conditions can you conceive of a situation that would necessitate you throwing $1 or any amount out of that $933 million? Mr. MARTIN. There are a lot of vicissitudes in this world, Mr. Patman, that you cannot foresee. The CHAIRMAN. Name one of them. Mr. MARTIN. I just mentioned one of a bank robbery. The CHAIRMAN. Bank robbery ? Mr. MARTIN. Where we had self-insurance. T H E FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS 75 The CHAIRMAN. Would you take that out of the surplus ? Mr. MARTIN. That is what it could be used for. The CHAIRMAN. I thought you carried insurance. I never did see any reason you should, but I thought you did. Mr. MARTIN. We have had self-insurance. The CHAIRMAN. Self-insurance—just like the Government has. A lot of things you have insurance on, don't you ? Mr. MARTIN. We have had it. This has been one of the things that has been discussed frequently in the System. The CHAIRMAN. All right. I n case of a robbery, you might need part of that surplus. What else would you need it for ? Mr. MARTIN. I could not possibly conjure up a series of cases where we would use it. But this is a businesslike procedure. And I think that there is no reason at all why circumstances, where we are having heavy losses, and our earnings are not substantial—there may come a time The CHAIRMAN. H O W could your earnings fail when 99 percent of your earnings come from the interest on Government bonds? And you bought the bonds with created money. Mr. MARTIN. Mr. Patman, the situation can change very quickly, and has changed before. If we had a major depression in this country, which I certainly hope will never happen again—but if we did, you would find that all of the circumstances around this would change surprisingly quickly. The CHAIRMAN. But my point is you could save the taxpayers a lot of money if you paid this into the Treasury today, $933 million. If you had a loss of $5 million, if you had to have it, Congress could appropriate it out of that very fund you turned in to the Treasury. There is no reason why it could not. But why have a billion dollars almost there that is idle and unused? You have no good reason to believe you will ever need it. But if you did need it, it could be taken care of. And it would save the taxpayers a lot of money every year. Mr. MARTIN. I question whether in the long run it would save the taxpayers money. We have set this up in this way as a businesslike procedure. And it is perfectly true, as you say, that we could pay all of this into the Treasury at this juncture, and then if we got into trouble we could come back to the Congress to appropriate the money. But it seems to me that by and large this was a good, workmanlike, businesslike way of handling it. The CHAIRMAN. Well, of course, this is not necessarily a private business. This is a Government business. Mr. MARTIN. Well, I am putting it on a Government business basis. The Congress can change this at any time that you want. I have never denied that. You can take the Federal Eeserve Act and rewrite it any time that you want. The CHAIRMAN. Yes, sir, that is very true. Mr. MARTIN. That is your prerogative and your authority, and I have never questioned it in any way. The CHAIRMAN. But it is awfully difficult to get consideration of the subject as important as this. 76 T H E FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS You said this morning—you kept talking about the accord. Don't you agree, in order for you to say that you have a real accord, like in March 4, 1951, that you would have to have not only the Federal Reserve, but you would have to have the President in on it—he would have to be a party to it, would he not ? Mr. MARTIN. Well, the President was a party to it. The CHAIRMAN. Well, he says he wasn't. Mr. MARTIN. Well, I am not in a position to question the President The CHAIRMAN. Mr. Truman—he says he was not a party to it. Mr. MARTIN. I wish you would read President Truman's letter to Mr. McCabe, commending him for his part in arriving at this accord. The CHAIRMAN. I know. But he commended him on the theory that he had just been in with the whole Board and promised that he would not let that long-term interest rate go up, didn't he? Mr. MARTIN- Oh, no, Mr. Patman. That came following that. The Board meeting was in the latter part of January, if I remember correctly, and the accord was on the 4th of March. The CHAIRMAN. Well, I can tell you now Mr. MARTIN. I had some small part in working on that. The CHAIRMAN. I know you did. And Mr. Truman did not agree to that accord, and the President of the United States fixes the lonsf-term interest rate. You agree to that, don't you? Mr. MARTIN. I agree that the President agreed to fix the longterm interest rate? The CHAIRMAN- H e is the one that agrees to the amount of interest on a long-term rate. Mr. MARTIN. On Government securities, he has to approve it, yes. The CHAIRMAN. That is what I say. That is the reason it is necessary for him to be a party to it. Mr. MARTIN. Well, he was a party. We issued at the time of the accord, as you will recall, a 2%-percent nonmarketable bond, which was sold to the insurance companies in very large measure, and took the overhang off the market. And the President's signature is on that piece of paper. The CHAIRMAN. There are two people that have never been heard on that—one of them is Mr. Truman, and the other one is Mr. McCabe, who was chairman. We might ask him to testify. Mr. MARTIN. I have no objection to your calling either one of them. I merely want to point out to you that the accord which was announced—I think it w-as in the papers on March 4 of that year—was negotiated over a period of about 6 weeks preceding its arrival. And it was a meeting of the minds at that time. I was authorized by the Secretary of the Treasury, my superior, to go over to the Federal Reserve Open Market Committee and negotiate with them on his behalf. And I went over—I think it was on the first of March or thereabouts. I have been looking through some of my notes in my dearies on this. And it was on the first of March, I think, the Open Market meeting at that time, that I went over and negotiated with the Open Market Committee on behalf of the Trpfl surv. The CHAIRMAN. Mr. Snyder was in the hospital at that time. Mr. MARTIN. Mr. Snyder was kept fully informed. I went with Under Secretary Foley out to the hospital, and despite the fact that T H E FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS 77 he was suffering and lying on his back, and was, as you say, incapacitated, he was informed. Now, the accord may not have worked out the way you wanted it, or the way I wanted it, necessarily. But that was an accord—in my judgment it is an indisputable fact of history. The CHAIRMAN. We will go into that a little more, because I think it is important in connection with this study. Now, I have a bill here, H.R. 9685 to amend the Federal Eeserve Act to provide that interest received by Federal Eeserve banks on obligations of the United States will be covered into the Treasury as miscellaneous receipts, to authorize appropriations for the expenses of the Federal Reserve banks and the Board of Governors of the Federal Reserve System, and for other purposes. (The bill, H.R. 9685, referred to, follows:) [H.R. 9685, 88th Cong., 2d sess.] A BILL To amend the Federal Reserve Act to provide that interest received by Federal Reserve banks on obligations of the United States shall be covered into the Treasury as miscellaneous receipts, to authorize appropriations for the expenses of the Federal Reserve banks and the Board of Governors of the Federal Reserve System, and for other purposes Be it enacted ~by the Senate and House of Representatives of the United States of America in Congress assembled, T h a t section 7 of the F e d e r a l Reserve Act is amended by inserting immediately after t h e section heading the following new paragraph: "The full amount of all interest and discounts received by Federal Reserve b a n k s on obligations of the United States shall be paid or credited by such b a n k s to t h e Secretary of the T r e a s u r y and covered into the T r e a s u r y as miscellaneous receipts. To t h e extent t h a t the income of such banks from other sources is insufficient for the payment of their expenses, there a r e hereby authorized to be appropriated such sums a s may be necessary." SEC. 2. ( a ) T h e t h i r d p a r a g r a p h (12 U.S.C. 243) of section 10 of the F e d e r a l Reserve Act is amended to read as follows : "There a r e hereby authorized to be appropriated such sums as m a y be necessary to pay the expenses of the B o a r d of Governors of the F e d e r a l Reserve System a n d t h e salaries of its members and employees. Subject to the availability of appropriations, t h e B o a r d may maintain, enlarge, or remodel its office building in t h e District of Columbia and shall h a v e sole control of such building a n d space therein." (b) The fourth p a r a g r a p h (12 U.S.C. 244) of section 10 of t h e F e d e r a l Reserve Act is amended by striking out the t h i r d sentence. SEC. 3. T h e first section and section 2 of this Act shall t a k e effect on t h e first day of t h e first fiscal y e a r which begins after t h e d a t e of enactment of this Act. During the period between the d a t e of enactment of this Act a n d the effective d a t e of the first two sections, t h e several F e d e r a l Reserve banks and the Board of Governors of the F e d e r a l Reserve System shall t a k e such steps a s may be necessary to change their accounting period from the calendar year to the fiscal year a n d otherwise to bring t h e i r accounting practices and procedures into conformity with those employed by other agencies of the United States operated with appropriated funds. The CHAIRMAN. NOW, that is to do away with what is known as back-door financing. And you are opposed to that. You gave your reasons for it. Mr. MARTIN. That is correct. The CHAIRMAN. NOW, then, the bill to require the payment of interest on certain funds of the United States held on deposit in commercial banks to provide for reimbursement of commercial banks for service performed for the United States, and for other purposes. 78 THE FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS (The bill, H.K. 9686, referred to, follows:) [H.R. 9686, 88th Cong., 2d sess.] A BILL To require the payment of interest on certain funds of the United States held on deposit in commercial banks, to provide for reimbursement of commercial banks for services performed for the United States, and for other purposes Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled, That (a) no deposit exceeding such amount as the Secretary of the Treasury may by regulation prescribe may be maintained in any commercial bank to the credit of the Treasury Department or any bureau or officer thereof unless such bank pays a reasonable rate of interest thereon. (b) The first sentence of the thirteenth paragraph (12 U.S.O. 371a) of the Federal Reserve Act is amended by inserting "(other than a deposit to the credit of the Treasury Department or any bureau or officer thereof)" immediately after "pay any interest on any deposit". (c) The first sentence of section 18(g) of the Federal Deposit Insurance Act (12 U.S.O. 1828(g)) is amended by inserting "(other than deposits to the credit of the Treasury Department or any bureau or officer thereof)" immediately after "the payment of interest on demand deposits". SEC. 2. The Secretary of the Treasury shall pay such compensation for services performed by a commercial bank for the Treasury Department or any bureau or officer thereof as may be justified, taking into consideration both the value of such services and the value of benefits conferred on such bank by the United States, Federal Reserve banks, and any departments or agencies of the United States. The CHAIRMAN. Have you made your comments on that one, Mr. Martin ? That is H.K. 9686. Mr. MARTIN. I don't think I have seen that. The CHAIRMAN. All right. I just introduced it yesterday. I t is to require the payment of interest on these so-called tax and Joan accounts, and to give the bank credit for any services rendered after measuring and taking into consideration and evaluating the services the bank renders, and also the services and benefits that the Government rendered to the banks. After taking those two factors into consideration—where it is justified to levy an interest charge for keeping of those tax and loan accounts. Mr. MARTIN. Well, the tax and loan account, as you know, Mr. Chairman, the Treasury is the one who operates that. The CHAIRMAN. That is right. You would not want to comment on that? Mr. MARTIN. They are primarily concerned. I will only comment on it to the extent of saying that when I was in the Treasury, which was some time ago, we did make studies of this. And, by and large, we were inclined to believe that net there was an advantage to t i e Government in the way it is presently handled. Now, times may have changed. I think it is perfectly justifiable to investigate that. The CHAIRMAN. Well, anyway, that is one of the bills. And the Treasury has more to do with that, as you said. Mr. BAIZ>ERSTON. Chairman Patman, may I make an observation at that point ? The CHAIRMAN. Yes, sir. Mr. BALDERSTON. There are two reasons, from the standpoint of monetary policy, for maintaining the tax and loan account. One is that the transfer of funds from the private sector to the Government sector at the time of a financing is cushioned. T H E FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS 79 The CHAIRMAN. I know. That is the reason you have a Federal Reserve System—to ease that. Mr. BALDERSTON. Market operations would be made much more difficult if it had to take account of a sudden influx of funds at the time of financing. As it is, they are cushioned. The CHAIRMAN. Yes, sir. But like it is now, they keep an enormous amount in those accounts. And sometimes a bank will buy, say, a million-dollar bond from the Government, and then they commence getting the interest on it immediately. Say it is a 4-percent bond. Then instead of paying the million dollars into the Treasury, where the Treasury could pay it on the national debt, and it would be an offset, they keep that money in their bank. Mr. Neilan, the president of the U.S. Chamber of Commerce, says that his bank invests it in 314-percent bonds. Well, that means that as long as the Treasury keeps its balance idle, the taxpayer is paying interest twice. He is paying interest on the original long-term bond that the bank bought and then, of course, he has to pay the interest on those 314-percent bonds. So there is the Government paying out 7%-percent interest. I do not see where that can be justified—having the taxpayers pay interest twice. Eecently the Committee brought out a report about the tax and loan accounts. Did you see it, Mr. Martin ? Mr. MARTIN. N O ; I have not seen it yet. The CHAIRMAN. Well, it shows the balance in the tax and loan account in each bank in the United States on October 15, 1963. And, of course, when I asked for the material, I gave a little leeway there on the date, thinking it would be more convenient one time or another. But the date selected was—I don't charge anybody with any improper doing or anything like that—was one on which the national balance was abnormally low, at about $4 billion plus, when it has sometimes been up as high as $10 billion. W h a t is in these figures is about two-thirds of the average for 1963— which is about $5 or $6 billion for the country as a whole. And, of course, I am going to try to persuade Congress to pass a bill to cause interest payments on that, giving credit to the banks for any services rendered. And then I have one here to amend the Federal Reserve Act—H.E. 9687—by eliminating the prohibition against the payment of interest on demand deposits. (H.E. 9687, referred to, follows:) [H.R. 9687, 88th Cong., 2d sess.] A BILL To amend the Federal Reserve Act and the Federal Deposit Insurance Act by eliminating the prohibition against the payment of interest on demand deposits Be it enacted dp the Senate and House of Representatives of the United States of America in Congress assembled, That section 19 of the Federal Reserve Act is amended by striking out the following paragraph (12 U.S.C. 371a) : "No member bank shall, directly or indirectly, by any device whatsoever, pay any interest on any deposit which is payable on demand: Provided, That nothing herein contained shall be construed as prohibiting the payment of interest in accordance with the terms of any certificate of deposit or other contract entered into in good faith which is in force on the date on which the bank becomes subject to the provisions of this paragraph; but no such certificate of deposit or other contract shall be renewed or extended unless it shall be modified to conform to this paragraph, and every member bank shall take such action as may 80 THE FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS be necessary to conform to this paragraph as soon as possible consistently with its contractual obligations: Provided further, That this paragraph shall not apply to any deposit of such bank which is payable only at an office thereof located outside of the States of the United States and the District of Columbia: Provided further, That until the expiration of two years after the date of enactment of the Banking Act of 1935 this paragraph shall not apply (1) to any deposit made by a savings bank as defined in section 12B of this Act, as amended, or by a mutual savings bank, or (2) to any deposit of public funds made by or on behalf of any State, county, school district, or other subdivision or municipality, or to any deposit of trust funds if the payment of interest with respect to such deposit of public funds or of trust funds is required by State law. So much of existing law as requires the payment of interest with respect to any funds deposited by the United States, by any Territory, District, or possession thereof (including the Philippine Islands), or by any public instrumentality, agency, or officer of the foregoing, as is inconsistent with the provisions of this section as amended, is hereby repealed." SEC. 2. Section 18(g) of the Federal Deposit Insurance Act (12 U.S.C. 1828(g)) is amended by striking out the following sentence: "The Board of Directors shall by regulation prohibit the payment of interest on demand deposits in insured nonmember banks and for such purpose it may define the term 'demand deposits'; but such exceptions from this prohibition shall be made as are now or may hereafter be prescribed with respect to deposits payable on demand in member banks by section 19 of the Federal Reserve Act, as amended, or by regulation of the Board of Governors of the Federal Reserve System." The CHAIRMAN. H O W would you feel about that one? You know in the 1935 act—I think it was written in the 1933 act first—there was a provision that thereafter it would be unlawful for national banks to pay interest on demand deposits. And then, of course, the same thing was written in the F D I C law—that would apply to all banks insured, in addition to national banks. NowT, this is to repeal that provision, which says it is a violation of the law to pay interest on demand deposits. Would you be for this bill or against it ? Mr. MARTIN. Well, I would be against this bill at the present time, Mr. Patman. This is an outgrowth of the difficulties we had in the 1932 period. The CHAIRMAN. But that period is over, Mr. Martin—I hope. Mr. MARTIN. Yes, that period is over. But the whole structure of the banking business has been impressed with the results of that period. And I would favor, as I have indicated before, eliminating perhaps regulation Q—any ceiling on time and savings deposits. But in the case of demand deposits The CHAIRMAN. YOU mean take the ceiling off of time deposits ? Mr. MARTIN. Time and savings deposits—I would think we would permit competition there without seriously disrupting either the money market or the banking system. I n the case of demand deposits—I think you would give the big banks of the country a very great advantage, and that they would tend, at least for some time, to siphon off from the smaller banks of the country, the ones that you are very much interested in, as I know—you would siphon off from them a good portion of deposits that come to them, because the larger banks w^ould be able to pay for this. Now, I know there are two sides to this argument, and this has been argued for many years. There are some people who say banking should be a completely competitive business, and we should not worry about that—the bankers cs a be prudent and take care of themselves. T H E FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS 81 But by and large the bankers were not prudent in the 1932 period, and banking is a regulated industry. I would hesitate to give the big banks of the country the advantage that I think wTould come to them instantaneously by permitting competition for demand deposits to just suddenly be offered them. The CHAIRMAN. Well, Mr. Martin, I don ? t understand you, my dear sir. Now, in 1933 and 1935 they put this into the law on the pretense of two things. One, that banks were competing with one another in such a substantial way that they were weakening the foundation of the banks, and therefore they wanted to stop it. Mr. MARTIN. That is right. The CHAIRMAN. And the other was that they were going to have to pay F D I C insurance premiums, and by not paying interest on demand deposits it would help them in the payment of those premiums. Now, then, you are suggesting that they still not be allowed—I thought bankers were opposed to direct controls and regimentation, and this is regimentation of the worst kind. You are advocating that the law remain in effect which tells a banker that although he can charge you interest on a thousand-dollar loan, when you keep a thousand dollars there all that time, the banker cannot even pay you a little interest on what you have kept there on deposit. You make it unlawful for one and legal for the other. I t is legal for the bank to charge you, but it is illegal for the bank to pay you interest on the same amount that has remained there on deposit. And then the worst thing, Mr. Martin—you advocate taking the ceiling off of time and savings deposits. You talk about a knockdown and drag out and skull-busting campaign now—you would really have it there. Because they would really go after one another on these time deposits and savings deposits. And they would get people to switch from demand deposits to time deposits and savings deposits and this could have very serious effects on our economy's growth. Then they could, of course, go after the savings and loans. That would help the banks which already have a great advantage over savings and loans, because the banks create their money. The savings and loans have to get theirs on investments. And you are advocating something there that I think is very unfair. I t would be unfair as between the banks. As between the banks and other institutions it certainly would be unfair. That is the way I view it. Mr. MARTIN. Yes. Well, this is just another case, Mr. Patman, where you and I are as far apart as the east is from the west. The CHAIRMAN. All right. There are several cases like that, I am sure. Let me ask one more question. You know, we passed a law in the early part of the war providing that during the war and for 6 months after the banks could buy bonds and would not have to put up any reserve requirements. When did that period expire? You are acquainted with that? Mr. MARTIN. Yes. I would have to check it up. I don't have it. The CHAIRMAN. Well, you put in the record as to when that 6 months expired. Mr. MARTIN. I will be glad to look that up and put it in the record. 82 THE FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS (The information referred to was subsequently submitted as follows :) The provision in question, which was added to section 19 of the Federal Reserve Act by act of April 13, 1943, reads as follows: "* * * until six months after the cessation of hostilities in the present war as determined by proclamation of the President or concurrent resolution of the Congress no deposit payable to the United States by any member bank arising solely as the result of subscriptions made by or through such member bank for United States Government securities issued under authority of the Second Liberty Bond Act, as amended, shall be subject to the reserve requirements of this section." The President issued a proclamation determining "cessation of hostilities" on December 31, 1946. The CHAIRMAN. If you don't mind we will take a recess for 10 minutes. (Short recess.) The CHAIRMAN. The committee will please come to order, after recess. Mr. Martin, I believe that I have asked you the questions that I wanted to ask you about these different bills. I will probably submit some to you in writing. But I will make sure they don't duplicate questions asked by others, to make it as easy on you as possible. Mr. MARTIN. Fine. Thank you, Mr. Chairman. The CHAIRMAN. Mr. Reuss ? Mr. REUSS. Mr. Chairman, Mr. Martin, starting tomorrow the Joint Economic Committee starts its annual deliberations on the President's Economic Report. You recall last year we had some discussions, and you and the Federal Reserve were most cooperative in getting to the Joint Economic Committee your annual report for the previous year, so that we could consider it in connection with the report which the Joint Economic Committee each year has to give to Congress by March 1. Are you going to be able to help us out this year by getting to us either officially or unofficially a copy of that report this year ? Mr. MARTIN. I was just checking with Mr. Molony on that. The report itself we think we can get out by the 15th of March. The policy record, which is wThat we tried to facilitate for you last year, we will try to get out in galley sheet before the end of your hearings, so you will have the benefit of that in the hearings. Mr. REUSS. YOU can do that again this year ? Mr. MARTIN. W e think we can; yes, sir. Mr. REUSS. We will be very appreciative of it. And it is entirely all right to have it in galley or pregalley form. But it would be helpful. And we intend to finish our hearings by the end of next week so that if you can have them in the Joint Economic Committee's hands as soon as possible, recognizing that we have to get our report out and printed and in the hands of the Speaker and the President of the Senate by March 1. Mr. MARTIN. We will do our very best, Mr. Reuss. Mr. REUSS. I know you will, and I appreciate it. Just one more question. I n your prepared statement, on page 13, when you speak of the goals of the Federal Reserve, you mention sustained high employment. Now, I don't mean to quibble with words, and I am all for sustained high employment. I n fact, we have had it now in this country for the last several years, and presently we have 70 million jobs, or close to it, which in one sense is excellent. But THE FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS 83 what worries a great many of us is the sustained high unemployment that this country has had, averaging close to 6 percent for the last 4 or 5 years. Mr. MARTIN. This disturbs us equally. Mr. KEUSS. I am sure it does. And I just wanted to make sure that sustained high employment is not your idea of the sole goal of our economic system. I t is sustained maximum employment, and as little unemployment as possible. Mr. MARTIN. That is right. This is not intended with any note of complacency. Mr. KEUSS. My idea of a rate of unemployment which we ought to shoot for as a national goal is that it should not be higher than 3 percent of the workforce. We have got some ways to go, because it is almost double that now. Do you have any disagreement with that ? Mr. MARTIN. Well, I have no goal in a percentage way in mind. I would like to see it as low as we can possibly make it. I would like to see it lower than 3 percent, if we could do it. I realize there is some frictional unemployment, and I don't know what that level ought to be. Mr. RETTSS. The fact is, however, there have been periods, peacetime as well as wartime, when we have had less than 3 percent—I think 1950, for example, when I think it was something like 2.3. Therefore, it seems to me that 3 percent is a reasonable goal for public policy. And I gather that you do not choose to differ from that. Mr. MARTIN. I don't choose to differ. I think our goal should be as low unemployment as we can possibly make it. I don't think we ought to keep a target in mind. I think that you are right in pointing out that in the immediate postwar period we had low levels, and to what extent that has been influenced by the war or what the relationship is to the size of the force itself and the components of it, whether it is structural or cyclical, all the other factors, I think all have to be weighed and taken into account. But our goal certainly should be to continue to promote reduction in the unemployment rolls. Mr. RETJSS. We talked this morning about the situation this year in which the administration's most optimistic estimate is that we won't be able to get unemployment below 5 percent. You and I hope they are wrong, and that we can do better. But this is the best guess of people who know. I n the light of that, do you really think that there is much danger of demand inflation, as long as we have 5 percent or more of our workforce unemployed, and that, therefore, you need to be quite as poised and ready as I am afraid you are to tighten money, prior to bringing unemployment below the 5-percent mark ? Mr. MARTIN. I am not poised and ready to do anything here. But I am alert to market forces, and market forces frequently come with a surge. They move more rapidly than you would like to have them move, because human nature has a frailty in this direction. And we have a real problem, where you have had a budget deficit of the size we have had—now we are going to contract that slightly. And we have had all of these swings in expenditure and utilization of funds, retained earnings, and depreciation in companies. But the one thing I am certain of is that inflation creeps up on you. 84 T H E FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS And the reason that I am against inflation is because I know that it ultimately leads to not only disruptions in the economy, but to a lower level of employment than would have been possible but for the inflation. That is the only reason in the wide world for our fighting it. Mr. REUSS. Isn't it true in retrospect that the Federal Reserve System put on the brakes and tightened money at a premature time, at least once or more in the last 5 or 6 years ? Mr. MARTIN. Mr. Reuss, I don't like to take the position that I think that everything the Federal has done has been rjerfect. Neither do I like to confess error on things that are matters of judgment. I think you can make an equally good case that the dereliction of the System was that we didn't put the brakes on soon enough and hard enough. And I do not think that this matter of w^hat causes a downturn is so simple as to just be able to isolate it and say tight monev did it. Now, that would be very nice if you could do that. But what you are dealing with in any upswing is the framework of waste and inefficiency and extravagance and incompetence that comes with every period of speculative affluence. And we had a great deal of that in the postwar period. We were fighting inflation—the inflationary surges that were submerged in the entire postwar world. And as I pointed out a number of times to this committee, we were losing—the gross national product was rising by more than a billion dollars a month without any additional goods and services. Now, there are people who think that the problem of the downturn that came in 1957-58 w^as due to the simple fact that the Federal Reserve shouldn't have raised the discount rate, because it should have known that the peak of this particular movement was over. If you can act within 6 months of the time I think that you are doing fairly well. And the Federal Reserve reduced the discount rate in the fall of 1957. We had an inflationary psychology that had built up to the point that most corporations were just marking their inventories up at the end of every year, and that had become a part of their profitmaking processes. Now, against that I am not trying to say you cannot make a case that the Federal Reserve might not have handled things differently or more wisely. B u t I say that within the tolerance of human error, and of differing judgments, that I am not willing to concede that the Federal Reserve, by its policy in 1957, brought on the downturn. I think that the causes were much more fundamental than that. Important as I think monetary policy is, I don't think that it has as much influence as some people seem to think it has. Mr. REUSS. I note your refusal to don the hair shirt I was holdingout for you. Now let's talk about the year 1964 in which I am disturbed by your assertion that you may feel it necessary to tighten money, even though unemployment continues in excess of* 5 percent. Would you give me a conceivable situation in which you would feel justified in tightening money this year, where unemployment remained at about its present level or at least did not decline below 5 percent, and where our industrial plant, as is now the case, has a considerable excess capacity. That is the situation we have today. T H E FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS 85 Mr. MARTIN. I am not willing—-— Mr. EEUSS. I cannot see money tightening as an appropriate remedy for any foreseeable period this year. Therefore, I would like you to define this possible beast so I can be ready for him. Mr. MARTIN. I cannot define it for you, Mr. Reuss. This is not the sort of problem that can be defined. As I tried to point out this morning, I think we have to be alert to the flow of funds, as well as this matter of unutilized capacity that you raised. There are some people who think there is a great deal of unutilized capacity in this country today, and there is, if it doesn't make any difference what the price of the product is they sell. Mr. REUSS. McGraw-Hill thinks there is about 13 percent of our capacity unused, and I have not heard anyone challenging that figure successfully. Mr. MARTIN. W e need a great deal of modernization of equipment. If you are going to ignore that, of course, there is unutilized capacity. B u t I am not willing to concede it is any particular figure at the moment. But it is not a major factor, in my judgment. I t is one of the factors we must bear in mind. I want to keep all of these factors in mind. Mr. REUSS. I t may well be that 100 percent of our industrial capacity is not of the most modern 1964 type—I am sure that is true. But that seems to me irrelevant on the question of whether our somewhat antiquated, or partially antiquated, industrial capacity is not capable of providing jobs for more people, assuming that demand is increased by the tax reduction, and assuming that money is not so tightened as to vitiate the effect of that. I don't see why the fact that some of our unused capacity could be more modern than it is means that it thereby disappears into thin air and could not be used at all. Mr. MARTIN. I t doesn't necessarily mean that. B u t don't forget foreign competition. And it may be that with the tax reduction that there will be some domestic lines that can be utilized against foreign competition because of the demand that is created in this country. But when you are bucking up against foreign competition, you have a different problem. This is where the problem of the balance of payments is tied in. Since the period when we inherited the markets of the world at the end of the war, we have reached a period where, to get back on our favorite theme here—interest rates—we can no longer in the money markets be isolationist on interest rates any more than we can in the political area. You can transfer funds all around the world and you can transfer goods all around the world by the price mechanism. Mr. REUSS. Well, what you have just said, Mr. Martin, if it means anything, and I think it does, says this—that you are prepared to tighten money in order to make us more competitive abroad, to bring down prices. Now, if that is really what you mean, I hope somebody stops you from doing it, because the effect of this would be to bring down prices, sure enough, by creating a worse recession and more unemployment than we have got. 86 T H E FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS Mr. MARTIN. Well, I don't happen to think so, Mr. Reuss. But I have not indicated that I intend or any of my colleagues intend to tighten money. And I have indicated that the forces of the market are the principal factors here. As I pointed out to you this morning, there is quite a difference between positively trying to tighten money on the one hand, and permitting the forces of the market to be reflected in the money market, on the other hand. But I say that under present conditions, and with the speculative impulses that there are in the world, and the current levels of liquidity there are in the world, we would be most irresponsible, in my judgment, as custodians of the credit facilities of this country, if we just said under no conditions will we permit interest rates to rise because it might vitiate the tax reduction. I don't think it would vitiate the tax reduction at all. But this again is in the area of judgment. You certainly are doing all you can to see to it that we do not move in this direction, and I think that is perfectly proper. Anyone who wants to give us suggestions is perfectly all right. As I said this morning, Mr. Rains has a resolution—it is possible for someone to introduce a resolution saying to be equally aware of the fact that money could get too loose. You could have a spillover of speculative impulses that create an inflation that will undermine employment and lead to a decline in business of the sort that we don't want. And then we would have more difficulties. Now, this is the problem that the Federal Reserve has to deal with. And all I want to do is be sure that there is no misunderstanding between you or me, or any other member of the committee; we are not making a commitment to anything in the course of the year 1964. I t is far too early to have any idea of what impact the tax reduction will have. I t might create a boom that would be unwise. I t may not have the effect that it has been advertised as having. Nobody knows what is going to come from the tax reduction at this point. Mr. REUSS. That is quite true. And I certainly was not asking you to make a commitment as to what you in fact would do under any set of circumstances. W h a t I wanted to do is explore your mind on what you would do, assuming that the tax cuts effect is what the administration thinks it will be; namely, one not bringing our present unemployment rate below a most unsatisfactory 5 percent level this year. And on that hypothetical proposition, you said that you might want to tighten money anyway. And when I asked you to present to me the set of circumstances under which you might want to tighten it, all that I have so far been able to gather is that you would feel like tightening it if you felt that American export sales needed a shot in the arm by lower prices, which you would then try to bring about by tightening money. To me this is not a legitimate reason for tightening money. I think our $4 billion export surplus every year is peanuts compared to our $600 billion economy. And I would not like to see you tighten money, with 51/2 percent of our workers unemployed, simply because it would be nice to have lower export prices. Mr. MARTIN. This is a matter of competitive pricing that we are talking about, not necessarily lower prices. I t is keeping prices competitive—particularly if there is a surge upward in the economy. THE FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS 87 But let me state over again, as I have a number of times, what I conceive to be our function in this. We want to see the economy progress as rapidly as anyone. I t makes my job, our job, much easier when it does. We have a responsibility, however, that when we create money, that we do not ignore the forces in the market, nor do we think that we can come along here and say that we will create money over and above and beyond what in our judgment the economy can utilize without producing inflation, merely to assist the Treasury in its financing, or making it possible for the Treasury to finance at a lower rate than it would otherwise have to finance. Mr. EEUSS. Yes. I said nothing about that. Mr. MARTIN. But this is the fundamental. T h a t is why I say you have overlooked what to me is the basic point in this problem. The very fact that you said nothing about it is why I wanted to raise it. Mr. REUSS. Well, I didn't suggest for 1 minute that you should conduct your monetary policy primarily to assist the Treasury's financUnlike my chairman, I have never found fault with the treaty, the accord of 1951. But that has nothing to do with the question or whether you should tighten the money supply at a time when we have 5y2 percent unemployed. Mr. MARTIN. Well, I just beg to differ with you there, because as long as we are running a deficit in this country, we have to finance that deficit. And I insist that the major portion of any Federal deficit should be financed out of bona fide savings, and not out of created money. We have been successful in the last couple of years largely due to depreciation factors and retained earnings in corporations following the post-Korean period coming to a halt in 1958-59. We have been successful in doing that with the very sizable deficit that the Government has been running. I am very pleased that President Johnson's budget has recognized this, and I believe that our problem is somewhat easier now as a result of his budget than it would be if we w^ere projecting a $10-billion deficit instead of a $4.9-billion deficit. But these are all part of the factors that have to be borne in mind. Now, it may be that these forces will be here. But the process of inflation goes on when money is created, in excess of the supply of goods and services. Now, there is always a point of judgment at where that point comes. But let me point out that the people are always asking: "Where is the inflation?" And then all of a sudden you have it. And our job is to try to prevent this, try to keep this in its incipient stages from getting out of control. And to go back to the 1957-58 period we were talking about, we then had an inflation psychology. And I think it was essential that we stop it. And I happen to believe that the Federal Reserve made a real contribution, for which it has been widely damned—which has made it possible for the expansion that is presently occurring to be as successful and as noninflationary as it has been. And we want to see to it that this time we don't have to wait until that late—if the forces of the market make it possible. 88 THE FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS Now, we can have easy money and lower interest rates any time you have a declining economy. We don't want that. We don't want easy money in that way. But as a device for promoting growth, I will confess to you, as I have confessed to many groups—I still have very serious doubts that deficit finance and easy money is a sound basis for promoting growth. Mr. REUSS. And I agree with you, but that really is not the problem. Is it not a fact that tight money and high interest rates are an excellent way of clobbering a rise in the economy and an attack on unemployment ? Mr. MARTIN. Anything that is overdone can have unfortunate results. We want neither too loose nor too tight money, and that is exactly what we are trying to achieve. Mr. EEUSS. But we are trying to give some content to this airy principle to which we all agree by applying it to a specific situation; namely, an economy with close to 6 percent unemployed, and with something like 13 percent of its productive equipment not being used. I n this connection, I want to divest myself of a role which you seem to want to push on me—of guardian of the Treasury's debt financing activities. I am an old accord man. I agree that Treasury financing is a secondary requirement. But why isn't the job of the Federal Reserve in the days to come in 1964 simply to provide adequate increases in the money supply to make possible the national goal of a very much lower rate of unemployment and, consequently, a higher rate of growth, because that is what you have to have in order to get rid of unemployment? W h y isn't it just as simple as that? Mr. MARTIN. This is always our goal. Mr. REUSS. And if this means that the Treasury has a hard time funding the debt, well, that is its problem. I f it means it will have an easy time, well, we would not want to change an otherwise good policy just to give them a hard time. Mr. MARTIN. We certainly would not. One of our goals is to help the Treasury, consistent with this overall objective, and we do not want that to interfere. Mr. REUSS. Getting back to Mr. MARTIN. Let me just put one other thing, because the line of questioning you are pursuing is of great interest to me, and I am very sincere in this. I think that it is possible when we talk about spelling these things out, you know, and you and I have had this interlocutory Mr. REUSS. We are making a career of it. Mr. MARTIN. That is right; we are doing very well at it, and each of us has a point of view on it. I t would be possible for the Congress to spell out what the level of free reserves ought to be, for example, over 1964. I am not saying Mr. REUSS. I would be against this. Mr. MARTIN. I know that. Mr. REUSS. We have set you up to do our day-to-day implementing for us. Mr. MARTIN. Right; that is right. But I am saying it would be possible, and it would be possible in this framework to set u p some criteria. But the reason I think the Federal Reserve Act is drawn as it is, and we are given the discretion that we are given, is that we are the T H E FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS 89 ones who have to accept the responsibility, and if Congress specified these benchmarks, and then those benchmarks did not work out, the Congress would have the responsibility. Now, all I am saying here is that I want to maintain for the Federal Eeserve Board this area of judgment which the Congress has given to us, recognizing fully that if it goes wrong, if we get too tight, so to speak, we will bear all the brunt of it. If we get too easy we will bear all the brunt of it, and we have been through two periods like that. The period of the preaccord was a period when almost the entire country had suddently wakened to the fact that monetary policy was too easy, and the depreciation of the currency w^as undermining everything. Now we have come into a period here recently w^here some people think that in 1957-58 the Federal Reserve brought on this recession. I have some question about it on either score, but that is an intellectual problem, and I do not want to deal in semantics there any more than you do. Mr. REUSS. Getting back to 1964, and the 5i^-percent unemployment rate, would you agree with me that with as high an unemployment rate as 5 percent or more, and with as great an unused industrial capacity, however modern it may be, as presently exists, that it is unlikely that you will be called upon in exercising your good judgment to tighten money ? Mr. MARTIN. Oh, I would not go even that far. Mr. REUSS. You would not even agree with me on this ? Mr. MARTIN. I won't even go that far because those things can change so rapidly, and I do not want to tie it. Whether it is 5y2- or 3- or 2-percent unemployment depends on conditions at a given time, and also has to do with world markets. We are facing inflation abroad today. We are Mr. REUSS. I was waiting for you to bring that up. Mr. MARTIN. Yes. We are facing it abroad. That has helped us somewhat with our balance of payments recently. But all of these are factors, and I have gotten very wary, as you can see, having lived with this for a long time, I have gotten very wary of putting up prospective models or conditions and believing that I can see the answer. Now^, I say to you perfectly openly that I do not have the answer to this overall problem. I simply say to you as a defense for that I would be a much more dangerous man than I presently am if I had the answer. Mr. REUSS. Let me ask you this in the light of my relative lack of success at finding out from you what circumstances you think would justify your tightening money with 5 percent or more unemployed, would you be willing to notify this committee, through its chairman, and ask for an executive session, if you prefer it, as you well might, if you should in this year of 1964, feel that money tightening is necessary although the unemployment rate continues at above 5 percent? What I have asked you there is simply this: If things go much better than the President and his advisers think, and our unemployment goes down markedly, then I not only would expect you to tighten money but I would applaud your doing it if anybody asked wrhat I thought of it. But as long as we have more than 5 percent unemployment, speaking only for myself, I can see no apparent justification for money tightening. Now, I do not say that something might not come up which might change matters, but what I ask is simply this: 28-680—64—vol. 1 7 90 T H E FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS Would you and your six colleagues on the Board of Governors be willing under those circumstances to request an executive session conference with the Banking and Currency Committee so that you might inform us of precisely what ugly cloud it is on the horizon which induces you to embark upon a policy of tighter money ? Are you willing to do that? Mr. MARTIN. N O , Mr. Reuss; I would not be willing to do that. I would think, and wre have discussed this one before, too, I wrould think that under those circumstances all of you ought to be members of the Federal Reserve Board. Mr. REUSS. Under the Constitution we cannot do it. Mr. MARTIN. Well, that is right. Now, we took an action last summer that was disapproved by a good many people, although it had the backing of the President of the United States and the Secretary of the Treasury. We took an action, and we were up here explaining it to this committee 3 days after we took it. I personally think you ought to wait a little bit longer than that. I have no quarrel with it, though, and it is perfectly proper for this committee to inquire into our actions through public hearings. But I do not think in the decisionmaking process—before decisions are reached—that I should be put in the position of coming up and talking to small groups of the Congress and telling them what we might do or getting this into an arena where somebody might try to divide my Board. We have to make our decisions and we have to stand or fall on them. We are responsible. You are not responsible for our decisions. You can tear us apart after they are over. This is a matter Mr. REUSS. The only trouble with that is that it is no satisfaction to any of us to tear people apart. W h a t we are interested in is seeing that the constitutional function of Congress to see that we have a stable and sound dollar, that contributes to maximum employment and production, is maintained, and we delegate that, and I think properly so, to the Federal Reserve. But what I am trying to work out is some nonmechanical, friendly relationship of mutual understanding and confidentiality which will then enable us to discharge our obligation better, and the position you put us in is the position of bystanders who are welcome to learn these things 13 months later when we see in March your annual report which tell us what you did Mr. MARTIN. Oh, n o ; we were up here 3 days after the last—Mr. Patman had us up here 3 days Mr. REUSS. That was because of the extraordinary acuteness of our chairman who, by some divination, had a hunch as to what was going on. But many times decisive action can be taken by the money managers and yet this decision not be known to Congress. For example, you could make such a decision which, I think, would be very ill advised, to tighten money tomorrow. We would not know of it. We would not know of that decision for 15 months until March 1965, and our economy simply moves too fast nowadays for the constitutional managers of it—the Congress—to be kept in the dark that long. You talk about a small group of Congress. If you would prefer to have a caucus of the full Senate and full House to which to report, T H E FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS 91 that is all right with me. I thought I was being merciful in suggesting this committee, which is the committee that the House has entrusted this constitutional jurisdiction to be the one to consult with. Mr. MARTIN. We issue a statement, you know, every Thursday, and the market reads that statement like a hawk hovering over its prey. We supply more information about our activities, in my humble opinion, than any other central bank in the world. I t is impossible for us to take any overt steps that are kept completely silent. The modus operandi of it may be, but when free reserves fluctuate even due to a snowstorm, they are watched with respect to Federal Reserve policy. Now, we get back again—and I am not trying to deal in semantics— to the earlier point that I made. You have been using 5y2 or 5 or 3 percent of unemployment as the principal factor that we ought to be concerned with here. I want sustainable employment, and by that I do not mean I am against full employment. I do not know what full employment is. But the Congress has the power, and I do not challenge it for a moment, to amend the Federal Reserve Act and change this authority that we now have of a discretionary nature, and put us into a box and say to us in the law that, "You shall never permit free reserves to fall below a certain level or interest rates to rise above a certain level unless unemployment is less than 5% percent," and then you can spell out how that unemployment is going to be figured. I am sure that my job, and the Federal Reserve Board's job, would be simplified. Then, if we had a wild inflation, and unemployment w^as 5.3, 5% percent, and the currency was depreciating all around the country, we could say, "Well, Congress did it." You have delegated this authority to us under the Federal Reserve Act. I t is a very grave authority. I do not happen to think that we are quite as powerful as Mr. Patman does. Mr. Patman very graciously frequently says I am more important than the President of the United States. I do not believe that, but I think that we are important, and we have a very serious responsibility, and I think that within the limits of our powers we have to discharge it. When I first became Chairman of the Federal Reserve, Senator Maybank was chairman of the Banking and Currency Committee. My predecessor, Mr. McCabe, had from time to time talked to him about various actions that the Federal Reserve might take. I had very close relations with Senator Maybank. He was a man for whom I had great respect, and I got along with well, and he told me early in my regime, " I don't want to know until after it is all over what you people are going to do." He said, " I don't want to get tangled up as chairman of this committee in getting an inkling of what you are doing because then I don't know whether I ought to tell every other member of the committee and, after all, it is your responsibility." Now, I want to be honest with you and say that I do not think it would be proper for me to come up to this committee and say that despite the fact that unemployment is 5y2 percent we are going to have a meeting of the Open Market Committee next week, and it is just possible we might permit money to tighten. 92 T H E FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS Mr. EEUSS. That is not what I asked. I asked whether after such a meeting if the Open Market Committee decided that despite 5y2 P e r _ cent unemployment and the existence of 13 percent excess industrial capacity, if despite that it had decided to tighten money by action solemnly taken, I would have hoped, assuming it is done in this month, January 1964, that there would be some way in which the Banking and Currency Committee could be made aware of that action prior to March 1965, 15 months later when it will read your report. You say, no. Well, O K ; no harm in trying. Thank you, Mr. Chairman. The CHAIRMAN". Yes, sir. Any questions ? Mr. Widnall? Mr. WIDNALL. I am a little bit confused by the line of questioning of Mr. Eeuss. I have been a member of the Joint Economic Committee for some time, and also of this committee, and it seems to me now that he is making a distinction between the type of action you should take between 5% percent unemployed and 5 percent unemployed, and that when it is below 5 percent. I thought we had concern, from the testimony I heard before, for anybody who was unemployed, all the way down to 3, 2 ^ , 2 percent. I do not understand this new cutoff at 5 percent. I t may mean—maybe the administration thinks 5 percent is acceptable unemployment in the United States now. I used to hear 3 percent quoted all the time as being thoroughly unsatisfactory. I do not quite get what is going on. Mr. EEUSS. Will the gentleman yield ? Mr. WIDNALL. Yes, I will yield. Mr. EEUSS. I think the gentleman was not, perhaps, here earlier when I stated my view that 3 percent was the highest tolerable level of unemployment that we ought to have in this country at any point. The way 5 percent got into it, I wanted to relate my questioning to the current unemployment situation which hovered between 5 and 6 percent. Mr. WIDNALL. Then I understood you to say you could not understand any action that might be taken to tighten credit until unemployment was down to 5 percent, and that if it went below 5 percent then you could understand if some action was taken. This is what I understood you to say. Wasn't that your understanding, Mr. Martin ? Mr. EEUSS. Let me clarify what I was trying to say, which is that I am concerned with the likelihood or possibility that the Federal Eeserve is going to tighten money under present conditions. If conditions get considerably better than they are now, I want to put that to one side, but I did want to ask whether the Federal Eeserve envisaged as a distinct possibility that there would be a tightening of money under conditions approximating present unemployment conditions, and the answer was, I am sorry to hear, that, "Yes, they are," but that certainly did not mean that I regard anything over 3 percent unemployment as any way tolerable. Mr. WIDNALL. Wasn't I correct in understanding that you said below 5 percent you could understand the possible taking of measures then of tightening credit if they found it necessary ? Mr. EEUSS. I think you are right in understanding that I said that, and I think on reading the record I probably did say that. T H E FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS 93 Since what I am concerned with, however, is what they are going to do with unemployment rates of over 5 percent, that was the main thrust of my questioning. Mr. WIDNALL. I understand. Mr. REUSS. And in this connection I do not suggest that the monetary authorities alwyays under all circumstances should wait until unemployment gets down to 3 percent before they do a single thing about tightening money. Where I disagree with the Federal Reserve is that I think you start putting on the brakes much too early, and that you tend to thwart any real attack on unemployment, that this has been the effect of what you have done in the past, and I do not like to see it repeated in the future, and that is what I am mainly concerned with what happens over 5 percent unemployment. Thank you. Mr. WIDNALL. Just one point: I n thinking of prize ring parlance in connection with this, the Federal Reserve System, I look to, as a fighter who is in the ring against inflation and against deflation. Now, no fighter who is worth his salt telegraphs his punches. I t is deadly in the prize ring, and it seems to me that what is being tried nowT is to put them in a position of telegraphing their punches, which would make any steps they make ineffective as far as the economy is concerned. That is all I wanted to say. The CHAIRMAN. Mr. Bolton ? Mr. BOLTON. I have some questions I would like to address to the witness, but in order to clarify one thing, Henry, in discussing unemployment, there is no question that the monetary policy has very real effect on the expansion or contraction of business. But wouldn't you agree wTith me that you can well visualize a situation where you can have 5, even 6, even higher percent unemployment and still have an inflation with it, because of the demand for the need for labor and for jobs that do not exist in the unemployment market ? Mr. REUSS. No; I do not. But this is the fundamental question. Let me reply to you briefly. If you have 5, 6 percent unemployment, such as we have got now, and if you have from 10 to 15 percent excess industrial capacity, which is w^hat we have now, according to all the people who make these studies, I think that any inflation that you are going to get is inflation that comes about through what is called administered wage-price inflation. We had some of that back in the late fifties, and it results from labor organizations and business organizations being able to, despite excess capacity and unemployed labor, being able to either raise prices or raise wages, so that a price increase can be based upon such an increase. I do not think that when you have 6 percent unemployed and 13 or 15 percent of the industrial capacity unused, you are going to get demand inflation, because additional demand is simply going to pull the whole structure up toward the full employment level. I t is going to put people back to work, and it is going to put idle machines back to running again. This is precisely what you want to have happen. Mr. BOLTON. Well, I do not think we need to hold the witnesses on this, but I did want to ask that question. Mr. Martin, if I could return to the bills before us, I do not have the number of the bill retiring the stock, and I wonder if I could just ask you a few questions to make myself clear. Why was the stock for the members' bank originally created? Has this purpose for which 94 THE FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS this stock was created become unnecessary in view of the present portfolio system ? Mr. MARTIN. I think it was originally the idea that you would have a business-like structure, that the Eeserve banks were going to be corporate instrumentalities of the Government, and woufd be set up like corporations. Now, with respect to your question of whether stock is now necessary, I think it probably is not. I won't say that I think the System will stand or fall on this. I think we could have a $10 membership in place of stock, but I think that people would wonder why it was changed after all the years that the System has operated this way, and some people, including some of our friends abroad, would see it as a step toward nationalization of the banking system. I do not think the change would achieve any positive benefits to balance the harm it might do. ^ Now, as I pointed out, there are differences between State and National banks. All national banks are compelled to be members of the Federal Eeserve System. State member banks do not have to be members of this System. The majority of the banks of the country, because of this compulsion, have been in the System, and we have been able to maintain standards that might be lowered to the lowest common denominator if we did not have this membership, and this stock. While I do not wrant to make a big point of it being attractive as an investment, it is certainly one inducement. You can take 6 percent of your capital and surplus and you get a stock interest. Now, we could have another device—this was just a device—for electing the A and B directors in some rational way. I have weighed this many times, and I think if we were beginning the System today, I want to be completely honest with you, we might not start it this way today. But in the light of 50 years of experience, and the heritage of corporate management that we have tried to develop in the Federal Reserve banks, where we have tried to get the benefit of private management along with public management, I believe on net it is better to retain the stock. Mr. BOLTON. Well, when the System was originally established, weren't the contributions for the stock considered in the same way an equity investment is in a corporation ? Mr. MARTIN. That is correct. Mr. BOLTON. They were in there in order to get the System going. The CHAIRMAN. Would the gentleman yield briefly ? Mr. BOLTON. May I finish the statement ? To get it going and produce a reserve that did not have the common cost of the Federal Government as a cushion. Mr. MARTIN. That is correct. Mr. BOLTON. I will be glad to yield to the chairman. The CHAIRMAN. That being true, why did some of the banks use their capital for operating expenses? Some of this capital stock was used for operating expenses. Mr. MARTIN. Well, they needed it. The CHAIRMAN. I know. But that is contrary to the principle announced by the gentleman from Ohio. Mr. BOLTON. Excuse me, it is what I was trying to imply in my question, Mr. Chairman, frankly, on the surface, for a fellow like T H E FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS 95 myself who is just recently getting into this, let us say, as a second exposure only, on the face of things, does not seem to make sense that we should not pay off the stock and return to the Treasury the amount which is paid each year in dividends, therefore, in effect, save the operation of the Federal Government this amount of money because the funds of the banks would then not be tied up, and would be able to operate normally. Mr. MARTIN. I cannot quarrel with that analysis except on the psychological basis and, as I said a number of times, I do not think the System will stand or fall on this. By and large, I think it would be wiser to retain it the way it is. Mr. BOLTON. Along the same line, Mr. Chairman, the statement shows, I think it is about $33 billion in the portfolio. How was this created? Was this just made or did this come out of the operations of the System ? How was this made ? Mr. MARTIN. This came out of the operations of the System in purchasing Government securities. This is the fruit of the w^ork of the Open Market Committee. Mr. BOLTON. I wTould like to again, shifting water, go back to a statement of the Chairman who stated that the long-term interest rate is, and I presume we were then talking about, purely about, Government obligations, was set by the President, but actually the real interest rate, the real return on the Government securities, regardless of what the face interest bore, the real interest is actually set by the market; is that not right ? Mr. MARTIN. N O question of that. When I said, "set by the President," I meant that he has to sign for everything beyond 90 days or 6 months that the Treasury puts out. He has to approve the issuance of that. That is what Mr. Pat man and I were referring to. Mr. BOLTON. I see. Thank you very much. Thank you, Mr. Chairman. The CHAIRMAN. Mr. Martin, I will try to be brief. Suppose we were to deny any bank the privilege of getting its checks cleared, directly or indirectly, through the Federal Reserve System unless they were members by the payment of this small fee. Don't you think that would be a sufficient inducement ? Mr. MARTIN. I t might be, Mr. Patman. I t depends on the charge. The CHAIRMAN. Well, you know that is quite a valuable item to each bank. Now banks that are not members of the System get their checks cleared by the Fed through their correspondents that are members, and they get the same service members get. So there is no inducement to be members, from that standpoint. But if you charged them for the clearing of their checks, I think that would be some inducement. Now I do not know of anyone who wants money too loose or too tight. The question is who is to guide whether it is tight or loose. The issue here is, I believe, whether an agency that has such vital powers should not be accountable to those elected by the people, so that they would be responsible, if not directly, at least indirectly to the people, the electorate. Because when people come into office, like a new party, they have maybe sweeping reforms. They have things they want to do, and I think they ought to be charged with it, and if they do not succeed, the people should be allowed to vote against them. 96 T H E FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS But if we have an independent body like you are insisting that we have, which is almost a dictatorship, the people have no way to express their disapproval. They do not vote against you at any time in the future. You are in a stormproof celler with all modern conveniences. You have a 14-year term and cannot be reappointed. Mr. MARTIN. NOW, you are underestimating your own activities, Mr. Patman. The CHAIRMAN. YOU have nothing to lose at all. But now somebody connected with the administration who is responsible to the administration, they have something to lose. You have nothing to lose. You cannot even lose your job. Mr. MARTIN. I can do pretty good The CHAIRMAN. And that is the reason, I believe, that an agency that is under obligations to the Government, that is in power by reason of the confidence of the people, is much better than one that is off to the side and not directly responsible. You see, a politician has the greatest responsibility of anybody. H e has many decisions to make, and they had better be good ones, because if they are not in the people's interest, the people will turn him down, as they should. But here you are off in a stormproof cellar; they cannot reach you; they cannot vote against you, they can hardly get to you to criticize you. Mr. MARTIN. Well, Mr. Patman, I am very humble as a nonelected officer of the Government, in the face of you who do face the electorate from time to time. But I want to return to the fact that the Congress does have the power to coin money and regulate the value thereof. I n an evolutionary w^ay through the first bank of the United States, and the second bank of the United States, down to the Federal Reserve System, the Congress determined that in their interest as well as the country's interest they would delegate this authority to the Federal Reserve Board. We would have a managed currency. I n the early stages, you remember, Mr. Hamilton had great difficulty even getting access to the books of the first bank of the United States. The people were so afraid of the Government with respect to the money power. Now, that shifted in Andrew Jackson's time. H e did not destroy the second bank of the United States because he thought it was bad. He just thought it was not responsive enough to the people. Now we have brought into being a Federal Reserve System, following the money panic of 1907. The Congress has delegated this authority to us under the trust indenture of the Federal Reserve Act. Now, we do bear the slings and arrows of the public. You are in the position of being able to blame us if it goes wrong. We are certainly not asking for your applause if it goes right, but to say that if things collapsed we would not bear the brunt of the public opprobrium I do not think is quite a fair approach to it. I think wTe will bear the opprobrium of the people if things go wrong, and we have to, this is p a r t of our responsibility. I say quite respectfully that this may be the wrong setup, but I do not think so. I think it is a very effective and a wise one. You think we would be better off if the chairman of the Board were the Secretary of the Treasury. H e is subject to appointment by an elected official, just as I am, but the President can remove him. H e does not have a term of office the way I have. T H E FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS 97 People, through the ages, have come to feel that money will not manage itself, as has frequently been said, from Walter Bagehot down, and that money management to be effective and useful should be insulated so far as possible from private pressures just as much as political pressures; but that it ought to be given a chance to develop itself without being directly the result of those pressures. Let me say to you I do not believe it will ever be completely insulated from those pressures. Nobody who has been in my position believes that there are not pressures that are brought to bear on the Chairman of the Federal Reserve Board. They come from every direction. But I am given the ability to resist them by you people. If you people want to take that away or want to change that or want to place in the hands of the Treasury the power to create money that can be done. I t would be very nice if we could finance the Government by just selling our debt, whatever it is. The CHAIRMAN. NO one is advocating that. Mr. MARTIN. When you talk about removing $300 billion, when you say that if the Federal Reserve had acted wisely we would not have any debt, I say it would be very nice if we could just finance the Government by selling bonds to ourselves and then writing it off. The CHAIRMAN. Oh, I did not advocate just issuing bonds. Mr. MARTIN. I did not say you were advocating it. I said that is where it would lead. The CHAIRMAN. If you had just charged the interest rates charged by Mr. Roosevelt and Mr. Truman, say, from 1939 until 1951, our debt would be greatly reduced now. And if you had followed full employment momentary policies these last 10 years we would have had some big surplus budgets instead of deficits and we would have had still less debt today because of these full employment surpluses. About the first and second banks of the United States, now, they had 25-year charters, I believe—maybe 20, I do not recall exactly— but anyway their charters expired. Now, this third Federal bank, the Federal Reserve System, had a 25-year limitation on its charter, and some people opposed the Federal Reserve System. The big banks opposed the Federal Reserve System, I do not think there would be any denial of that, when it was established, they did not like it, but as time went on it began to look like they might begin to get more of a voice in the Federal Reserve, that had to do with the volume of money and the interest cost. They began to like the Federal Reserve. So in 1926 or 1927, along in there, I do not recall, when Mr. McFadden was chairman of this committee, they rushed through a bill right quick to take off that 25-year limitation because they could see coming up what happened to the other two banks of the United States, and they did not want to go through that. So while the going was good they got that limitation cut off, and now it is a perpetual charter, so to speak. Mr. MARTIN. But you can change it at any session of the Congress. The CHAIRMAN. I know we can. But you see there are lots of problems there, you know. I t does not take very many to block the passage of a bill because there are so many people who can say, "No," in a legislative body and make it stick. So the first and second banks, they had a limitation and they did expire. This third bank might be a lot better today if it had gotten 98 THE FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS right up to the 25-year limit and Congress had looked it over good for its first 25 years, and this national debt might—and I am sure it would—be a lot smaller, and our country, I believe, would be in better shape. But by rushing through that bill to take off that 25-year limitation that contest did not come off. Now, in your case, you are so far removed—you talk about isolation, you have real isolation. You are isolated against the voters, you are almost isolated against Congress. You just tell Congress to do anything they want to, and they cannot do anything with you. You have got a 14-year term. You cannot be reappointed anyway, you have got nothing to lose, you have got nothing to gain. This is the most important power the Government has, the money power, and it is all to the side, and we cannot reach you like we can other agencies. Other agencies have to have an appropriation. Congress passes on that. The committees of Congress, passing on the appropriation of the Federal Reserve, would have you up there, Mr. William McChesney Martin and say, "What have you done with this money and that money and what are you going to do?" and you would have to account for it. But here you are even isolated against the Appropriations Committees. You have this back-door financing, and you are allowed to buy Government bonds and pay nothing for them. Mr. Bolton asked you what you paid for them. You said you created money, w^hich is right. You paid nothing for them. You get all the money you want from the interest on these bonds and you do not have to deal with an Appropriations Committee, so you are isolated against the voters, you are isolated against Congress, you are isolated against the committees. You are just in a stormproof cellar with all modern conveniences, Mr. Martin, and my complaint is that a Board with as much power as your Board has should be under just a little bit more control of the people of the Nation. When the people express their will and elect an administration, they expect that administration to carry out the promises that are made, and here you are occupying a position where you can veto everything that the Congress does and everything that the Executive does, and what can we do about it ? Nothing; absolutely nothing, and that is w^hat I would like to change. Now, a while back the President of the United States had to select a Chairman of the Federal Reserve Board. Maybe he would have selected you anyway, but that is not the point. The point is that he had to pick one of the seven Governors. The president of the United States was in a straitjacket. He did not have the freedom of choice. I t is not democracy to give the President of the United States no freedom of choice. He could not go out and pick the best man or woman in the United States to exercise the powers of the Chairman of the Federal Eeserve Board, which is more power, in many ways, than the powers of the President of the United States, and the powTers of the Congress of the United States. He did not have a right to pick out the best person for that. H e had to take one of you seven. Maybe you were the best one, but what I object to is the fact that he had to take one of you seven. That is putting the President in a position of no freedom of choice which, I think, is entirely wrong. T H E FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS 99 For all these reasons I think we ought to seriously consider a Board that will be obligated to the people, and in some way not set off to t hemselves. I believe the bankers have too much control over the volume of money and the cost of interest. I honestly believe that, Mr. Martin. I am not impugning your motives, I am not questioning your honesty or sincerity of purpose and I have never done that. I think you are a fine man. But you have 12 banker representatives on the Open Market Committee, along with seven members of the Board, and normally you would know who would win. Of course, I know you are a strong man. You would stand up to them and fight, but I doubt that you have won any battles. I n fact every battle I have known of you lost because every time a question of low interest and high interest came up the high interest man always gains, and that is where the bankers come in. They make money out of high interest. I t is in their interest, they think, to help the bankers help the country, and I do not criticize them for thinking that, although I disagree with them. So these are the differences between us, the things we expect to pursue here, and we want to get all the information we can on them. Mr. MARTIN. Let me just return the compliment, Mr. Pat man, by saying that one of the nice things about the duels that you and I have had, if I can use that phrase, is that neither one of us impugns the motives of the other. The CHAIRMAN. That is right, and I am very proud of that. Mr. MARTIN. But we are both trying to serve the public interest. The CHAIRMAN. That is right. May I bring this u p : Of the 62 former presidents of the 12 Federal Reserve banks, not counting the 12 presidents currently serving, 9 served only one 5-year term, and 37 served over 5 years; 20 served over 10 years, 6 over 15 years, and 6 over 20 years. The 16 not accounted for served less than 5 years, their terms evidently cut short by death, resignation, or disability. Thus it seems quite customary for Federal Reserve bank presidents to serve more than one term. If we assume that these men like their jobs and want to continue to hold them, we can readily see that not only are the six bankerelected directors able to elect a president with views favorable to private banking interests, but they are also able partially to insure his continued good behavior by threatening not to reelect him. I think there is substance to that, Mr. Martin. These people who are serving as presidents of Federal Reserve banks, one of them gets as much as $70,000 a year and all expenses, does he not ? Mr. MARTIN. That is correct. The CHAIRMAN. And others are pretty well paid, especially where they are not doing much, and they like that. Mr. MARTIN. Well, I insist they are doing quite a bit, Mr. Patman. The CHAIRMAN. I have often said that in the 11 Federal Reserve banks outside of New York, all the people working really for the Federal Reserve carrying out the Federal Reserve Act, can be put in a room one-third as big as this and carry it out. The others are just used for clearing checks and different things like that, but not directly connected with the administration of the Federal Reserve Act. 100 T H E FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS We will have more and more of that, Mr. Martin, as we go along. But the point is that these are good jobs these presidents have. I am not impugning their worth. They are wonderful men, I like them all, but they are human beings. They are going to carry out the will of their directors, and the bankers who elect a majority of the directors. You cannot expect them not to, and they have too much control over the monetary affairs of this country, according to my beliefs. They have a reason to cooperate with these six of the nine directors elected by the banks, because they might want to serve again, just like Members of Congress want to be reelected, and they want to do things that will not cause their defeat. I think that there is strong reason to believe that they are influenced by the private bankers in that way. Mr. MARTIN. May I just comment, Mr. Patman The CHAIRMAN. Yes, sir. Mr. MARTIN (continuing). Because I know you do not intend it that way, but I just wanted to be on the record that the integrity of these men is such that in my judgment they could not be captives of the bankers. The CHAIRMAN. Oh, they would not be. Neither would a Member of Congress be captive of any group of his constituents, but we are not going to do anything to Mr. MARTIN. I know you do not want to impugn their integrity at all. The CHAIRMAN. No, Mr. MARTIN. But I sir. really want to point out that is really what one of the basic problems is. The CHAIRMAN. I certainly would not want to impugn their integrity ; no, sir. But I do honestly believe that our national debt is too high by reason of the practices of the Federal Reserve System, which were unfortunate. I think that our national debt would be much, much lower if it had been operated so that the people's interest and the Government's interest had been considered above everything else. I honestly believe that. I am apprehensive, and I am afraid if it is not changed, Mr. Martin, in 15 years we will have a $600 billion debt, and Mr. BOLTON. Mr. Chairman. The CHAIRMAN. Yes, sir. Mr. BOLTON. YOU made the statement on two different occasions during these hearings, and because it puzzles me I would like a little explanation of it—I do not see how a government can spend more than it takes in year after year without having a debt. The CHAIRMAN. Well, you have a debt that way. I can give you a good verse and page on this deal. You see back in 1943 I went before the Ways and Means Committee. A t that time our national debt was about $132 billion, and I said that it looked like our national debt would be $300 billion by the end of the war. And I did not object to heavy taxes. I felt like Mr. Roosevelt was right that we should pay half of the cost of the war and the other costs of Government as we went along, and because people were making money it would siphon off purchasing power, and it would be so much nicer to do it that way. I advocated heavy taxes, and then I advocated people buying bonds that they could buy with their own money out of real savings. B u t I suggested that the Ways and Means Committee change the laws so t h a t THE FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS 101 after the people had bought all the bonds they could and wanted to buy with their money, and the corporations had bought all the bonds they could buy with their money, if more money was still needed, the F e d should create it. I said that the Treasury should issue bonds and the Fed would buy them, and there would be no interest, and it would be a 2%-percent repayment of principal every year, and in 40 years it would be wholly paid off. I advocated that, and if we had started that back 20 years ago, we would have a lot less national debt today. Mr. BOLTON. How would the Federal Eeserve have done this? The CHAIRMAN. J u s t like they bought the $33 billion in bonds. You see, there is no limit to what the Federal Eeserve can do. They can buy a trillion dollars worth of bonds; isn't that right, Mr. Martin ? Mr. MARTIN. Well, there is a limit. The CHAIRMAN. W h a t is the limit ? Mr. MARTIN. I n the statute, you know, we have to The CHAIRMAN. I am talking about the Federal Reserve. Mr. MARTIN. Well, I am talk ing about the limit with respect to the gold requirements that we have. We cannot just create money indefinitely beyond that. But to come back to my earlier point, it would be very nice if the Federal Eeserve could just buy these securities, which in a sense is the Government buying them from itself, and then cancel them out. But I do not believe there would be many people who would hold Government bonds very long if that were done. The CHAIRMAN. I did not advocate that you create money indefinitely. I advocated that the Federal take care of these bonds and that they be paid off 2y2 percent a year. Mr. MARTIN. I do not believe a lot of people would believe they would be paid off. The CHAIRMAN. We did not get anything like that done at that time, because during the war people were not paying much attention to logic and reason, and if the leaders suggested something, people would do it. We did not pay much over 25 percent of the war as we went along. Mr. MARTIN. I agree with you that it would have been better to have increased taxes more than we did during the war. The CHAIRMAN. Yes, sir. I advocated 50 percent all the way through, and I voted against the excess profits tax repeal at the end of the war because I wanted more taxes to be paid on the national debt. Mr. BOLTON. The fact is that blame cannot be placed on the Federal Eeserve System for not doing it. The CHAIRMAN. Well, they could have advocated it. If they had come in and advocated it it could have been done. Mr. MARTIN. I doubt that, Mr. Patman. We do not have that influence. The CHAIRMAN. Well, you have more than you think. Anything else before Ave close for the day ? Well, Mr. Martin and Mr. Balderston, we appreciate your attendance, and we will try not to impose on you any more than we can help, but it is possible we would like to have you up here again later on, and if so we will get in touch with you and we will agree on a time mutually satisfactory. Tomorrow we will have three members of your Board, and then after that we are going to have the presidents of the Federal Eeserve 102 T H E FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS banks, two a day. We expected to have the Secretary of the Treasury after the Chairman of the Federal Reserve Board, because he logically belongs there, but the Secretary of the Treasury is engaged in some matters right now that he cannot leave very well, possibly some of it in connection with the tax bill, and we agreed to postpone him until after the presidents of the banks were heard. He will be here some time in the early part of February. If there are any suggestions you have now or if any of you gentlemen wish to offer suggestions to the committee at any time, we shall be very glad to receive them. You will be allowed the privilege of extending your remarks in the record, including anything that you think is germane to these hearings. Mr. MARTIN. Thank you. We are at your service. The CHAIRMAN. Thank you, sir. We will stand in recess until 10 o'clock tomorrow morning. (Whereupon, at 4:45 p.m., the committee recessed, to reconvene tomorrow, Thursday, January 23,1964, at 10 a.m.) THE FEDERAL RESERVE SYSTEM AFTER 50 YEARS THUESDAY, JANUARY 23, 1964 HOUSE OF REPRESENTATIVES, SUBCOMMITTEE ON DOMESTIC F I N A N C E OF THE COMMITTEE ON BANKING AND CURRENCY, Washington, D.G. The subcommittee met, pursuant to recess, at 10 a.m., in room 1301, Longworth House Office Building, Hon. Wright Patman (chairman) presiding. Present: Representatives Patman, Multer, Minish, Weltner, Widnall, Bolton, and Brock. The CHAIRMAN. The committee will please come to order. We have this morning as our witnesses Gov. A. L. Mills, Jr., Gov. J . L. Robert son, and Gov. Charles N. Shepardson. We are delighted to have you gentlemen. We had two members of the Board of Governors yesterday, the Chairman and the Vice Chairman. We have you three senior members today, and the two junior members, who are not in the city, we expect to have later on. Do any of you have prepared statements ? STATEMENTS OP A. L. MILLS, JR., J. L. ROBERTSON, AND CHARLES N. SHEPARDSON, GOVERNORS, FEDERAL RESERVE BOARD Mr. MILLS. N O , sir. The CHAIRMAN. YOU would just like to answer questions then, I assume. We have before us, gentlemen, a reevaluation of the Federal Reserve Act for the past 50 years. We know the strength of the Federal Reserve System, and we believe we know some weaknesses. I t is not our desire to injure the System. We will try to keep the good, and if there is any bad, we expect to recommend that changes be made. Mr. Mills I believe is the senior of the three. Would you like to comment on the Federal Reserve Act over the last 50 years, just a thumbnail sketch, Governor Mills, and tell us what you consider the strong points and the weak points ? Mr. MILLS. Mr. Chairman, the most effective answer that I could give to your question is if the committee will bear with me, to allow me to discuss the various measures that you, sir, have introduced. The CHAIRMAN. I will ask about those if you don't mind. First is the one about—we will take them up in order—about the retirement of the stock, and we will just get your brief opinions on it, each one of you, and then we will go to the other bills. 103 104 T H E FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS There are five bills here. Suppose you give us your opinion first on the one about reimbursing the banks the amount they paid in for what is known as stock. What do you think about that, Governor Mills? Mr. MILLS. Mr. Chairman, that would be a very drastic revision of the original principles and spirit of the Federal Reserve System which provided, as has been brought out in previous discussions and hearings before your committee, a mixed representation of private and public interests acting in the public interest. If the Federal Reserve bank stock was retired, in my own thinking the result would be to weaken the very happy combination that now exists, and in a sense draw the System by one step nearer to nationalization and to a closer relationship with the executive branch of the Government than w^as intended by the f ramers of the act. The CHAIRMAN. I believe that clearly expresses your view. Governor Robertson, suppose you express your view on that bill. Mr. ROBERTSON. Could I take 30 seconds to say something else before that? The CHAIRMAN. Yes, sir. Mr. ROBERTSON. Because I would like the record to show that I think these hearings are not only appropriate but very well timed. I think that any agency performing as important a function as the Federal Reserve System performs should be scrutinized by the Congress from time to time to see whether or not it is up to date, whether its organizational setup is what the Congress wants, whether its policies are in accord with what the Congress wants, and it seems to me that this should be done at a time when it can be looked at objectively and dispassionately, and I believe this is such a time. Therefore I think that it is all to the good that you are taking a look at the whole System and all aspects of it. I would like to add that I think the scrutiny which you, Mr. Chairman, have personally lavished on the system over the years has been beneficial in more ways than you know, because it has served to keep the System on its toes. I think that the System is a better system because of the fact that somebody has been scrutinizing it. I think the prodding that you have done as an individual has resulted in real improvements. I think we are in a much better position to justify whatever actions we take as a result of that than we otherwise would be, and yet I don't think ithas resulted in the System being so afraid of making a mistake that it has always acted in a cautious manner. I think it has realized that it would make mistakes from time to time and it always will. Having said that, you will probably find that I am not in accord with many of the suggestions which are here, but this doesn't mean that they shouldn't be discussed. They should. As for the desirability or undesirability of retiring the stock of the Federal Reserve banks, I think there is very little to be gained and very little to be lost if this proposal were enacted. I think the System certainly has no need for the funds represented by that stock. I t was a desirable way in which to set up the System, to get it launched in the first instance, but it isn't needed at this time. I t seems to me that the absolutely safe, tax-free, 6-percent return on stock issued before 1941 is probably one of the best assets in any bank in this country, even though it is a very tiny part of any bank's annual income. Unquestionably the expenses of operating the System THE FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS 105 would be reduced if the stock were eliminated by the amount of dividends paid each year and by the cost of handling stock transactions. But what the effect would be on the allegiance of commercial banks to the System—and we need member banks in this System—the extent to which the prestige and status of the System would be lessened by enactment of the proposal is anybody's guess. If it were bad, I think it wouldn't be worth it, but if it weren't, and anyone can guess, then I see no real problem involved in this particular proposal. The CHAIRMAN. Thank you very kindly. Governor Shepardson? Mr. SHEPARDSON. Mr. Chairman, I can add very little to what has been said. I t seems to me that this question is not one of great importance on either side. Admittedly in the beginning the capital stock did provide a base for the start of the System. At this time I don't think it is significant in the operation of the System. To me the principal question here is what the appearance is as an organization, functioning as the System does as the central bank of this country, whether or not the image of that organization would be affected by the presence or absence of a capital structure. I am not in a position to judge what the reaction may be. I t might be adverse, it might not. So far as affecting the membership of the banks, certainly it is not a deterrent to membership at the present time, because, as Governor Robertson has mentioned, it is a good investment. The deterrent to membership is not in the stock retirement. I t is in other areas. The CHAIRMAN. I want to ask you gentlemen something further on that particular bill. Don't you think the ownership of this stock creates the impression that the banks own the Federal Reserve System? Mr. SHEPARDSON. Mr. Chairman, I think that might have been true, probably was true at the time the System was created. I think the discussions that have been held on this point over the years have completely disabused any such thought in the minds of bankers, and I think the public generally. I don't think that it is a factor today. I think it is well understood. The CHAIRMAN. W h a t do you think about that, Governor Mills? Mr. MILLS. Mr. Chairman, you will find my remarks at a different scale than either Governor Robertson or Governor Shepardson. I place great store and importance on the stock ownership. The CHAIRMAN. I am just talking about that impression. Now, do you think that the "stock" creates the impression in the minds of the bankers and other people that the private banks own the Federal Reserve banks ? Mr. MILLS. If you go back to the fact that there are nine directors of the Federal Reserve banks of which only three are bankers, three represent the public and three are elected from the business interests, the banker representation is minor, and by and large in my observation over the years the directorships of the Federal Reserve banks have been indoctrinated with a very high degree of public interest, and if there were any inclination to press the private interests above the public interest, they have refrained from doing so. There is a symbolic importance in the ownership of Federal Reserve bank stock because the Federal Reserve banks, in being organized as corporations with a capital and surplus, it gives the opportunity and 28-680—64—vol. 1 8 106 T H E FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS the right to the directors to guard the operation of those banks in the light of the risks that they take, and to apply their own judgment as to their proper administration, which is of value to their public officials and to the overall public interest represented in the banks. If you withdraw the capital stock and there was just a symbolic interest in the Federal Eeserve bank, in other words the directors became merely an advisory body, I think it would so detract from their lively interests and their intent to supervise adequately the System, that the general public would stand to lose. The CHAIRMAN. YOU do not claim though, Governor Mills, that the banks own a proprietary interest in the Federal Reserve banks ? Mr. MILLS. No, sir. The CHAIRMAN*. They do not own a proprietary interest, is that right? Mr. MILLS. Indirectly Chairman Martin has chosen a happy expression, that the stock in Federal Reserve banks is not an equity stock. I n essence it is a preferred stock, in which the member banks are returned a dividend, and beyond that the earnings that accrue to the Federal Reserve banks of course funnel net to the Treasury. The CHAIRMAN. Governor Robertson, do you believe the ownership of this stock gives the banks a wrong impression that they own a proprietary interest in the system and own the system ? Mr. ROBERTSON. I think the ownership of stock in the Federal Reserve banks has led some people, including some legislators, to suspect, I think mistakenly, that the System is banker dominated. The CHAIRMAN. That is right. Mr. ROBERTSON. I don't believe that the banks themselves really believe that they owoi the System or can control it. The CHAIRMAN. NOW that covers generally the first bill. Now the second one. Mr. BOLTON. Mr. Chairman. The CHAIRMAN Yes, sir. Mr. BOLTON. I S it your thought as to procedure that the members of the committee should ask questions ? The CHAIRMAN. I thought we would just go through the bills briefly and then yield to you gentlemen. Will that be satisfactory? Then in that way we will surely get them all in the beginning. Now if you will make your comments brief, gentlemen, so we can have your ideas about the bills, and then we will yield to the other members so they may ask questions. Now the second bill is H.R. 9631 proposing to change the Board. That is really in essence what it is. I t is changing it from what some people call an independent interest Board to one where the Secretary of the Treasury would be Chairman, and where the terms are shorter. What would be your comment on that bill, Governor Mills. Mr. MILLS. Mr. Chairman, that would be again in my personal opinion a further step toward the nationalization of the Federal Reserve System and its coverage into the executive branch of the Government, which is a moot question, and it has both its antagonists and its protagonists. But the theory has been continuously expressed that the Federal Reserve System is independent within Government, but at the same time you could add that it is not irresponsive to the thinking and the policies of whatever administration holds office. THE FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS 107 So that you have sort of equalization there that is beneficial by insulating to a very moderate degree the Federal Reserve System from the executive branch of the Government. The theorists have always held, with good reason, that it is to the public advantage to protect the central banking authority from being embroiled in politics by way of maintaining its direct responsibility to the Congress in carrying out and fulfilling the delegated responsibilities that Congress vests with us. The CHAIRMAN. What is your comment, Governor Robertson. Mr. ROBERTSON. I think this bill would effectively destroy the independence of the system and would make it—and I think it is perhaps so designed—an appendage of the Treasury. I think this would not be wise. I think that there is a real need to separate monetary policies from fiscal policies, because of the possibility of utilizing the money creating facilities of the Federal Reserve System for purposes of financing unsound operations on the part of the Government. We have seen this happen in many other countries of the world; it is happening right now, and I think unfortunately. I think that a reversal of our present setup to one such as would be contemplated by this bill would not be wise. Do you want comments on individual asnects of this bill ? The CHAIRMAN. N O , sir; just the general bill. Governor Shepardson? Mr. SHEPARDSON. Mr. Chairman, it seems to me that the integrity of the money supply of the country is vital in the life and economy of the country, and that the watchdog, if you please, over that function should be removed as far as possible within a free government such as ours, from the day to day swings and pressures. I t seems to me the organization of the system as it was created, and the organization of the Board, with the long term, was a definite move to provide that insulation. I t seems to me that is essential as a safeguard to the continuing integrity of the money supply, which shouldn't be subject to day-to-day pressures. Those pressures change, and under, in some instances, widespread emotional feelings. At such times some things may be undertaken that in the long run and on more sober reflection later we might regret. To the extent that those pressures can be minimized, by a shock absorber if you please, a balancer to try to smooth out these fluctuating pressures, I think the present organization or something similar to it, to the extent that it insulates the board from those daily pressures, is in the interests of the economy as a whole. I think that a move such as is contemplated here, particularly the move to reestablish the Secretary of the Treasury as a member and Chairman of the Board, would be unfortunate. The Secretary of the Treasury has a responsibility in his function of handling the public debt that, at times, could be a matter of conflict of interest with the longtime stability of the money supply. I think that a wise move was made when that separation was made some years back. I think it would be unfortunate to reverse the setup. The CHAIRMAN. All right. Now the next three bills are short ones. The first one, H.R. 6985, is to provide that the interest that is received on the open market portfolio should be covered into the Treasury as 108 T H E FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS miscellaneous receipts, and authorize Congress to appropriate the money for the expenses of the Federal Reserve Board and the Federal Reserve banks. Now what is your brief comment on that, Governor Mills ? Mr. MILLS. Mr. Chairman, I am not certain what the complaint is with the present arrangement whereby in keeping with this theory of independence the Federal Reserve System is granted the stewardship and the expenditure of the funds that reach its possession through its earnings. Now you will recall through your very close familiarity with the history of recent years, that at one time it was proposed, and the Federal Reserve System has repeated its recommendations, that there be a franchise tax enacted that would by statute funnel the earnings of the System beyond its expenses to the Treasury. Approximately the same purpose has been accomplished by a tax, an interest tax on the Federal Reserve bank issuance of Federal Reserve notes, so that all earnings above expenses and some retentions to capital accounts move to the Treasury. Now, the only reason that I could see for changing that program would be a distrust or lack of confidence in the way by which the Federal Reserve System handles these funds and safeguards them through its general supervision over the Federal Reserve banks and the management of those banks, and through the outside accounting, independent accounting that is done of its own affairs. The CHAIRMAN. Governor Robertson ? Mr. ROBERTSON. There is no reason at all why the Federal Reserve System could not operate effectively on the basis of appropriated funds or on the basis of the appropriation process such as other Government agencies are subjected to. However, it seems to me that the purpose of this proposal is simply to reduce and eliminate the independence of the system which I think is bad and therefore I would be in opposition to the proposal. The CHAIRMAN. NOW Governor Shepardson ? Mr. SHEPARDSON. Mr. Chairman, I am not clear that it won't impede the operation of the System, because it is not clear to me how we separate certain types of experiences. In the operation of the System, operating through the Open Market Committee, in the purchase and sale of Government securities, as it relates to influencing the money supply, at times there will be profits, at times there will be losses. I would assume that those are part of the profits or expenses of the System. There have been times and conceivably will be times again when there will be considerable swings, and when the System might find it desirable to be engaging in operations which for the moment would incur considerable loss in the System account. Now, I would assume that that is part of the expense of operating the System, and it is not clear to me, if we put this on a basis of turning in earnings and getting our operating costs through the appropriation process, how that could be taken care of. I think it would impede the efficiency of the System in its operations to influence the money supply according to the needs of the economy from time to time. I also think that it would be one other step in impairing the independence of the System, which 1 stated earlier I think is essential in the idea behind the original creation of this organization to safeguard the money supply of the country. THE FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS 109 The CHAIRMAN. NOW H.R. 9686, to require the payment of interest on certain funds of the United States held on deposit in commercial banks, to provide for reimbursement of commercial banks for services performed for the United States, and for other purposes; would you like to comment on that one, Governor Mills ? Mr. MILLS. Mr. Chairman, I lack the knowledge and the competence to discuss that problem which is surrounded by many technicalities, and essentially is a matter subject to the discretion and the responsibility of the Treasury. The CHAIRMAN. Yes, sir; I know that. Would you like to comment on it, Governor Robertson ? Mr. ROBERTSON. I would like to comment on it, Mr. Chairman. I t seems to me that the present arrangement for holding tax and loan accounts in commercial banks—certain types of tax receipts and proceeds from the sale of government securities—has some very desirable features. The fact that these large payments are initially only transfers from the accounts of corporations and individuals to the account of the U.S. Government on the books of the commercial banks avoids reserve effects which would be disruptive to the smooth operation of the money market and the banking system as a whole if large sums were abruptly pulled out of the banking system. Care should be exercised to make sure it woudn't be difficult or impossible for the Treasury to maintain these accounts or for the banks to hold them, but the terms on which these accounts are maintained should be subject to review and analysis. Activity in the accounts and most of the services performed by the banks for the Treasury are subject, in my opinion, to the same kind of cost analysis that is used on the accounts of large corporations. If further study should demonstrate that more service to the Treasury or even some cash payment of interest is possible and desirable it should be provided. However, any changes in the arrangement should be permissive rather than mandatory. The Treasury should be left free to work out the details in a manner designed to protect all aspects of the public interest. F o r example, I do not believe that we would ever want to go so far as to require the Treasury to concentrate its balances in the hands of the highest bidders, the banks that would pay the largest amount of interest because even though such a policy might result in some small benefit to the Treasury from a dollars-and-cents point of view, it might lead to a general concentration of Government balances in the money centers, which would be very undesirable—again from my point of view as a matter of public policy. The CHAIRMAN. Thank you, sir. Governor Shepardson, would you like to comment on that one ? Mr. SHEPARDSON. I don't think I can add materially, Mr. Chairman, to what has been said. The CHAIRMAN. All right. Mr. SHEPARDSON. I think that it is significant in the flow of funds in the banking system. As to the cost of service and the value of service rendered, I would feel that is a function that the Treasury is in a much better position to evaluate than I. The CHAIRMAN. NOW the last one here, H.R. 9687, if you gentlemen will comment briefly on it, then I would like to yield to the members of the committee to ask questions. I t is a bill to amend the 110 THE FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS Federal Reserve Act and the Federal Deposit Insurance Act by eliminating the prohibition against the payment of interest on demand deposits. Governor Mills, would you like to comment on that % Mr. MILLS. Mr. Chairman, the best answer I can offer is to refer to Governor Robertson's statement and the concern he expressed with regard to Treasury tax and loan accounts, that a situation might develop which should be prevented, by which the bidding for interest on deposit accounts would draw funds into the banks of great size and best able to afford to pay that interest. The same possibility resides in this proposal that if there was a competitive race to pay rates of interest on demand deposits the smaller banks that are less able to meet that cost would lose funds to the larger institutions in the more important financial centers and, in doing so, their ability locally to finance their communities would be lessened by that loss of deposits. The CHAIRMAN. Governor Robertson ? Mr. ROBERTSON. I n my opinion, Mr. Chairman, there was no reason, no valid reason, in the first place to prohibit the payment of interest on demand deposits, but it was done and it is now a part of the warp and woof of our whole banking system. I think what would happen if the banks were now free to pay interest on demand deposits is a matter of conjecture. I fear that it would result in higher loan rates or higher service charges in order to offset the additional costs, neither of which do I think w^ould be desirable. I think it might also lead to some siphoning off from the banks in the inland part of the country to the large cities in times when they could utilize those funds more profitably. This I don't think would be good. Consequently, it seems to me the risk of transition from no interest on demand deposits to interest on demand deposits is not worth the effort. Now, this is quite aside from the question of time and savings deposits. There I think a mistake has been made all along. I think commercial banks should be in a position to compete for these funds, not only against eacli other but against other types of financial institutions. If I had my way about it, the interest rate ceiling on time and savings would be raised so high that it would not constitute a barrier to free competition, and I think this would redound to the interest of the public as a whole. The CHAIRMAN. Governor Shepardson. Mr. SHEPARDSON. Mr. Chairman, I agree essentially with what has been said. There is only this further thought in my mind. We do know that a situation developed at one time that led to this prohibition of payment on demand deposits. I am not persuaded that human nature is so changed that it isn't desirable to continue to maintain that safeguard. The CHAIRMAN. Thank you, sir. Now, then, I would like to yield to Mr. Widnall to ask questions. Mr. WIDNALL. Thank you, Mr. Chairman. The demand deposits are in different categories, aren't they, as to size of banks, the amounts that are actually held over a period of time, A, B , C? Mr. MILLS. Did you refer to reserve requirements Mr. Widnall ? Mr. WIDNALL. Yes. Mr. MILLS. That the banks are required to set aside from their demand deposits, the member banks, and have them in the deposit with T H E FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS 111 Federal Reserve banks a percentage which is 161^ percent for the Reserve city banks, the larger banks, and 12 percent for the other banks through the country. Now in nonmember banks, some States have formal reserve requirements and they vary from State to State, but where reserve requirements are not imposed by law, they are carried out largely by the banks as a means of having a first line of cash defense to meet fluctuations or unexpected withdrawals of deposits. Mr. WIDNALL. Where the Government is calling for funds and the funds are on deposit in large-, medium-, and small-size banks, the one that can expect the major calls almost daily are the large banks, is that not so ? Mr. MTLLS. I believe so. that there are A, B, and C banks, and I forget which category the larger banks come into. But by and large, if I am correct, the Teasurv, when it wishes to reconstitute its balances against its expenditures, draws first on the larger banks where their funds are more readily accessible, and only secondarily on the smaller banks which they are not inclined to disturb by withdrawals and interfere with the normal course of their operations. Mr. WIDNALL. So that if interest was paid on these deposits, actually paid bv the banks on these deposits, the smaller banks would be hurt more than the larger banks as I understand it. Mr. MILLS. I couldn't answer that. That would be relatively—I would be incUned to doubt it, because I think the Treasury's dispersal of these funds in tax loan accounts is such that no one class of recipient banks wou^d be disadvantaged relative to the others in the obligatory payment of interest. Of course those deposits originally arise out of subscriptions that banks have made to Treasury offerings of securities, the proceeds of which are placed to the Government's credit in those accounts. Mr. WIDNALL. I S the amount that is on deposit there a fairly stable balance or does Jt fluctuate violently throughout the year? Mr. MILLS. There would be fluctuations, but at a guess there is a residue of deposits that would carry through over 12 months in the year, and, above that, fluctuations above that amount would of course depend on the Treasury's needs for drawing on those deposits to meet its outpayments. Mr. WIDNALL. If interest was to be paid on the account, wouldn't there have to be some kind of guarantee as to the stability of a minimum amount in the account throughout the year, in order to make it a profitable rather than a loss operation as far as the bank is concerned ? Mr. MILLS. If I recall correctly, there is within the Treasury and the commercial banking system a program that would intend to analyze the exact status of those accounts, and to arrive at the kind of conclusions that you seek and which I couldn't answer. Mr. WIDNALL. YOU say there is a program in effect at the present time that you haven't seen the results of. Mr. MILLS. I believe so. I wouldn't want to be firm on that. Mr. WIDNALL. I will follow up on that. For the benefit of the committee, could you give, could each of you give us some idea of your own background before von became a member of the Federal Reserve Board? 112 T H E FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS Mr. MILLS. Mr. Chairman, if I might, my background isn't one that Chairman Patman would welcome, and whether I have been as good a convert to a public servant as I hope I have been is for others to decide. But I am now in my 44th year of financial work, bank work. The first 32 years was as a commercial banker and employee and officer of commercial banks in Portland, Oreg., which was my home. Mr. WIDNALL. What about you Mr. Robertson ? Mr. ROBERTSON. I have been in the Government service for 36 years. I worked here on Capitol Hill for a while, for 3 years while I was going to school. I w^as then in the F B I . I went with the Comptroller of the Currency as an assistant counsel in 1933 during the banking holiday, and eventually became First Deputy Comptroller. I was in the Navy during the war. I went to the Federal Reserve in 1952. Mr. WIDNALL. Mr. Shepardson ? Mr. SHEPARDSON. Mr. Widnall, I was from the time of graduation from college, or after service in the Army in the First World W a r in land-grant college work as a professor of agriculture. I n 1928 I went to Texas at a time the chairman will well remember when there was considerable distress about the one crop cotton farmer and a program to diversify farm income. I went down there as head of the dairy department at Texas A. & M. College to assist in promotion of a dairy program throughout the State. My training had been in dairy production. One of the first problems we encountered was the fact if you •were going to put a man in the dairy business and finance cows, it took a different type of financing than it did to finance a cotton crop from planting time to picking time. I became increasingly interested in the matter of farm credit and farm finance. I countinued at the college and was made dean of agriculture there in 1944 and came to the Federal Reserve Board in 1955. During my service in Texas, I became increasingly concerned in this matter of farm credit and finance, and for whatever background I have in it, it is what I accumulated out of that work. My entire service was with the State agricultural college. Mr. WIDNALL. I asked that question of all of you because I think there has been some question raised as to whether or not members of the Board had a prejudiced viewpoint because of what their background was prior to being a member of the Board. I also know that you all take an oath in connection with your office to serve the public interest and not any special interests as I understand it. I would like to ask this further question. There seems to have been some discussion as to whether or not Mr. Martin, the Chairman of the Board, runs the Board with an iron fist and his vote is the vote of the Board. Do you all indicate your own individual views ? Do you all cast your own individual vote without pressures ? I would like an answer from all three of you on that. Mr. MILLS. The case is that policy decisions are reached by vote and the Congress very wisely requires that the Federal Reserve Board publish a report annually that gives the background of policy decisions, and the votes of the individual Board members which reflect differences of opinion as they occur and where they are of sufficient importance to an individual member to justify his dissent from a majority. THE FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS 113 Mr. WIDNALL. I would like a statement from you, Mr. Eobertson. Mr. ROBERTSON. I would say no one knows better than Chairman Martin that I vote in accordance with my own conscience. My record of dissents over the years would so indicate. Mr. WIDNALL. This is obvious from what I have heard. Mr. Shepardson ? Mr. SHEPARDSON. Mr. Chairman, frankly I have been most agreeably surprised at the lack of any intimation of pressure from the Chairman or anyone else in matters before the Board or any member of the Board. I have felt perfectly free and have sensed no indication of pressure from anybody to influence my decisions in actions before the Board. Mr. WIDNALL. Thank you very much. That is all, Mr. Chairman. The CHAIRMAN. Mr. Minish? Mr. M I N I S H . Mr. Robertson, you referred in your statement in opposition to H.R. 9686 that withdrawal of the deposits might disrupt the banking system. Why isn't it disrupted on April 15 when all the payments on individual income taxes come in? Mr. ROBERTSON. That is the very point. You see, as these taxpayments are made they go into the tax and loan accounts of these banks. They aren't pulled out of the banking system at one fell swoop. Mr. M I N I S H . I am talking of the individual. Mr. ROBERTSON. But take any taxpayment you want, anywhere the payment comes in and is credited to the tax and loan account in the commercial banks; it stays in the banking system rather than going into the account of the Treasury in Federal Reserve banks and thus be pulled out of the reserve funds of the commercial banking system. You could have terrific swings in the volume of reserves of the entire banking system if you didn't have some sort of a procedure like this. Mr. M I N I S H . Why do you feel that the banks shouldn't pay interest on this? Mr. ROBERTSON. I don't say that at all, just the opposite. I say that these accounts should be subject to cost analysis just like any other account, and the Government should either get paid or should pay— depending entirely upon both sides of the coin—the services rendered by the banks and the benefit to the banks from the funds they hold. I take exactly the opposite point of view. Mr. M I N I S H . If I understand you correctly, you agree that the bank should pay interest on the money it holds ? Mr. ROBERTSON. I don't say that. I say that you ought to subject these accounts to an analysis to determine whether or not the banks should pay for having these deposits. If the analysis turns out that they should, I say yes, they should. Mr. M I N I S H . The analysis will show it isn't their money, it is the Government's money. Mr. ROBERTSON. Oh, yes; it is the Government's money, but also these banks perform many services free for the Treasury. Mr. M I N I S H . They should be compensated for that. Mr. ROBERTSON. That is right. I assume the present setup is on the basis that the cost of the services is equal to the benefits which the bank gets, so that no one benefits, banks or the Government. If this 114 T H E FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS is so, fine. I don't know this, and I say the only way to find out is to subject them to a cost analysis. That is, as I understand it, what is being done now on an experimental basis. Mr. M I N I S H . Thank you. The CHAIRMAN. Mr. Bolton ? Mr. BOLTON. Thank you, sir. Going back to the individual bills, gentlemen, first referring to H.E. 9631, this contains a provision which woukl subject the Federal Reserve System to audit by the GAO, which was not brought up in the original questioning. I wondered if you would each comment on that? Mr. MILLS. Mr. Bolton, to tackle that subject may bring up institutional concerns that aren't justified, but over the years where there have been recurrent proposals to reduce the independence of the Federal Reserve System, it has been the sense of the officers of the Federal Reserve System that if the System were to become subject to examination by the General Accounting Office, that the next step would be to bring its operations under the coverage of the Budget Bureau and appropriated funds, and to terminate the present authority of the System to recruit for the Board in particular its personnel as its own wishes dictate, and not from the civil service list. So it is a fear that movements in those directions would set up a momentum that at its logical conclusion would change the character of the System and limit its independence. Mr. BOLTON. Then I take it, Mr. Mills, that you would also oppose the appropriation process. I think I gathered that. Mr. MILLS. Yes, sir. Mr. BOLTON. Mr. Robertson? Mr. ROBERTSON. I don't see how anyone could object to scrutiny by an impartial outside agency of the Federal Reserve System for the purpose of determining whether or not money has been stolen or wasted. If this is the purpose of it, that is one thing. If the purpose is to exert pressure on the independence of, or judgment of, the System, if it is to raise questions whether or not Open Market Committee meetings ought to be held every 3 weeks or whether that is wasteful or whether or not the Federal Reserve operations ought to be based on their profitability rather than economic factors, this is an entirely different matter. But from my point of view, there is no need for a GAO audit—and I have some knowledge of audits from my past experience. We do have in every Federal Reserve bank and branch a good internal audit system. Secondly, we do have a good staff of examiners of our own in the Board. They go into each of these Federal Reserve banks and branches each year. We have taken many steps to improve these examinations. They are still subject to improvement. But there isn't any other agency in Government that can do a better job. Consequently I think it would probably be a waste of funds to employ an additional outside agency, whether it is the GAO or anyone else, to duplicate the job. Mr. BOLTON. Thank you, sir. Mr. Shepardson? Mr. SHEPARDSON. I have essentially the same feeling, Mr. Bolton. W e do have not only this internal audit within the banks, which is directly responsible to the Board of Directors and not to the management of the several banks, we do have our own examination force. THE FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS 115 I t is constantly in the field checking these facts. I n addition to that, to assure ourselves that we are keeping current with modern techniques in examination and audit, that we are maintaining appropriate standards, the Board has consistently for a number of years engaged 1 he services of an independent nationally reputable firm of public accountants to review our procedures, to see that we are maintaining appropriate standards, so that personally I feel confident as a responsible officer of this Board that we are getting a review of the operations and expenditures that puts us in position to appraise these actions, for which we are responsible. From the standpoint of a change in the supervision, I would feel that it was, as Governor Mills has indicated, a possible step that might impair the present independence within the Government of a function that I think should be as independent as is possible in any public agency. I think this might be one of the steps toward that impairment and I feel confident the job is being done at the present time. Mr. BOLTON. If I could summarize what all three of you have said then, in effect you are opposed to the GAO audit, first, because you feel a satisfactory audit procedure is not being done, and therefore that this would be an additional expense to the Government, and secondly, because you fear that this would inject a policymaking audit into the purely monetary auditing proceeding, an outside policy. Mr. MILLS. Mr. Bolton, may I add one comment. Chairman Patman, as you are aware, is examining the expenditures and the various activities of the Federal Reserve System, which is certainly in keeping with the responsibility of Congress to follow the activities of its delegates, and that is a very welcome program. Now, it may develop that expenditures within the System might not in all instances meet the satisfaction of the investigation. If they don't, it will be an opportunity for corrective action on the part of the System, or to respond by explaining those expenditures to your satisfaction. But if the House Banking and Currency Committee is the parent, you might say, of the Federal Reserve System, in its vigilant observance of our activities and examination of those activities, it is a very wholesome plan or program. Mr. BOLTON. Thank you sir. If I may now go to the bill which would remove the stock, I think, Governor Robertson, you mentioned that the interest paid on the stock was tax free. Just for the record that is Mr. ROBERTSON. Only on that which was issued before 1941. Mr. BOLTON. Right. Mr. ROBERTSON. I t is about a quarter of the total. Mr. BOLTON. On the face of it, this proposal would mean that the System would have $33 million a year and therefore certainly has something to advocate it. As I understood the Chairman yesterday, his objection to the proposal was on the basis, or one of the reasons that he favored continuation of the stock was that this ties in member banks and is an attraction to banks to join the Federal Reserve System. The proposal, the suggestion was made in the discussion yesterday that an additional attraction to pull member banks into the System would be to only furnish a canceling and forwarding service for checks to members of the Federal Reserve System. I n your opinion would this add to the attractiveness of the System, and would it perhaps 116 T H E FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS provide a greater incentive than the stock now does ? I wonder if you would comment on that. Mr. MILLS. Mr. Bolton, you are addressing the question to me? Mr. BOLTON. T O all three of you, sir. Mr. MILLS. I believe that there would be a loss if the membership in the System was identified merely by a certificate and not by a financial participation, that the Federal Reserve banks are in their operations in keeping with other financial institutions, and there is a symbolic importance in the private ownership, irrespective of the return on that ownership, that is an incentive to the directors of the Federal Reserve banks and the members of the Board of Governors to be stewards of that financial interest, and to see that the System is operated in accordance with financial principles, the best financial principles. Mr. BOLTON. Mr. Mills, on that point then would you feel that same stewardship feeling was present if you just did away with the interest ? Mr. MILLS. Frankly, Mr. Bolton, I have never thought in terms of the interest or the dividends paid the Federal Reserve bank stock. There unquestionably would be a saving to the Treasury if those interest payments were terminated. Mr. BOLTON. Mr. Robertson. Mr. ROBERTSON. Mr. Bolton, I do not think that the existence or nonexistence of stock makes members or keeps banks from becoming members. This is merely one of the little items which I think doesn't weight heavily on either side. I personally think every bank in the country should be a member of the Federal Reserve System and should participate in what I think is the central banking function. I think their reserve requirements ought to be identical among all banks, whether they are National or State, member or nonmember. This should apply across the board. Now there are means, of course, of enticing banks into membership by providing greater services, greater services than any correspondent bank can provide. B u t this I don't think is the way to go about it. I think that it ought to be done on a basis of a compelling national interest. Every bank should participate in the central banking function and carry its full share of the load, and not get a free ride by virtue of getting all the benefits of an economy which is influenced by the central banking system and still not pay the penalty of having reserve requirements equal to all of its competitors. Mr. BOLTON. Mr. Shepardson. Mr. SHEPARDSON. I couldn't add anything further. I agree completely with this last point Governor Robertson has made. If the System serves a function in our country, it does so through its effect on the money supply of the country, and to do that it must have a significant part of the total deposits of all banks represented. That being true, I don't see any basis for justifying a line that if wre get enough, we don't need to bother if the rest aren't in. I think, as Governor Robertson stated, this is a matter of policy in connection with the money and credit of the country, that we are rendering a service to the whole country, and that all banks have a responsibility. Specifically to the stock question, I don't think that is a significant factor one way or the other, and I do think it would be unfortunate if THE FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS 117 the System were to operate on a basis of trying to gain membership by the free services it might give them. I don't think that is our function. Our function in the matter of these services is to render such services as will facilitate the economy of the country. The checking process for example some would say is a benefit to the banks. I say primarily it is a benefit to the economy. The depositors, the recipients of payments across the country, have those payments facilitated, and we are serving the economy. Incidentally, it is a service to the banks. I t is a part of the whole check movement, and our economy today works primarily on checks. We talk about currency, but most of our transactions are checks. In my opinion checks should move at face value, and we should facilitate their movement in the interests of the economy. Mr. MILLS. Mr. Bolton, may I add a comment on the subject ? Mr. BOLTON. Fine. Mr. MILLS. On this subject of stock ownership, ownership of stock is an investment, an investment in the Federal Reserve bank or any other corporation which also implies an investment at risk. I t can be argued of course that the risks incurred by the Federal Reserve banks are nominal, but on the other hand there are risks in looking to the future. You don't know to what extent they will grow. Our entry into these swap arrangements, as they are called, reciprocally with foreign nations involve an element of risk that wasn't familiar to the System in the past. If at some unlikely time in the Reserve banks, in discounting paper for their members banks, or discounting for nonmember banks on an emergency basis, was obliged to absorb losses, it is necessary that the Federal Reserve banks have a proper amount of capital to protect them against those losses, and so that they would never have to become dependent on the U.S. Treasury to restore their capital. I think the capital stock ownership in the Federal Reserve banks serves that purpose of keeping in the mind of the directors of those banks the necessity of following the risks and the activities that those banks undertake. Mr. BOLTON. Thank you, sir. Thank you, Mr. Chairman. The CHAIRMAN. Yes, sir. Mr. Weltner ? Mr. WELTNER. Thank you, Mr. Chairman. Governor Mills, I believe in response to the request for your views on H.R. 9687, you stated that you feel this would result in a reconcentration of wealth. Deposits, you feel, would move to the larger city banks, is that correct ? Mr. MILLS. Mr. Weltner, that is correct, and there is some indication of that kind of a development in the present activities of many commercial banks to issue what are called negotiable, time certificates of deposit, in wThich they attract funds on a term basis to the banks on an interest payment basis. Now we are told that some of the smaller banks find themselves unable to meet the competition, on the higher rates paid by the larger banks on these certificates, and are therefore concerned about losing funds that otherwise could be constructively employed in their own communities. So there is an element of substance to the concern that might be expressed in that direction. Mr. WELTNER. I S it true that a Reserve city bank has about a 41/2 percent higher reserve requirement than country banks ? Mr. MILLS. Yes, sir; that is correct. 118 THE FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS Mr. WELTNER. Isn't that a factor that would permit a country bank to compete, and actually give it a competitive advantage in payinginterest on hank deposits ? Mr. MILLS. I would say that that is true, that they have less in the way of funds isolated on deposit with the Federal Reserve banks. But whether that is a sufficient differentiation to offset these possible difficulties I wouldn't be able to say. The CHAIRMAN. Would the gentleman yield for a brief question? Mr. WELTNER. Yes, sir. The CHAIRMAN. The national city bank pays the same interest on time and savings deposits accounts as all banks; is that correct? Mr. SHEPARDSON. Mr. Chairman, could I interject there? I t is not the same payment of interest. I think we are confusing the rate of interest and the reserve requirement. The CHAIRMAN. I know. Mr. SHEPARDSON. The reserve requirement on savings, on time deposits, is the same in all banks. The CHAIRMAN. I n all banks, that is the point, the reserve requirements. You see they only have 4 percent, and in practice they comingle these reserves. If they have what is that, 12 percent in our national city banks, and add 4 to it, that is 16. That is 8. For practical purposes it is an 8-percent reserve. Mr. SHEPARDSON. Assuming that they are half and half. The CHAIRMAN. Where the time deposits are about the same as Mr. SHEPARDSON. That varies in different banks. The CHAIRMAN. Excuse me, but I thought that point was important. Mr. WELTNER. Governor Mills, what was the history of the movement of funds when it was permissible under the banking laws to pay interest on demand deposits ? Mr. MILLS. A S a practical matter, and this is going back into memory in my earlier experiences in the banking business, that you didn't have the fluidity in the flow of funds, the availability of transferring them, that was made possible when the Federal Reserve Bank System was established, so that it wasn't a problem of great moment at that time. I n practice, the banks that paid interest on demand deposits were very largely located in the financial centers on the eastern and middle western and the Pacific seaboard. I t didn't affect the smaller banks. Mr. WELTNER. YOU say, then, that the actual movement was not such as to justify the fears, but that the situation is different; that wre have a much more fluid situation now which in your opinion would result in movement of funds? Mr. MILLS. Yes, sir: that is correct. Mr. WELTNER. May I ask a question, turning now to the issue that was raised in regard to whether or not the general public believes that the Federal Reserve System is "banker dominated." I t is true, is it not—I direct this question to Governor Robertson because I believe he was the most explicit on that—it is true that banks do elect six out of nine directors Mr. ROBERTSON. That is right. Mr. WELTNER (continuing). Of the Federal Reserve bank, and those directors elect a president. I s that not so ? Mr. ROBERTSON. That is right subject to the approval of the Board of Governors. THE FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS 119 Mr. WELTNER. Eight; and as the president is elected by the bankers,, 5 out of 12 members of the Open Market Committee are elected indirectly by banker members. They comprise 5 out of 12 members of the Open Market Committee ? Mr. ROBERTSON. T h a t is right. Mr. WELTNER. Well, now wouldn't you say that that is a pretty fair indication as to the situation that the Federal Reserve System is banker dominated ? Mr. ROBERTSON. On the face of it you would certainly take it for granted that the System is subject to banker influence. Whenever you have a majority of the directors of the Federal Reserve banks elected by the commercial banks that are members of the System, and you have the President selected, as you indicated, by them, you would think certainly he is going to speak for them. I think a very good case can be made in logic. This relates of course to the proposition that the Federal Open Market Committee operations should be transferred to the Board, which hasn't been raised here this morning but is contained in this bill. I think a very good case can be made for that proposition; namely, that this is so important a function that the decision should be made by a body composed exclusively of people who are 100 percent Government officials—men wTho are appointed by the President with the advice and consent of the Senate, and are, therefore, in the fullest sense of the word Government employees. A very good case can be made for that. But I must say that on the basis of my observation of open market operations over the past 12 years, I do not believe that any Federal Reserve bank President could have been more objective if he had been an employee of the United States rather than the Federal Reserve. I t has been amazing to me to see the extent to which they have remained objective. And I think the traditions wTithin the System are such as to assure real effort on the part of every individual to remain impartial and objective, and avoid any conflict of interest. Mr. WELTNER. Governor Robertson, I don't mean to pry into the operation of the Open Market Committee, but as a matter of practice has there been any healthy dissent by the five Presidents who comprise a portion by that Board to the general conclusions of the Governors ? Mr. ROBERTSON. I would say that while I have been on this Board, there has never been an occasion in which the Presidents have lined up against the Board. There have been occasions on which the Board itself has been split, and the Presidents have been split, and the splits are not always the same, which would indicate that they are doing just as independent thinking as members of the Board themselves. Mr. WELTNER. Thank you. If I have any more time, Mr. Chairman, I would like to inquire of the other two members of our panel today as to their feeling on Governor Robertson's expression that possibly the Open Market Committee should consist solely of the members of the Board of Governors. I would like to direct that to Mr. Mills if that is possible. Mr. MILLS. Mr. Weltner, the existing composition of the Federal Open Market Committee has proven out in experience, and the advantage of having seven Board members and five Presidents on the Committee permits a diffusion of its understanding and abets an opportunity to review the general financial and economic situation through 120 THE FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS the eyes of informed observers and thus better to reach sound conclusions. Now it has been mentioned in the hearings and on other occasions that there might be no good purpose if only five Presidents served on the Committee to have the other seven Presidents in attendance at the Open Market Committee meetings. But as you are familiar with the organization of the Committee, there is a rotation in service on the Open Market Committee, and the advantage of having the remaining Presidents is that they are able to keep themselves better informed, and are better situated to move into that responsibility when it falls to their lot. Mr. WELTNER. YOU don't think the matter bears close investigation then ? Mr. MILLS. N O , sir. Mr. WELTNER. Governor Shepardson, what is your viewpoint on that please, sir ? Mr. SHEPARDSON. Mr. Weltner I have exactly the same view. First I would like to reemphasize what Governor Kobertson said. I n my experience of close to 9 years now, w^e have had difference of view from time to time, both as among the Board members and as among the Presidents. But at no time have I seen anything that indicated a President split, or what you might call a banker's view of the thing. I have been particularly impressed with the concern of the Board in its function of approving the appointment of Presidents, and I have been impressed w^ith the character and caliber of men that we have had as Presidents and their ability to approach these problems objectively, and participating as members of the Committee, or as observers and advisers who are due to be members in the course of time. I t affords the Board a safeguard that I think is vital in getting the firsthand views of these gentlemen from their respective districts of situations across the country that the Board sitting in Washington, with the best of intelligent services, can't be as intimately familiar with as these men from the several districts. I think they make a valuable contribution. Mr. WELTNER. NOW may I interrupt there and ask you—isn't it true that you can obtain the benefit of these viewpoints without giving the Presidents the right to vote on such matters as this ? Mr. SHEPARDSON. Yes, wTe could get those, but I think that there is an added incentive as a participating member with a voice in the thing under the present setup, and in my 9 years' observation, I have seen nothing that would indicate that we are in any way bringing in biased or prejudiced views. Mr. WELTNER. Thank you, Mr. Chairman. The CHAIRMAN. Yes, sir. Mr. Brock. Mr. BROCK. Thank you, Mr. Chairman. Mr. Robertson, if I might clarify in my own mind the question that was raised by Mr. Weltner, and your answer to it, first as I gathered from your response, you did not indicate that you would change the System today to make it entirely a publicly appointed membership on the Open Market Committee, that there is some value in the tradition, in the membership as it has been presently built up, the System we currently have. You do not advocate a change do you ? THE FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS 121 Mr. ROBERTSON. N O . I merely say a very good case can be made for this sort of a setup. Many people have suggested it, and I think from the point of view of logic they have the best of the argument. I think it should be in that form—if you were starting from scratch, put it that way. I would set up, if I were the one who were doing it, I would set up a completely Government employee institution to make decisions on open market operations ? which I think are so important. But as these gentlemen have pointed out, this System has worked over the years, and I think that the System has benefited from points of view brought into these meetings by the Presidents of the Federal Reserve banks. Now any group, and I mean any group, but this group especially, can get into a rut very easily. I t meets day after day after day after day—the same people. Their points of view get fixed. You can get into a rut. But once every 3 weeks we bring in all of the Presidents. This brings a freshness to the discussions, which I think is invaluable. I n addition to that, we do have the information, economic information concerning each area of the country—which we could get even if they didn't have a vote, true. But we do get it. So that as a pragmatic matter, this has worked over the years. Mr. BROCK. I t has worked, and as a pragmatic matter, as you suggest, you don't have a clean sheet of paper always to start with. You have an existing system. Mr. ROBERTSON. T h a t is right. Mr. BROCK. Isn't it logical to assume that the present system as it is constituted today, if we were to change it, would be less efficient for a time, for a number of years, until the same type of background and tradition of knowledge and experience could be built up ? Mr. ROBERTSON. I really don't think so. I think that if the law were changed so that the operation was transferred over to the Board exclusively, and it made the decisions, it bringing in the Presidents only as advisers, there is such a tradition within the Federal Reserve System, one of real loyalty to the Federal Reserve System, that the Presidents would perform just as well in that role as they do at the present time. Mr. BROCK. I concur with the present Presidents who have been with this present tradition but would we not destroy the position of the Federal Reserve if we put the Secretary of the Treasury on the Board? Mr. ROBERTSON. This is a very difficult matter. Mr. BROCK. Isn't that jeopardizing all of the traditions of the Federal Reserve System ? Mr. ROBERTSON. This is a very different matter that you are speaking about. Mr. BROCK. W e have to speak in the context of the proposal that we have before us, and this is suggested as a major reform by these bills that we have in front of us. Wouldn't t h a t jeopardize then the tradition and the efficiency ? Mr. ROBERTSON. A S I indicated, I think at the outset, I believe it would be a mistake to put the Secretary of the Treasury in charge, to relegate the System to the position of just another Government bureau subject to all the influences of the fiscal officer of the United States. I think this would be a mistake. 28-680—64—vol. 1—9 122 THE FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS Mr. BROCK. I completely agree. I thank you. Mr. SHEPARDSON. Mr. Brock, could I add a word ? You indicated possibly if a change were made, that over time we might adjust to it. I think it would have the opposite effect. As Governor Robertson indicated, the loyalty of the present group of Presidents, if they were deprived of the vote on the Open Market Committee, I think would continue. But I think over a period of time, a man who sits in only as a reporter of conditions would not have the same interest, would not bring the same value to the Committee that he does as a member, and that rather than correcting itself over a period of time, there would be a deterioration of that interest that is now afforded by the direct responsibility of membership. Mr. BROCK. I think I would concur in that. I didn't mean to give the impression that it would return to its present efficiency. I said that it might. But I do think that there is reason to question the soundness of taking these people off, if you do take away the incentive of having the right to participate directly in the vote, I think it w^ould reduce their effectiveness and their desire to be effective. On another matter, Governor Robertson, you said something earlier to the effect that the System should be looked at by the Congress to see if the policies it is now effecting, I assume those are your words, is what the Congress wants. You don't, from what you have said, I don't believe you wish to change the present tradition of the independence of the Board by getting its policies, by weighting them more in the light of the current demands of the political situation. You would not jeopardize that independence, would you ? Mr. ROBERTSON. Not at all. Mr. BROCK. I didn't want to misinterpret that desire for investigation. Mr. ROBERTSON. N O , and it isn't a desire for investigation either. I t is merely a feeling that this is an extremely important function, a function which should be operated in the best interests of all the people of these United States. I think in the form of government we have, the Congress has the responsibility to see to it that this unit to which it has delegated power is operating in a way in which a majority of the people in Congress want it to operate. Mr. BROCK. But you could not have it reflecting day-to-day changes of opinion ? Mr. ROBERTSON. That would change the whole matter. You can't operate on this basis. Mr. BROCK. T h a t is right. Mr. ROBERTSON. Monetary policy decisions must be made on a dayto-day basis, and you can't treat it, for example, like the tax legislation is treated. You can't wait for a year before you adopt a decision. You have to act today, and this should be done without regard to partisan politics or the push and pull of political debate. Mr. BROCK. Thank you, sir. Mr. Minish, we were talking earlier in some questioning about the rate of interest paid on demand deposits, and I think Mr. Weltner raised the point of the possible shift. H e was questioning whether the funds would shift. Are they fluid enough to switch from the small cities to the large cities ? Isn't it true that when we did allow the interest payments on demand deposits many years ago, that the competitive situation caused some of the smaller THE FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS 123 banks, not all but some of them, to pay interest on demand deposits, and perhaps wasn't this an excessive strain on those smaller banks which might have contributed to their weakness in times of crisis ? Mr. MILLS. Yes, sir, that is my belief, and in that particular period, focused with the difficulties in the 1930's, the most extreme competition in the payment of interest rates was on time deposits and savings accounts, and to retain their deposits in the smaller communities, many banks were drawm into taking into account on their books higher yielding and higher quality assets that when the impact of bad times fell, it was an important reason for insolvencies and difficulties in that period. Now you can draw an inference at least from those times to the present times in reviewing the annual financial statements that are published by large and small banks, and to observe the cost of their interest payments as a part of their operating costs, and the heavy burden that that cost has become to a great many banks, and which if there is complete freedom in paying interest on deposits could become even a more serious burden. Mr. BROCK. Along the same line, when you have the ability of a small bank to make loans, it is dependent in some degree upon the ability to borrow from the Federal Reserve with the eligible paper. Now it has been suggested that we might help the small banks and the small businessmen by restricting the use of eligible paper. Wouldn't this reduce the ability of a small bank to meet the demands in a restricted or in a recession period? Mr. MILLS. That is a question that the Federal Reserve Board is asking the Congress to consider at the present time, which is a movement awTay from the original concept of the System, and is a movement that Chairman Patman questions. The concern of the Board is to ask for a statute that would liberalize the opportunities of the member banks to borrow at Federal Reserve banks is that since the origin of the System there ha^ been a remarkable evolution in the types of commercial banking loans and investments that are carried today as compared to those in 1914 and 1915. The result is that banks now carry paper which doesn't meet the technical qualifications of the Federal Reserve Act, and are therefore foreclosed from Federal Reserve credit except on an emergency basis, and it is our belief that a liberalization of the law that would permit freer technical access, but an access which would be closely supervised and regulated by the Federal Reserve System, would be helpful. Mr. BROCK. I t would be a more realistic access though, would it not, in terms of the actual security involved ? Mr. MILLS. We believe that to be the case, sir, yes. Mr. BROCK. And if we were to restrict the definition, further restrict it, of eligible paper and go back to the old itself like dating short term notes as eligible and that is all, aren't you going to completely dry up any source of loan funds available to small borrowers in times of an economic recession ? Mr. MILLS. I t could be a crippling influence. Drawing on my own experience in the 1930's, and before the passage of the 1933 and 1935 amendments to the Federal Reserve Act, the limitations to discounting eligible paper in a time of emergency prevented smaller banks from getting help that was justified, and by the same token threw them back for assistance on correspondent banks and other institutions who were experiencing some of the same difficulties, and weren't 124 THE FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS as able to be helpful as would have been appropriate. The evolution of the Federal Reserve Act and the 1933 and 1935 amendments are rather generally held to have been a step forward. Mr. BROOK. Thank you. My time has expired, Mr. Chairman. The CHAIRMAN. I would like to comment briefly on the suggestion that one way to get members in the Federal Reserve System would be to permit only members to clear checks. I want to weigh that carefully with respect to the correspondent banking system. I wouldn't want to do anything that would be disruptive or would tend to destroy the correspondent banking system. Correspondent banking is doing a good job, and I feel like* it should be encouraged. Now as to the audits that were mentioned here, do you gentlemen believe that the audits that you are making now and have made over n period of 50 years are full and complete and they don't leave out anything that Congress should know or that the Federal Reserve Board should know ? Is that your belief, Mr. Mills ? Mr. MILLS. Generally Mr. Chairman, but we will look forward to the results of your investigation, and to learn whether you feel our stewardship has been adequate or whether it is open to correction and improvement. The CHAIRMAN. But if your self-audit is not full and complete, you would of course view with more favor the Government accounting office audit, would you not, Mr. Mills ? Mr. MILLS. That, Mr. Chairman, would be acknowledging a deficiency in the adequacies and efficiency of our audit reviews. The CHAIRMAN. Not the way I iramed it, Mr. Mills. You see I framed it this way. That if it were shown that your audits are incomplete, that your audits do not contain all the information that the Congress should know, and that the Board should know, winthen you would give consideration to the question whether or not the General Accounting Office should make an audit. Mr. MILLS. Mr. Chairman, I would hope that in a situation of that sort, that your committee would direct us to follow different practices. The CHAIRMAN. That is a very good answer. Mr. MILLS. That would meet your criticism. Mr. BOLTON. J u s t a question, Mr. Chairman. The CHAIRMAN. Yes, sir. Mr. BOLTON. Mr. Mills has made reference twice to a study being made by this committee or by the chairman. Are we familiar with that, sir? The CHAIRMAN. The only thing we are doing is getting information from the Federal Reserve over the period of the last 50 years as much as we can. Naturally it is not complete. I t is bound to be limited. Mr. BOLTON. Are we in effect studying the record of the Federal Reserve ? The CHAIRMAN. T O the extent possible, wTe are, yes; and that will come out as the Presidents of the banks come on, as to each bank. Mr. BOLTON. And this is the study which the chairman The CHAIRMAN. Sure, it has been going on a long time, to the extent possible. I t is limited naturally. Mr. BOLTON. This is the first I had heard of it. The CHAIRMAN. I don't agree with the gentleman there. T H E FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS 125 Mr. BOLTON. I thought the full committee had discussed the fact that we would not have such a study unless the full committee agreed to it. The CHAIRMAN. N O , just the opposite was voted. Now on demand deposits it is your duty to enforce the law that interest will not be paid on demand deposits; is that right, Mr. Robertson? Mr. ROBERTSON. That is right. The CHAIRMAN. Well, what have you done on that? Have you ever enforced any law on it ? Mr. ROBERTSON. Oh, yes. We have issued regulations. We have issued rulings as to what constitutes the payment of interest. The CHAIRMAN. I know, but what have you done in the way of enforcing it ? Have you actually had any defendants, anybody charged ? Mr. ROBERTSON. N O , I would say not any one charged. We have found where they were indirectly paying interest on demand deposits, for example in the absorption of exchange. That was a problem which was before the The CHAIRMAN. W h a t about interest on these certificates? I t occurs to me you couldn't have a plainer, more obvious evasion of the statute than when you permit them to issue certificates of deposit on demand deposits that they may be cash at any time. Mr. ROBERTSON. N O ; there is a misunderstanding I think, Mr. Chairman. They do not issue any certificates of demand deposits. The CHAIRMAN. Well, they change them to the so-called time or savings deposits, I assume ? Mr. ROBERTSON. They actually are, you see. They are for 30, 60, 90 days. They can't be withdrawn on demand. The CHAIRMAN. But they can get their money at any time they want can't they ? Mr. ROBERTSON. No, no; that is not true. The CHAIRMAN. They can sell them to somebody ? Mr. ROBERTSON. They can sell them to somebody else but the banks The CHAIRMAN. I am not talking about the banks. I am talking about negotiable certificates. Mr. ROBERTSON. The CHAIRMAN. Mr. ROBERTSON. Yes. On what is tantamount to a demand deposit. There I would disagree, Mr. Chairman; it is not a demand deposit. Mr. BROCK. Will the chairman yield for a question ? 4 The CHAIRMAN. Yes, sir. Mr. BROCK. When you sell notes of this type it is sold at a discount ; is that not correct? Mr. ROBERTSON. Yes; and only when you can find someone to buy it. A market has only been established in this field in the last couple of years. The CHAIRMAN. I know it is new but it seems to me to be a direct 'evasion of that provision of the law. Now one thing that bothers me. Suppose you, Governor Robertson, wanted to borrow $1,000 ifrom your local bank, and you normally keep over $1,000 in that bank at all times. You never let it get below $1,000. You do not expect it to go below $1,000, and you borrow $1,000 because you want to keep a sizeable account there and you need $1,000. Now under 126 THE FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS t h a t ruling, it is all right for the bank to charge you 5-, 6-, or 7-percent interest, it is perfectly legal, but for the bank to allow you a small percent for your deposit that has been there all that time of more than $1,000 is illegal, it is wrong. Don't you think that is rather contrary to what the bankers have always said, that things like that were regimentation ? Isn't that regimentation at its worst, that it is legal for a bank to charge a customer interest, but it is illegal for the bank to pay the customer any interest on a deposit he has had there equal to that loan at all times'? Doesn't that seem a little unreasonable to you ? Mr. ROBERTSON. As I said, I think there was no real justification for this sort of a selective control even in the first instance, but it is in the law now. The CHAIRMAN. Yes. Mr. ROBERTSON. I t has been for a number of years, and getting out of it is a difficult thing. The CHAIRMAN. I think you will find that the small banks did better before 1933 when this law was first passed than they have since. I just say that in answer to the claim that it would be of benefit to the large banks to change the law. Now about the Open Market Committee, you said that it consists of the 7 Governors and 5 of the 12 Reserve bank presidents. But as Governor Mills said, you have the other seven Reserve bank presidents in there, too. I n other words, you have 12 men who are selected in effect by the representatives of private banks, and only 7 public tmembers who are members of the Board. Now it is true that the extra seven presidents do not vote unless they split their votes. I have heard that they actually split their votes sometimes, where they have three presidents and there is one voting, why they kind of have a consensus to see which way they should vote on that. I don't know whether it is true or not. I t is not important in this discussion. But the point is that you have the 12 Presidents of the Federal Reserve banks there with the 7 public members, and the presidents are listened to. Their views are given and stated. I n other words, they make arguments. They say and do everything right down to the vote. Therefore, they have something to do evidently with the actions of the Open Market Committee. I say that is in violation of law. I say that the laws says specifically that the Open Market Committee shall consist of the seven and five. But here you are allowing not only them to participate, but you have a large group of people. I guess you have from 30 to 50 or 60 at a time, don't you, Governor Robertson ? Mr. ROBERTSON. That is right. The CHAIRMAN. And so that is a far cry from just a small group of 12 that is fixing the policies for the people of the Nation involving such important things as the amount of money that will be in circulation, and also the interest rates that they should pay. Therefore, I say that since none of us wants tight money, none of us wants loose money, somebody has got to decide that question. Who is going to decide it ? Should people who are directly involved, that will profit from the actions, be allowed to select the men who will make those decisions, or should those decisions be made only by people who are in the Government service, who have no conflict of interest THE FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS 127 at all, and have no reason on earth to have high interest and low interest except just in the public interest for the benefit of all the people ? Now, the directors of the Reserve banks are selected for 1 year; is that right ? Mr. SHEPARDSON. Three years. The CHAIRMAN. Yes; 3 years. Now of the nine directors of each Eeserve bank, the big banks select two—one class A and one class B—and the medium-sized banks select two, and the small banks two, so really six of them are elected by the private banks, and they are beholden to the private banks. My experience in life teaches me that they would be beholden. Three of them are actually officials of banks. Three of them are class B directors, and they can be stockholders of banks. They represent business. They are people that want accommodations from banks occasionally. I am not saying that there is necessarily anything wrong about this. But at least they are beholden to the banks, six of them are. At one time before the Joint Economic Committee or maybe it was the Small Business Committee, when I was interrogating Mr. Martin, he took the position that the class B directors couldn't be stockholders of banks, and we had a discussion about it. I insisted he was clearly wrong and he said he didn't think that they owned any stock, even if they were allowed to. I asked him to take a poll of the class B directors by name, and he did, and over half of them actually owned stock in banks—actually owned stock. I have got a record of that and can produce it. So there is a case where you have six directors who can be involved in the banking business, and they select this man to represent them, this President. They select him for 5 years. Now, the history of the Presidents shows that most of them stay on from 10 to 20 years. Naturally a President of a bank wants to be reelected just like a Member of Congress does. He has only nine voting constituents. Six of them are selected by the bankers, and three are actually bankers. I just doubt that he would be too much inclined to go for the public interest some time when the bankers are bringing tremendous pressure against him the other way, and he wanted to be reelected say next week or next year. I just have a feeling that they are normal human beings like the rest of us, and that would influence their decision. I t is just perfectly natural to say that. I believe that it is just simply wrong for the people who can profit from such a system as that to have the power to make the decisions. Now, during the discussion of the original Federal Reserve Act before it was passed in 1913, Eepresentative Glass, the chairman of this committee, took some prominent New York bankers down to see President Wilson in Princeton. This is in Mr. Glass' own book. When they went in, Mr. Wilson received them and Mr. Glass said: Now, Mr. President, these gentlemen are big bankers. They know the banking business. They feel that they know so much about it that they know more than other people know, and they have a right to say that, and they want to be on these boards. They want to be on the main Board of the Federal Reserve System so as to have something to do with the decisions, of course, in the public interest and so forth. 128 THE FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS Mr. Wilson looked at each one of them and said : Which one of you gentlemen would have me select presidents of railroads to be on the Interstate Commerce Commission to fix passenger rates and freight rates ? And not one of them has ever answered to this day. Mr. Glass said that they looked at each other and looked out the window and they changed the subject and they finally left. So that is really the basis of this whole thing the way I see it. Would we let the railroad owners regulate the conditions under which they do business ? Are we going to let the bankers determine the volume of money, something that they are vitally interested in, and the interest rates on that money ? They are vitally interested in it, just as much as the presidents of railroads are interested in passenger rates on railroads. And so it occurs to me that the bankers ought to take another look at this, and be just a little bit more considerate of the public interest. They have gone too far on this thing; they have gone too far. Back 40 years ago we had 31,000 banks. W e have 13,000 now. So the number of banks has been going down, down, down. This is a great franchise: to issue money on the credit of the Nation and get interest for it—a tremendous franchise. But instead of the number of banks increasing as you normally would expect over such a profitable period in the last 20 years, the number of banks has been going down. The bankers instead of branching out to help the people in the area where they have a franchise to do business, they are getting away from that. The small farmers can't hardly see a banker nowadays. The small businessman has difficulty getting to see a banker about a small loan. They are not interested and it is perfectly natural they wouldn't be interested, because they can handle all this other paper that is just about as profitable, and at no risk, no trouble. We have helped the bankers get out of the banking business. Now the way I review the Federal Reserve System it is just a continuation of tne old goldsmith system used for centuries in Western Europe and in other places. One time the feeling was so strong about goldsmiths not having the actual reserve to back up this money when they had runs on the goldsmith, they passed laws in some countries that it was a hanging offense to put out a rumor that the goldsmith didn't have the money or didn't have the gold. At one time they had a run on the goldsmith anyway and he didn't have the gold and they hung the goldsmith. So this thing is a continuation of the old goldsmith theory, that the Federal Reserve permits the banks to make loans based upon a reserve that the Reserve bank has. A bank can take a million-dollar bond belonging to a customer and sell it to the Fed. And that bank gets the credit in the reserve of $1 million. Like it is now the deposit-reserve ratio is approximately 10 to 1, so the banks can take $1 million and pay the customer for that niillion-dollar bond, and lend or invest $9 million more at interest. So on every million-dollar reserve they can loan approximately $10 million or invest $10 million, and if the interest is 5 percent, that is $500,000 for the use of the $1 million. THE FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS 129 That is a pretty good privilege banks have and I am not objecting to it, if they will do it in the public interest and take care of local communities and the small businessman and the farmers and everybody else, and quit seeking this opportunity of getting out into everybody's business, in the leasing business of heavy equipment and everything else, and reducing the number of banks to where they cannot satisfactorily serve the people. I will not go into that further because I am taking more time than I should. Mr. WIDNALL. Mr. Chairman. The CHAIRMAN. YOU wrant to ask a question ? Mr. WIDNALL. Will the gentleman yield ? The CHAIRMAN. Yes. Mr. WIDNALL, You have just repeated a statement I have heard you make many, many times before about the lack of adequate banking facilities and the ability of small farmers and the small man to get a loan at the bank. I w^ould like to see you some day place in the record where there is a lack of banking facilities. I am sure the bank facilities could be obtained if we knew the location, and a list of some of the people who are unable to get any help through the banks. I know it is very easy to make statements like that. The CHAIRMAN. All right. Mr. WIDNALL. I am interested in following up on it. Get some of these people to come up and testify before us. The CHAIRMAN. N O , no; I won't do that. I will give you better evidence than that and I will give you convincing evidence. No. 1, why do we have the Farmers Home Administration to take care of farmers ? That is the only reason, because they can't get loans at the banks. I have known counties where all the bankers in that county gave the farmers notice "We won't run you next year" and they turned to the Farmers Home Administration, a Government agency, to get loans, and they don't have enough money to make the loans, and lots of farmers go out of business on that account. You don't have to chase down A, B, and C farmer. T h a t is convincing proof right there. No. 2, why do we have a Small Business Administration ? Because the small people can't get loans from the local bank. That is why we have it. I think the R F C was one of the greatest agencies we ever had. That helped people who wanted to go into competition with big business. If a few fellows could get together and put up enough money themselves, they could borrow $75 million, build a steel mill or something else and go into competition with big business. But when you Republicans came in power in 1953, very quickly you put that R F C out of business. But you organized a Small Business Administration, which is fine as far as it goes, but they could only make loans of $150,000 at that time, and they haven't been increased too much since. So it is just something to help the small businessman compete with other small businessmen, but denying many an opportunity to get enough credit to compete with the big businessman. And the reason the Small Business Administration is in existence today, and the reason we have the Production Credit Association and credit unions and all is because the bankers have not been doing their duty as they should. Now those are the basic examples. You don't have to pick out individuals to prove the point. There is your proof right there. 130 THE FEDERAL RESERVE SYSTFM AFTER FIFTY YEARS We wouldn't need Farmers Home Administration and a number of other agencies supported by the Government to make these loans to farmers, if they could get loans from the banks. We wouldn't need the Small Business Administration and many other small loan organizations that the Government sponsors, if they were able to get loans at the banks. They just aren't able to do it. I think the banks are subject to criticism for not rendering the service to the people they are charged with the duty of helping first, those in the area where they have a franchise to operate, and where they are allowed the privilege of creating money 10 to 1 for the purpose of helping those people. But they forget them. They leave them alone. Mr. M I N I S H . Mr. Chairman. The CHAIRMAN. Yes. Mr. M I N I S H . Mr. Mills, I think it was you that referred earlier to the House Banking and Currency Committee being the father of the Federal Reserve, or words to that effect. Mr. MILLS. Correct, sir. Mr. M I N I S H . I n view of that, yesterday as I recall Chairman Patman asked Chairman Martin to present the minutes of the Open Market Committee. What is your position on that, for the years 1961, 1962, and 1963, as I recall ? The CHAIRMAN. 1960-63. Mr.MiNisH. 1960,1961,1962, and 1963. Mr. MILLS. Mr. Minish, my personal feeling and belief is that at a proper period in time, that the minutes of the Open Market Committee should be made available, but I do, in line with what I understand to have been Chairman Martin's position The CHAIRMAN. Mr. Minish, would you excuse me just one second. I have an appointment. I have to go. Would you serve as chairman please. Would it be all right, gentlemen, if any of us on the whole committee desires to ask any questions, to clear them through the clerk to make sure that they are not duplicated, and that you gentlemen will answer them when you look at your transcript? Mr. M I N I S H . Yes, sir. The CHAIRMAN. Fine. Mr. Minish will take Mr. M I N I S H . Mr. Mills ? Mr. MILLS. Mr. Minish, I do think a waiting over. period is in order, and that the minutes for 1960 through 1963 could have enough content and would be close enough to the actions of the committee t o raise embarrassments that would needlessly involve in some cases foreign countries, and in other cases questions about policies and their impact on private affairs. B u t I very strongly feel that the committee should have at some point access to the minutes. There is one problem that comes out of that, that having access, it would be a physical impossibility for the members of the committee to individually review the contents, and that means placing a responsibility on individuals of your choice to make that examination, and to come up with findings. Now that would be all important, because there is such a range of different points of view on the policies of the Open Market Committee, and the emphasis that should be placed on policy decisions at one time or another that you might find it quite difficult to delegate the responsibility to one or two or three people, and have those individuals with the best intentions in the world, not drawing in their findings personal beliefs that other experts in the same field might disagree with. T H E FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS 131 Mr. M I N I S H . Thank you. Mr. Robertson, would you care to comment ? Mr. ROBERTSON. I concur generally in these views. I have been of the position for many years that the minutes of the Open Market Committee and the Board of Governors should be made available for public inspection after a waiting period, so that it cannot be used to indicate what the trend of action would be in the future. I have thought in the past that there should at least be a 1- or 2- or maybe even a 3-year period, a gap, but that everything before that from the beginning of the System should be made available to everybody, so that every student of monetary policy would have equal opportunity to see how it was made, to make suggestions as to how it could be improved. This I think would be in the public interest. Mr. M I N I S H . Thank you. Mr. Shepardson? Mr. SHEPARDSON. I would have the same view, Mr. Chairman, that the actions of a public body, and we are such, should at some point be made available. I have raised questions about the minutes, frankly. We are required to make an annual report of all of our actions, and the basis for them, which is included in our annual report. I have had a little different feeling than the other two gentlemen have expressed when it comes to the minutes, because in the course of discussion and debate on questions that are before either the Committee or the Board, it seems to me that there is a freedom of discussion that is desirable that in any proximate period need not necessarily be laid open to the general public. I think actions that are taken and as are reflected in our policy statements in the annual report very properly should be divulged, and the reasoning back of the action that was taken. Mr. M I N I S H . Thank you. Are there any further questions ? Mr. WIDNALL. Mr. Chairman, for the record I would just like to make this statement. That with respect to loans to deposits the member banks now have about a 62-percent ratio, loans to deposits, as I understand it. This compares with about 20 percent in 1945, directly after the war. That shows a rather wholesome increase as far as that is concerned with respect to the banks, and not a contraction. Mr. M I N I S H . Mr. Brock? Mr. BROCK. I might comment just briefly Mr. Robertson to pursue the point that Mr. Minish raised. The committee has requested the minutes for 60, 61, 62, and 63. You said a 3-year period. I n 1963 if we reveal these minutes, if they were brought before the committee and if somehow^ they got into print publicly, w^ould you not feel that there might be some jeopardy to the policies and the prospects of the U.S. Government? Mr. ROBERTSON. Oh, yes; I think so. I think this is too close. I do not think that the minutes for last year should be made available to anybody. I think when they are made available to anybody, they ought to be made available to everybody, and that this is the reason that I think you ought to have a gap—whatever that reasonable period is, and people can differ on this—and I waiver myself as to whether it should be 3 years, 2 years, or 1 year, but certainly nothing less than that. Mr. BROCK. I t could be as much as 3 years on a particular policy or problem and 1 year on another? Mr. ROBERTSON. I t might very well. 132 THE FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS Mr. Mr. BROCK. YOU can't be ROBERTSON. And that Mr. BROCK. Yes. specific. You would have to generalize ? is what I am trying to do. Mr. ROBERTSON. I am not trying to be specific. Mr. BROCK. I think we would endanger the security of this country if we did this, in all sincerity. Mr. ROBERTSON. I t would be very unwise. Mr. BROCK. If we released the minutes of the past 12 months. Thank you, sir. Mr. MINTSH. Gentlemen, thank you very much. I t won't be necessary to come back tomorrow, with the exception that you may have some questions. The committee will be in recess until Tuesday. (Whereupon, at 12:05 p.m., the committee adjourned, to reconvene on Tuesday, January 28,1964.) THE FEDERAL RESERVE SYSTEM AFTER 50 YEARS WEDNESDAY, JANUARY 29, 1964 HOUSE OF REPRESENTATIVES, SUBCOMMITTEE ON DOMESTIC F I N A N C E OF THE COMMITTEE ON BANKING AND CURRENCY, Washington, D.C. The subcommittee met, pursuant to recess and subsequent postponement, at 10 a.m., in room 1301, Longworth House Office Building, Hon. Wright Patman (chairman) presiding. Present: Representatives Patman, Reuss, Ashley, Vanik, Pepper, Minish, Weltner, Hanna, White, Kilburn, Widnall, Harvey, Bolton, Brock, and Taft. The CHAIRMAN. The committee will please come to order. We are interested in the operations of the Federal Reserve System as it is being operated today, 50 years after its founding. We have heard from the Chairman, and the Vice Chairman of the Board of Governors, and three of the Governors. We will now continue our inquiry with the presidents of the 12 Federal Reserve banks. Directors of the Federal Reserve banks are the responsible controlling individuals for the operation of the Federal Reserve System. Federal Reserve bank directors are charged with many important responsibilities, one being the economical and efficient operation of the Federal Reserve banks. This responsibility is carried out through prescription of the bylaws of the banks—selection of the President, First Vice President, and other officers of the banks, subject to the approval of the Board of Governors, review and approval of semiannual budgets and maintaining and supervising all internal auditing systems. The policies determined by the directors are carried out by the presidents and other officers selected by the directors for each Federal Reserve bank. The President of each Federal Reserve bank is the chief operating official. As the chief operating official, I expect that these gentlemen are in the best position to explain to the subcommittee how the banks are operated and the reasoning behind the actions that the banks take. Some years ago the examination reports prepared by the examiners of the Federal Reserve Board of Governors listed many questionable expenses. But recent examination reports have not mentioned similar expenses. Was it possible that by my simrjly bringing the kind of expenditures to public view that the practice was immediately stopped? I must admit that I can hardly trust such a conclusion. In order to determine whether or not my skepticism was justified, I had two members of the staff review the working papers of the Fed 133 134 T H E FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS eral Reserve Board examiners to see if questionable expenditures were in the working papers, but not in the reports. Although these questionable expenditures were not in the working papers, or the reports, I still was unbelieving. Finally, the staff obtained listings of amounts spent by the banks in four categories for the period from January 1, 1962, through J u n e 30, 1963. A test selection of the amounts was made, and an explanation requested. I n an effort to accelerate the receipts of the information requested, members of the staff visited the Federal Reserve banks in New York, Cleveland, and Chicago. At each location they scanned the vouchers that supported the amounts selected from the lists supplied by the banks. The search was successful in the sense that hundreds of examples of expenditures not normally found in a U.S. Government agency like the Post Office were found. They were the same kind of expenditures that had been questioned by the Board's examiners prior to 1957. But, peculiarly, they were no longer reported after I publicized the practice. Is it reasonable to assume that the Board's examiners were instructed to not report such expenditures? Examples of questionable expenditures include dinner parties, theater parties, luncheons and dinners for commercial bankers, card parties, garden shows, golf outings, elaborate Christmas parties, dues for trade and professional organizations, fees and other costs for attending conventions. One might think that the Federal Reserve banks were trying to drum up business, from an examination of their travel and entertainment expenses. One might think that commercial banks paid for the free services provided by the Federal Reserve banks. During the year 1962 I estimate that the free services provided to commercial banks by the Federal Reserve System for check collection and currency and coin handling alone amounted to about $125 million. Perhaps the presidents of the banks can give us reasonable explanation of what seemed to be unreasonable expenditures in addition to many other of the banks' day-to-day operations. Now, our first witness this morning, I believe, is Mr. W. Braddock Hickman, President of the Federal Reserve Bank of Cleveland. ~~ Mr. Hickman ? Mr. HICKMAN. Yes, Mr. Chairman. The CHAIRMAN. NOW, do you have someone accompanying you? Mr. H I C K M A N . Yes. Mr. John J. Hoy, assistant vice president in charge of accounts and budgets at our bank. The CHAIRMAN. Glad to have you, sir. And the other gentleman is with the Boston bank—he is the next witness. All right. Well, Mr. Hickman, you may proceed in your own way, sir. Mr. H I C K M A N . I have a brief statement here which I would like to read. The CHAIRMAN. That will be satisfactory. Mr. H I C K M A N . Thank you very much, sir. The CHAIRMAN. Just a minute. Mr. Ellis, we will have you after we get through with him, and you may, according to your own wishes, be at the table or back in the audience, either one you like. But we will—you can suit yourself. THE FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS 135 STATEMENT OF W. BRADBOCK HICKMAN, PRESIDENT, FEDERAL RESERVE BANK OF CLEVELAND; ACCOMPANIED BY JOHN J. HOY, ASSISTANT VICE PRESIDENT Mr. H I C K M A N . My name is W. Braddock Hickman. I am president of the Federal Reserve Bank of Cleveland. I joined the staff of the Federal Reserve bank as senior vice president on February 1,1960, for the purpose of familiarizing myself with Federal Reserve operations and policies with a view to assuming the presidency of the bank on the retirement of my predecessor, Mr. Wilbur D. Fulton, effective May 1, 1963. My tenure of office, therefore, has beenjshort. I hold a bachelor's degree in economics from the University of Richmond and a doctorate from the Johns Hopkins University. I taught at Princeton and Rutgers Universities. I served in the Navy for 4 years during World W a r I I , and have since worked at the National Bureau of Economic Research, New York Life Insurance Co., and American Airlines. I have had no direct official connection with any commercial bank at any time in my career. For a short time (less than 1 year), I was associated with a savings bank in Baltimore, Md., as a fellow of the Social Science Research Council. The possibility of my joining the official staff of the Federal Reserve Bank of Cleveland to assume the Presidency was first suggested to me by the then Chairman of the Board of Directors, Mr. Arthur B. Van Buskirk, who informed me that my name had been suggested to him by members of the staff of the Board of Governors of the Federal Reserve System in Washington, D.C. My qualifications were first reviewed by the Board of Directors' Special Committee on Senior Officer Personnel, which consisted of: Dr. Aubrey J . Brown, chairman, professor of agricultural and marketing and head of the department of agricultural economics, University of Kentucky, Lexington, Ky. Joseph B. Hall, president (now chairman of the board), the Kroger Co., Cincinnati, Ohio. Charles Z. Hardwick, executive vice president and director, the Ohio Oil Co. (now Marathon Oil Co.), Findlay, Ohio. Joseph H . Thompson, president (now chairman of the board, Hanna Mining Co.), the M. A. Hanna Co., Cleveland, Ohio. Arthur B. Van Buskirk (ex officio), vice president and governor, T. Mellon & Sons, Pittsburgh. Pa. ^ Subsequently, I met with the entire Board, which included, in addition to those above, the following: George P . MacNichol, Jr., president (now chairman of the board), Libbey-Owens-Ford Glass Co., Toledo, Ohio. Ray H. Adkins, president, the National Bank of Dover, Dover, Ohio. John A. Byerly, president, Fidelity Trust Co., Pittsburgh, Pa. Paul A. Warner, president, the Oberlin Savings Bank, Oberlin, Ohio. Prior to meeting these gentlemen under the stated circumstances I had had only passing, casual, business or professional contacts with persons in the Fourth Federal Reserve District. I have no knowledge that those contacts, such as they may have been, played any part in my selection. 136 THE FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS I do not feel that I am under obligation to any bank or banker or that I have been subjected to any pressure whatsoever by the bankers in the fourth district or elsewhere or, indeed, by anyone in the business world regarding the position I should take on monetary policy. On the contrary, I have felt that for the most part bankers and businessmen in the community have tended to look to the Federal Eeserve System and its officials for leadership in this area. The directors of the Federal Eeserve Bank of Cleveland have been outspoken and vigorous in asserting their responsibility for, and interest in, those bank operation matters in which their training and experience have given them particular competence: efficient and economical operating methods; reasonable and responsible personnel policies; the training and development of people to assume responsibility; review and control of budgets; and review of audits and audit procedures. Their interest and activity in those areas are a part of their normal and proper responsibility as directors, and have not been used in any way to embarrass me in the discharge of responsibilities in the field of monetary policy. Prior to assuming the presidency of the bank, I served for a short period as associate economist of the Federal Open Market Committee. As President since last May, I have been an alternate member of the Committee. During my contacts with the Committee I have been impressed with the competence of the group and with their devotion to public duty. The different backgrounds of the participants in the Federal Open Market Committee are reflected clearly, in my opinion, in the thorough discussions of the issues and policies that affect monetary management. As an alternate member of the Committee during the past 9 months, I have tried to keep the Committee informed of business and financial developments in the Fourth Federal Eeserve District. I have, also, at the invitation of the Committee, expressed my views on national and international developments, and on monetary policy. A t the same time, the deliberations of the Federal Open Market Committee—the discussions by members of the Board of Governors, the other Federal Eeserve Presidents, and the Committee's staff—have helped to keep me abreast of business and financial developments, and have deepened my understanding of the objectives of system policy. This experience will be helpful to me when I become a member of the Committee and face the responsibility of voting on the questions that come before it. I am in agreement with the opening statement made by Chairman Martin before this committee last Tuesday in all major points of principle. However, insofar as you may wish me to express my own views today, I might mention a point on which I apparently differ with Chairman Martin. I have some reservations about the desirability of reducing the size of the Board of Governors from seven to five members. As a matter of public policy, it is desirable to have the Board membership occupy a majority position in the Federal Open Market Committee, as they do now with 7 out of 12 members. With only five members, the Board majority would disappear, unless the number of Presidents holding membership were also reduced, which (perhaps because I am a President), I think would be undesirable. I should think, also, that a reduction of the Board membership from seven to five would throw T H E FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS 137 an excessive burden on the Board when there are absences. The inevitable illnesses, vacations, and essential travel at home or abroad in connection with the official business of the Board, must frequently necessitate the absence of at least one member and quite possibly two members. To reduce the Board to five members would seem to be cutting it pretty thin. On the whole, it has seemed to me that the present Board membership of seven works fairly well. But Chairman Martin is clearly much better qualified on this subject than I, and I defer to him. I would like to supplement Chairman Martin's comments regarding the proposal to retire the capital stock of the Federal Reserve banks, H.E. 3783, by pointing out that this proposal would increase the annual revenue of the Treasury by only about $31^ million. (See the exhibit attached.) (The document referred to follows:) EXHIBIT I n 1963, the F e d e r a l Reserve b a n k s paid to the member b a n k s in dividends $29, 000, 000 T h e member b a n k s paid estimated income t a x e s on these dividends of 7, 600, 000 T h e net gain to t h e T r e a s u r y would h a v e been 21, 400, 000 T h e r e t u r n of t h e $500,000,000 of capital stock would increase member bank reserves by about 500, 000, 000 As a result, F e d e r a l Reserve e a r n i n g assets would be less ( t h a n they otherwise would have to be to provide t h e reserves desired for m o n e t a r y reasons) by about 500,000,000 E a r n i n g s which would be lost to t h e Treasury, on $500,000,000 a t the average r a t e of 3.6 percent earned by t h e System in 1963, a m o u n t to about 18, 000, 000 T h e difference would h a v e represented a n e t gain to t h e T r e a s u r y in 1963 of approximately 3, 400, 000 Mr. H I C K M A N . I do not believe that the small amount involved would justify the disadvantages that would accrue from the proposed retirement of the stock. A change in this area, unless it is clearly for the better, might disturb the confidence of bankers and businessmen. The loss of an asset yielding a certain return of 6 percent would reduce the attractiveness of membership in the System, particularly for small banks. Substantial withdrawals from membership would increase the difficulty of making monetary policy effective. If the attractiveness of membership in the System is reduced to the point where monetary policy becomes ineffective, it would be necessary to require compulsory membership or uniform reserve requirements for all banks. The CHAIRMAN. Thank you. I would like to ask you a few questions, sir. Mr. H I C K M A N . Yes, sir. The CHAIRMAN. YOU have Committee in New York. Mr. H I C K M A N . No, The CHAIRMAN. I had some experience in the Open Market I believe you said sir. misunderstood you, then, in listening to your testimony. But you do know about the Open Market Committee, because, of course, as president of the bank you attend all the meetings. Mr. H I C K M A N . Oh, 28-680—64—vol. 1 yes. 10 138 T H E FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS Well, I am an alternate member of the Committee. I thought you said New York, sir. The CHAIRMAN. I did say New York. But you have not had experience in a New York bank ? Mr. H I C K M A N . N O , sir. The CHAIRMAN. With the Open Market Committee ? Mr. H I C K M A N . I have never had experience in any bank, except the Savings Bank of Baltimore, w^hen I was a fellow of the Social Science Research Council—years ago, when I was a student at Johns Hopkins University, sir. The CHAIRMAN. YOU attend all the meetings, of course, of the Open Market Committee, whether you are a member or not ? Mr. H I C K M A N . That is correct. The CHAIRMAN. Under the ruling of the Federal Reserve Board, permitting all of you to attend on the theory that you have been, or will be a member, and it will be helpful to them to get your views. Now, when you vote on a qquestion, there are three of you from one—from three districts, and only one is a member. Do you ever have conferences and let the majority determine how the one should vote, or do you just leave it up to the one who is actually the member, entirely ? Mr. H I C K M A N . Well, let me clarify The CHAIRMAN. I n other words, if there is a dispute, and two of you want to vote one way and one the other, how do you determine it ? Do you just let the fellow who has the responsibility to do it, regardless of the views of the other two members ? Mr. H I C K M A N . Well, may I clarify—you say there are three of us> sir. That is not correct. The CHAIRMAN. Well, there are two of you. Mr. H I C K M A N . TWO of us—in the case of Cleveland and Chicago. The CHAIRMAN. Usually there are three; are there not ? Mr. H I C K M A N . That is correct. I n the case of the other nine banks, there are three. The CHAIRMAN. Well—two of you. Do you discuss it and determine how you should vote, or do you just leave it up to the one who is a member ? Mr. H I C K M A N . I have never discussed monetary policy in any way, shape, or form with my alternate, Mr. Scanlon, of Chicago. The CHAIRMAN. Well, I will wait and ask one of the three about that. Now, when you have a meeting, of course you are all charged with the duty of not telling anybody about these meetings; are you not ? Mr. H I C K M A N . Yes, that is correct. The CHAIRMAN. D O you have any kind of written obligations on that? Mr. H I C K M A N . NO. The Chairman has made that very clear. Of course this is a deliberation, the results of which might aflfect confidence in the currency of the country, and in the financial markets of the country. The CHAIRMAN. And could help speculators if they knew it ? Mr. H I C K M A N . I t certainly could. The CHAIRMAN. S O you don't tell anybody after you leave that room. Mr. H I C K M A N . That is correct. THE FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS 139 The CHAIRMAN. But when you go back to your board of directors, what do you tell them? Mr. H I C K M A N . Well, every 2 weeks it is necessary for the board of directors to reestablish the discount rates for the district. The CHAIRMAN. Yes, sir. Mr. H I C K M A N . Subject, of course The CHAIRMAN. D O you actually have a meeting to do that? Mr. H I C K M A N . We do, every month. And then in alternate 2-week periods we have an executive committee telephone conference, around the district. And they always ask for my recommendation on this—the chairman asks for my recommendation on it. And I review the money market, the state of the bill market, the state of the long-term bond market, and so forth. And at all of these telephone hookups we have agreed we will never actually change the rate at that time—so it is usually simply a matter of reestablishing the existing structure. The CHAIRMAN. YOU mean that is the Presidents of the other banks ? Mr. H I C K M A N . That is what I do. The CHAIRMAN. T h a t is what you do. And then do you report that to your board of directors? Mr. H I C K M A N . This is in the telephone hookup. I tell them that the bill rate is 3.53 percent on 91-day Treasury bills, and so forth. The CHAIRMAN. I am afraid I am confused on that. I thought you were first talking to the other 11 Presidents. Mr. H I C K M A N . Oh, no; I beg your pardon. This is the directors. The CHAIRMAN. YOU were talking to the nine directors? Mr. H I C K M A N . T O the directors. I am not making myself clear— I am sorry, sir. The CHAIRMAN. N O ; I think I was just confused about it. I am not as fully acquainted with it as you are. So you talk to your nine directors over one hookup. I n other words, kind of like an old country telephone line. Mr. H I C K M A N . That is just roughly it; yes, sir. The CHAIRMAN. All talking at the same time. Mr. H I C K M A N . N O . We have an agenda. The CHAIRMAN. W h a t I mean—you are talking to them and they are hearing, and then you get their views on it? Mr. H I C K M A N . That is correct. The CHAIRMAN. NOW, of course, this business of recommending every 2 weeks the discount rate doesn't mean too much. You don't change it too often; do you ? Mr. H I C K M A N . N O ; that is correct. The CHAIRMAN. W h a t important decisions do you make outside of that recommending ? Of course you don't establish the discount rate. You just recommend every 2 weeks; don't you ? Mr. H I C K M A N . That is correct. The directors establish the rate. The CHAIRMAN. That is right. B u t what decision—say in the last year, what were the Mr. H I C K M A N . Subject to review and determination by the Board of Governors in Washington. The CHAIRMAN. Yes, sir. The last year, we will say, what were the most important decisions you had to make as President of the bank? 140 THE FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS Mr. H I C K M A N . Well, I think the most important decision had to do with our check-handling equipment. The CHAIRMAN. Check-handling equipment? Mr. H I C K M A N . Yes. We had a very high float due to some electronic equipment that was not working properly, and this was costing the Federal Reserve Bank of Cleveland and, of course, the Treasury large sums of money. And it was important to take steps to try to bring this into some order. The CHAIRMAN. All right. W h a t would you say the No. 2 most important decision you had to make was ? Mr. H I C K M A N . I think the next most important decision was to review the personnel policies of the bank as carefully as I could, and try to familiarize myself with them, and as a result I changed them in some minor particulars. But I would say that personnel matters having to do with selection of officers in charge of various functions of the bank involved some important decisions. The CHAIRMAN. W h a t would be the third, would you say ? Mr. H I C K M A N . Well, we had a major problem having to do with some $850 odd million of bonds that were held in safekeeping by the bank against public deposits. There was a change in the State law of Ohio, and there was a question of whether the Federal Reserve Bank of Cleveland was vulnerable to legal action if we held these bonds under certain circumstances. The CHAIRMAN. They are not the bank's bonds—they belong to other people ? Mr. H I C K M A N . T h a t is correct. And this, of course, could conceivably have involved us in a legal action. And a lot of negotiating had to go on, and rather hard decisions—some rather unpopular decisions—had to be made about that. We decided not to continue to take these bonds. The CHAIRMAN. What would be your next most important decision ? Mr. H I C K M A N . Again, we had the problem of examiners. Some of the junior examiners were being lured away from us by a salary scale that was slightly out of adjustment. We had to make an emergency study of that. We had to make adjustments in that scale. The CHAIRMAN. NOW, of course, I know under the Open Market Committee law, you are not privileged to buy or sell Government bonds unless the Open Market Committee specifically gives you that power. Is that correct ? Mr. H I C K M A N . Our bank is not allowed to buy or sell, except that we can buy or sell for the account of member banks. The CHAIRMAN. F o r the account of member banks. Who do you sell those to ? Do you sell them or buy them from the dealers ? Mr. H I C K M A N . That is correct. We check around. A member bank requests us to buy Government securities. We check around with the four dealers in our area. THE FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS 141 The CHAIRMAN. Wait a minute. You mean the recognized dealers, like there used to be 17—I think there are 19 now; are there not ? Mr. H I C K M A N . Yes. I think so, sir. I am not The CHAIRMAN. We will not quibble about that. We will put the correct number in the record. I t used to be 17, but I think it is 19. Do you deal with them exclusively, or do you deal with other dealers ? Mr. H I C K M A N . We deal with less than that number, sir. The CHAIRMAN. I know. But do you deal with one of that number ? Mr. H I C K M A N . We deal with four. The CHAIRMAN. W h a t I am trying to get is Mr. H I C K M A N . Four in Cleveland, sir. The CHAIRMAN. What is that? Mr. H I C K M A N . We deal with four in Cleveland. The CHAIRMAN. W h a t I am trying to get—you know, there are recognized dealers. Mr. H I C K M A N . Yes, sir. The CHAIRMAN. That are recognized by the Open Market Committee—that all the bond transactions are made through these dealers, are they not ? Mr. H I C K M A N . That is right—for the System open market account. The CHAIRMAN. D O you deal with one of those dealers, or do you deal with anybody you wyant to ? Mr. H I C K M A N . We deal with 4 of the dealers from the 16 or 19. The CHAIRMAN. Which are the recognized dealers ? Mr. H I C K M A N . On behalf of the member banks. The CHAIRMAN. On behalf of the member banks. In other words Mr. H I C K M A N . Not as the Federal Open Market Committee—but as the agent of the member banks. The CHAIRMAN. The Open Market Committee—— Mr. H I C K M A N . I t changes from month to month. Mr. ELLIS. We heard yesterday there are three new ones within the last recent months. I believe the total is either 19 or 20. The CHAIRMAN. Well, anyway, the Open Market Committee deals exclusively with those dealers, do they not? Mr. H I C K M A N . That is correct. The CHAIRMAN. They buy and sell—don't deal with anybody else in the United States ? Mr. H I C K M A N . That is correct. The CHAIRMAN. On Government bonds. Now, all those dealers, they also have a party line in New York. They can pick up the receiver, all of them at the same time, can they not? Mr. H I C K M A N . YOU mean with one another ? The CHAIRMAN. Yes—and also with the open market account? Mr. H I C K M A N . Yes, they can. The CHAIRMAN. They all have offices right around the Federal Eeserve in New York. 142 T H E FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS Mr. H I C K M A N . Well, no, that is not true. Some of them are in Chicago. The CHAIRMAN. I know. But they have a New York office. We were over there. We saw the office. Mr. H I C K M A N . I don't think they all do, sir. The CHAIRMAN. Well, anyway, when you deal with those dealers, 19 or 20—now, the ones that you deal with as a bank president has got to be one of them, hasn't it ? Mr. H I C K M A N . Yes, it has. The CHAIRMAN. And that is the way all the other banks do. Mr. H I C K M A N . I t w^ould not have to be. But as a matter of practice, it is. The CHAIRMAN. Well, it is important to know whether or not you have to. You don't know whether you have to or not? Anyway, I will pursue that Mr. H I C K M A N . YOU appear to be talking about open market operations—I am talking about buying bonds for the account of member banks. This is a completely different type of transaction. The CHAIRMAN. I know it is. You see, one is Open Market Committee dealing with the 19 or 20 dealers. Now, then, you are privileged only to buy and sell bonds for your member banks—nobody else ? Mr. H I C K M A N . That is correct. The CHAIRMAN. But suppose a bank, a correspondent bank, has a bond that belongs to a State bank that is not a member ? Could you handle that for the correspondent bank, because he is not a member? Mr. H I C K M A N . Yes; we could handle it. The CHAIRMAN. YOU could do that. And the point is, do you have to deal with one of those 19 or 20 ? Mr. H I C K M A N . NO ; we do not. The CHAIRMAN. YOU do not'? You are not exactly sure about that, are you ? Mr. H I C K M A N . I am fairly sure that we don't. I don't think there is anything in the bylaws of the bank that would prevent us from dealing with anybody, sir. The CHAIRMAN. H O W much would they aggregate during the course of a year ? Mr. H I C K M A N . Oh, I think that they would aggregate somewhere in the neighborhood, for the Cleveland bank, of half a billion dollar's. The CHAIRMAN. I n the course of a year ? Mr. H I C K M A N . I n the course of a year. The CHAIRMAN. Well, as Government bonds go, that is not too many, is it ? Mr. H I C K M A N . N O ; it is not. The CHAIRMAN. A small amount Committee. in comparison to the Open Market THE FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS 143 Mr. H I C K M A N . That is correct. Of course, it involves a number of small transactions. The CHAIRMAN. NOW, then, you are acquainted with the Open Market Committee? Mr. H I C K M A N . Yes, sir. The CHAIRMAN. YOU have been in the New York bank ? Mr. H I C K M A N . I have been in the New York bank. The CHAIRMAN. NOW, then, the New York bank is dealing with the other 11 Reserve banks as though they were keeping their books for them, are they not? I n other words, if they buy a bond, they tell each bank how much is that bank's part, don't they ? Mr. H I C K M A N . That is correct. They are dealing with our assets and liabilities. The CHAIRMAN. That is right. Mr. H I C K M A N . W i t h our claims. The CHAIRMAN. But they keep the books there in New York, do they not? Mr. H I C K M A N . That is correct. The CHAIRMAN. And you don't have a thing to do with that open market portfolio of $33 billion. You don't make any decision for yourself on that, do you? They make that, the Open Market Committee? Mr. H I C K M A N . That is correct. The CHAIRMAN. S O they just notify you that they have sold bonds, and your interest is so much, or that you bought bonds, each of the 12 banks interest is so much. You, in effect, keep the books for each bank, the 12 bankbooks, right there in New York, don't you ? Mr. H I C K M A N . That section of it. The CHAIRMAN. That section of it ? Mr. H I C K M A N . The participations in the Open Market account are kept there, and, of course, checked with our accountants in Cleveland. The CHAIRMAN. Yes. I n fact, they send telegrams, don't they ? Mr. H I C K M A N . That is right. The CHAIRMAN. I t must be an enormous business, the telegraph business—every time they buy something or sell something, they have to notify each of the 12 banks. Mr. H I C K M A N . We have leased wires, sir, in the System The CHAIRMAN. I t is a Western Union system, I assume. Mr. H I C K M A N . N O ; it is leased from A.T. & T. Mr. Chairman, these are summarized—these purchases and sales by the Federal open market account are summarized daily. The CHAIRMAN. Summarized daily ? Mr. H I C K M A N . And sent to us. The CHAIRMAN. And that is done by each bank, is it not ? Mr. H I C K M A N . The summaries are sent to each bank. 144 T H E FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS The CHAIRMAN. The summaries are sent to each bank? I n other words, you don't send one telegram on one transaction ? Mr. H I C K M A N . That is correct. We do not send one The CHAIRMAN. YOU send it at the end of the day. Mr. H I C K M A N . Yes, sir. The CHAIRMAN. And the only information the other banks have as to what their condition is, is what you tell them, is it not ? From the New York bank ? Mr. H I C K M A N . I t is what the New York bank tells us. The CHAIRMAN. That is right. And in your case, they tell you ? Mr. H I C K M A N . That is right. The CHAIRMAN. The President of the Bank of Cleveland ? Mr. H I C K M A N . Yes, sir. The CHAIRMAN. The New York bank advises you your condition every day, and they keep all the books there, do they not ? Mr. H I C K M A N . N O , n o ; just on the open market accounts. The CHAIRMAN. Well, that is the principal business, is it not? Mr. H I C K M A N . That is a good part of it. I suppose the bonds we hold are $2,500 million out of total assets of around $4% billion. The CHAIRMAN. YOU mean your bank holds that ? Mr. H I C K M A N . Yes, sir. The CHAIRMAN. I have not seen a copy of your statement lately. Do you have one with you ? Mr. H I C K M A N . I do. The CHAIRMAN. H O W many copies do you have ? Mr. H I C K M A N . Well, I happen to have one. Mr. Hoy has one, Mr. Chairman. Now, we would be glad to put that in the record here. The CHAIRMAN. All right. Without objection, we will place it in the record at this point. (The statement referred to follows:) FORTY-NINTH ANNUAL STATEMENT FEDERAL RESERVE B A N K OF CLEVELAND, Cleveland, Ohio, January 2, 196Jf. To the Stockholders of the Federal Reserve Bank of Cleveland: T h e following pages present a s t a t e m e n t reflecting t h e financial r e s u l t s of t h e operations of t h i s b a n k for t h e y e a r 1963. F o r convenient comparison, t h e corresponding figures for t h e year 1962 a r e also shown. An a n n u a l r e p o r t of t h e b a n k for t h e y e a r 1963 containing a n account of its operations in g r e a t e r detail is in course of preparation. W h e n the r e p o r t is issued, a copy will be sent to each member b a n k in t h e district and to others who m a y be interested in receiving it. W. BRADDOCK H I C K M A N , President. T H E FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS 145 Comparative statement of condition Dec. 31, 1963 Dec. 31, 1962 ASSETS $1, 072, 428, 053 $1, 254, 874, 381 120, 891, 715 112, 001, 545 T o t a l gold certificate reserves. Federal Reserve notes of other b a n k s Other cash 1, 193, 319, 768 31, 391, 715 10, 938, 681 1, 366, 875, 926 27, 690, 620 20, 241, 475 Total cash Discounts a n d advances 1, 235, 650, 164 8, 701, 000 1, 414, 808, 021 249, 000 343, 585, 1, 469, 385, 196, 1, 059, 861, 332, Gold certificate account R e d e m p t i o n fund for Federal notes__ Reserve __ U.S. Government securities: Bills Certificates Notes __ _ Bonds Total U.S. Government securities Total loans a n d securities Cash items in process of collection Bank premises _ __ Other assets . _ 270, 699, 507, 044, 000 000 000 000 364, 973, 788, 641, 000 000 000 000 2, 783, 520, 000 2, 450, 766, 000 2, 792, 509, 6, 34, 2, 451, 015, 721, 013, 7, 275, 29, 726, 221, 071, 427, 414, 000 091 573 996 000 659 098 416 4, 577, 784, 824 4, 623, 838, 194 Federal Reserve notes 2,811,931,560 2, 679, 742, 230 Deposits: Member bank—Reserve accounts _ .. U.S. Treasurer—General account Foreign _ _ Other deposits . _ 1, 158,351,902 43, 915, 293 14,880,000 7, 910, 939 1,201,043,442 38, 220, 731 24, 440, 000 13, 848, 557 T o t a l deposits. _ _ _ Deferred availability cash i t e m s . Other liabilities __ 1,225,058, 134 399, 373, 828 6. 738, 252 1,277, 552,730 530, 832, 841 5, 257, 793 4 , 4 4 3 , 101,774 4, 493, 385, 594 44, 894, 350 89, 788, 700 43, 484, 200 86, 968, 400 4, 577, 784, 824 4, 623, 838, 194 8, 546, 700 7, 905, 400 Total assets __ __ __ LIABILITIES T o t a l liabilities. _ _ __ CAPITAL ACCOUNTS Capital paid in Surplus T o t a l liabilities and capital a c c o u n t s . Contingent liability on acceptances purchased for foreign correspondents _ __ 146 THE FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS Comparison of earnings and expenses Total current earnings Net expenses Current net earningsAdditions to current net earnings: Profit on sales of U.S. Government securities (net) __ Profit on foreign exchange transactions (net)__ All other Total additions._ _ Deductions from current net earnings: Proportionate share of losses under Federal Reserve System loss-sharing agreement (net) __ All other Total deductions Net additions _ _ Net earnings before payments to U.S. Treasury Dividends Paid U.S. Treasury (interest on Federal Reserve notes) Transferred to surplus 1963 1962 $94, 972, 347 15, 652, 180 $88, 180, 787 15, 143, 856 79, 320, 167 73, 036, 931 26, 166 27, 303 18, 646 167, 498 27, 030 23, 005 72, 115 217, 533 0 1,415 177, 558 418 1,415 70, 700 177, 976 39, 557 79, 390, 867 2, 653, 643 73, 076, 488 2, 547, 615 73, 916, 924 66, 832, 373 2, 820, 300 3, 696, 500 FEDERAL RESERVE BANK OF CLEVELAND DIRECTORS, 1964 Chairman: Joseph B. Hall, chairman of the hoard, the Kroger Co., Cincinnati, Ohio, Deputy Chairman: Logan T. Johnston, president, Armco Steel Corp., Middletown, Ohio. Frank E. Agnew, Jr., chairman of the hoard and chief executive officer, Pittsburgh National Bank, Pittsburgh, Pa. Walter K. Bailey, chairman of the board, the Warner & Swasey Co., Cleveland, Ohio. Albert G. Clay, president, Clay Tobacco Co., Mount Sterling, Ky. Richard R. Hollington, president, the Ohio Bank & Savings Co., Findlay, Ohio. David A. Meeker, chairman of the board and chief executive officer, the Hohart Manufacturing Co., Troy, Ohio. C. N. Sutton, president, the Richland Trust Co., Mansfield, Ohio. Edwin J. Thomas, chairman of the board and chief executive officer, the Goodyear Tire & Rubber Co., Akron, Ohio. OFFICERS, 1964 W. Braddock Hickman, president. Donald S. Thompson, first vice president. Roger R. Clouse, vice president and secretaryEdward A. Fink, vice president. Elmer F. Fricek, vice president. Clyde Harrell, vice president. Fred S. Kelly, vice president and cashier. Fred O. Kiel, vice president. Maurice Mann, vice president. Clifford G. Miller, vice president THE FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS 147 Martin Morrison, vice president. Paul C. Stetzelberger, vice president. Elfer B. Miller, general auditor. Paul Breidenbach, counsel. Phillip B. Didham, assistant vice president. Robert G. Hoover, assistant vice president. John J. Hoy, assistant vice president. Harry W. Huning, assistant vice president. George E. Booth, Jr., assistant counsel. Addison T. Cutler, special economist. George T. Quast, chief examiner. Donald G. Benjamin, assistant cashier. Anne J. Erste, assistant cashier. R. Joseph Ginnane, assistant cashier. William H. Hendricks, assistant cashier. Thomas E. Ormiston, Jr., assistant cashier. James H. Campbell, assistant general auditor. Lester M. Selby, assistant secretary. MEMBER, FEDERAL ADVISORY COUNCIL Leland A. Stoner, president, the Ohio National Bank of Columbus, Columbus, Ohio. CINCINNATI BRANCH DIRECTORS, 1964 Chairman: Howard E. Whitaker, chairman of the board, the Mead Corp., Dayton, Ohio. G. Carlton Hill, chairman of the board, the Fifth Third Union Trust Co., Cincinnati, Ohio. John W. Humphrey, president, the Philip Carey Manufacturing Co., Cincinnati, Ohio. Walter C. Langsam, president University of Cincinnati, Cincinnati, Ohio. James B. Pugh, president, the Security Central National Bank of Portsmouth, Portsmouth, Ohio. Barney A. Tucker, president, Burley-Belt Fertilizer Co., Lexington, Ky. John W. Woods, Jr., president, the Third National Bank of Ashland, Ashland, Ky. OFFICERS, 1964 Fred O. Kiel, vice president. Phil J. Geers, cashier. John Biermann, Jr., assistant cashier. George W. Hurst, assistant cashier. Walter H. MacDonald, assistant cashier. PITTSBURGH DIRECTORS, BRANCH 1964 Chairman: William A. Steele, chairman of the board and president, Wheeling Steel Corp., Wheeling, W. Va. J. S. Armstrong, president and trust officer, the Grove City National Bank, Grove City, Pa. G. L. Bach, Maurice Falk professor of economics and social science, Carnegie Institute of Technology, Pittsburgh, Pa. F. L. Byrom, president, Koppers Co., Inc., Pittsburgh, Pa. S. L. Drumm, president, West Penn Power Co., Greensburg, Pa. James B. Grieves, president, Commonwealth Bank & Trust Co., Pittsburgh, Pa. Alfred H. Owens, president, the Citizens National Bank of New Castle, New Castle, Pa. OFFICERS, 1964 Clyde Harrell, vice president. John A. Schmidt, cashier. J. Robert Aufderheide, assistant cashier. Paul H. Dorn, assistant cashier. Charles E. Houpt, assistant cashier. Roy J. Steiribrlnk, assistant cashier. 148 T H E FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS Statement of condition of the Federal Reserve Bank of business, Dec. SI, 1963 [In thousands of dollars] of Cleveland at the close ASSETS Gold certificate account Redemption fund for F e d e r a l Reserve notes 1, 072, 428 120, 892 Total gold certificate reserves Federal Reserve notes of other b a n k s Other cash 1, 193, 320 31, 392 10, 939 Discounts and a d v a n c e s : Secured by U.S. Government securities Other Acceptances: Bought outright Held under r e p u r c h a s e agreement U.S. Government s e c u r i t i e s : Bought outright Held u n d e r repurchase agreement Total loans and securities Cash items in process of collection B a n k premises Other a s s e t s : Denominated in foreign currencies All other Total assets 5, 725 2,97$ 2, 783, 520 2, 792, 221 509, 071 6, 428 14,194 20, 220' 4, 577, 785 LIABILITIES F e d e r a l Reserve notes 2, 811, 932 Deposits: Member bank reserves U.S. T r e a s u r e r — G e n e r a l account Foreign Other 1,158, 352 43, 915 14,880 7,911 Total deposits Deferred availability cash items Other liabilities 1, 225, 058 399, 374 6, 738 Total liabilities 4, 443,102 CAPITAL ACCOUNTS Capital paid in Surplus Other capital accounts Total liabilities a n d capital accounts R a t i o of gold certificate reserves to deposit a n d F e d e r a l Reserve note liabilities combined percent Contingent liability on acceptances purchased for foreign correspondents 44, 894 89,7894, 577, 785 29. 6 8,547 THE FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS 149 FEDERAL RESERVE NOTE STATEMENT Federal Reserve Bank of Cleveland at the close of "business Dec. SI, 1963 [In thousands of dollars] Federal Reserve notes: Issued to Federal Reserve bank by Federal Reserve agent and outstanding 2, 991, 515 Less held by issuing bank, and forwarded for redemption 179, 583 Federal Reserve notes, net 1 Collateral held by Federal Reserve agent for notes issued to bank: Gold certificate account Eligible paper U.S. Government securities Total collateral 1 2,811,932 610, 000 2, 450, 000 3, 060, 000 Includes Federal Reserve notes held by U.S. Treasury and by Federal Reserve banks other than the issuing bank. 150 ^o *-< crt <v © o m TJ CO -+3 QJ (D a; > 0> bp> C3 O fl co €^ i-T T-TT-T CO~l^O~«fC<fC^T4W<N~rH~CO~^rH%H~<rf CO ^H CO *C © <N CO CO 00 <N <D ^ * 0 CO <N <N r-Tr-t«f i H N N N W T H O O T H N O C O O O i C O O O ^ O i H O f f l ^ O O O M ^ H N O H O i O C O C C K N O i « e H ^ H Q 0 O N N » O < O N 0 0 N ( N H i C ^ H ^ ) » O 0 0 ( M O M O N O N c O ^ ^ T } < N i O 0 0 H rHTjH^Hi-HlOOOO^TtHOO^t^OOC^^HOrtHO €^rHCO<£)Tt<COT^Oil>iO<N(M»OCOO»Or-iLO COI>00 OOCDCOCOI>-t^OI>C000505005CO'^ HCOCDO>0(NCOHHCCH(NiCW«>0 COOH HWHiHOOOiCOiNOiMCOiOONOi^O €e^TjHTt<iOi-Hl><MTt*"^iOCX)<N'^0005<^ C* rH i-H T^ rH (N i-H <M (N rH rH r-ilOcO(NOiOa>OiiOt^THrH05iLOOOOOCO(N HT^C0(N00,*C005CONO»OHNai'OOH T H E FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS C35 aJ co .8 •£Kg GO C .§ * 3 T5 PI ^3 a s 2 ft$ CO o o3 cc CD 33 83 H H H N N N N N N N N N N W C O C O 05 05 05 OS G i O G i Qi O i 0 0 ^ 0 5 0 5 0 5 0 5 0 5 0 0 H rt<«Dt^0005OT-iC<|c0^i0C0t^00G5Or-iC^ H i—i , T t H a > , t f O * O r H C < l l > H O O i O O O O O ^ i O ^ W O C O W N Q O W J O rHO5CDcOl>|>l^.00COt^l>.I>.|>cNQ0CN^T-HCN rH H r H C N C N N I 1 1 1 1 I 1 I 1 i I I 1 1 1 1 ! i i 1 1 1 1 i i i 1 I 1 1 ! I l 1 1 1 1 ! i I 1 1 1 1 ! i I 1 I 1 1 i i l 1 1 1 1 H H N N C N I i i i I i I i ! I I i H O ! I I i i I i | 1 ! i i i 1 1 lCOCOt^<N l l > 00 00 I© iCOC^rHC* I<y& ! ! !! i l 1 i I i 1 1 1 . i | 1 ! i i i W N « O N ^ i f J t 1 1 1 CO C * CO • * * CO T f b - 1 > r H r H CO H rH<N<N ! i I H COCOCOC0COCO00^TtH"^cOClCOCO^0000*OcO T t H O ^ c O O O c O I > < N O C X ) C O i O O i O I > c O I > ( N < N €# I H O O ? O H I O T } < H O C O ( N 1 1 1 1 ^ I CO 0 0 Tfr< CO GO 0 0 CO » 0 O GO C * 0 * i € # 00 00 ^ CO r-4 T-H i - l C * O J H 1 1 1 1 00 rH 00 O r-i T - e t f COCOC<l N r H €£• CO ^ O N rH £5 1 1 1 1 N Tt^COCOCOCOCO^^""tfCOa>COCO»001>0>*OCO y$ H H H N N N C C l > r H C 0 * © O ^ 0 0 ^ r H 0 5 l > C O < N 0 0 r H e N C 0 C O * 0 l O O O ^ t ^ t ^ r H C O * © T * < » © r H THE FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS § ** 3 5 o c ! "8 »© § W^\ftcONOOO)OHWCO^iO(ONOOOiOH COCOCOCOCOCOCOrhT^T^TjHT^T^T^r^T^r^iC»0 0^CiC^Oi0^0^0^C^CbcbO5O3O5O5O5Oi0iO5Gi Total earnings All other U.S. securities CommitAcceptments ances to make industrial purchased loans Purchased Industrial loans bills Discounted bills Discounts and advances W Federal Reserve Bank of Cleveland—Current earnings—Continued [In thousands] Discounts and advances 1952 1953 1954 _ 1955 1956 - 1957 1958 1959 1960 1961 1962 _-- Industrial loans CommitAcceptances ments to make industrial loans $955 1,364 277 863 1,905 2,366 840 2,051 769 167 216 $6 6 6 5 2 1 1 U.S. Government securities Foreign currencies All other Total current earnings % $43, 908 46, 085 37, 127 34, 170 49, 230 64, 104 64, 755 74, 377 93, 077 79, 647 87, 614 $329 $15 16 12 17 20 24 21 28 53 33 22 $44, 884 47, 471 37, 422 35, 055 51, 157 66, 495 65, 618 76, 456 93, 900 79, 847 88, 181 W H 3 NOTE.— Details may not add to total because of rounding. > Federal Reserve Bank of Cleveland—Profit and loss account, 1914-25 [In thousands] 8-680- 1914-15 a T Current net earnings -$55,774 1916 $301, 905 1 1917 $1, 009, 138 j 1918 1919 1920 $4,320,463 $6, 458, 212 $12, 129, 464 r* Additions to current net earnings: f Withdrawn from reserve for— Federal Reserve Board expenses ^ Depreciation on U.S. bonds •* All other 63, 246 5d a on Total additions Deductions from current net earnings: Bank premises—depreciation Furniture and equipment-Reserve for probable losses Reserve for self-insurance_ Reserve for Federal Reserve Board expenses Reserve for depreciation, U.S. bonds >_ All other 8,097 45, 986 85, 784 254, 684 53, 414 63, 246 a 129, 551 141, 008 3 a 209, 470 84, 406 14, 477 46, 555 5,044 4,730 53, 900 48, 220 Total deductions 8,097 255, 456 184, 667 364, 427 372, 679 Net deductions from current net earnings.- _ 8,097 255, 456 184, 667 364, 427 309, 433 293, 808 753, 682 4, 135, 796 6, 093, 785 11, 820, 031 143, 237 716, 168 716, 107 3, 552, 000 556, 785 5, 537, 000 604, 194 11, 215, 837 150, 571 37, 514 -132,311 Net earnings Distribution of net earnings: Dividends paid Transferred to surplus account Franchise tax paid U.S. Government Balance to profit and loss a a a -55,774 a Hi a - 5 5 , 774 00 CO Federal Reserve Bank of Cleveland—Profit and loss account, 1914-25—Continued [In thousands] 1921 Current net earnings Additions to current net earnings: Withdrawn from reserve for— Federal Reserve Board expenses Depreciation on U.S. bonds All other Total additions. Deductions from current net earnings: Bank premises—depreciation Furniture and equipment Reserve for probable losses __ __ Reserve for self-insurance Reserve for Federal Reserve Board expenses Reserve for depreciation, U.S. bonds All other 1924 1923 1925 $6, 519, 851 $2, 553, 016 $2, 104, 431 $1, 105, 839 $1, 413, 827 37, 209 55, 739 32, 123 43, 728 5, 161 4,148 7,803 21, 612 18, 385 333, 802 125, 071 48, 889 11, 951 39, 997 333, 802 64, 759 85, 684 100, 000 100, 000 125, 428 42, 779 699, 651 336, 702 100, 000 100, 000 10, 096 45, 010 58, 808 7,078 30, 115 Total deductions 360, 539 313, 217 1, 195, 161 1, 618, 989 537, 053 Net deductions from current net earnings. 235, 468 264, 328 1, 183, 210 1, 578, 992 203, 251 6, 284, 383 2, 268, 688 921, 221 - 4 7 3 , 153 1, 210, 576 660, 228 2, 329, 442 3, 294, 713 692, 436 861, 264 714, 988 725, 626 195, 595 756, 152 -1,229,305 778, 811 431, 765 Net earnings Distribution of net earnings: Dividends paid Transferred to surplus account Franchise tax paid U.S. Government Balance to profit and loss 1 1922 271, 978 34, 960 W < CO Deficit in earnings after payment of dividends, charged to surplus account. 1, 509, 445 102, 466 CO 200, 000 1 Federal Reserve Bank of Cleveland—Profit and loss account, 1926-85 [In thousands] Current net earnings__ Additions to current net earnings: Profit on U.S. Government securities sold Other additions Total additions Deductions from current net earnings: Special depreciation allowances on bank premises Reserve for losses Reserve for self insurance Building for Board of Governors All other deductions. Total deductions Net deductions from current net earnings Net earnings Dividends paid Franchise tax paid U.S. Government Paid U.S. Treasurer (sec. 13b) Transferred to surplus (sec. 13b) Transferred to surplus (sec. 7) Footnotes at end of table, p. 157. 1930 H $3, 884, 081 $619, 001 © 3,193 175 178, 163 200, 333 2, 138 3,193 175 378, 496 100, 000 21, 709 19, 267 20, 024 188, 959 1926 1927 1928 1929 $1, 666, 376 $1, 229, 128 $3, 324, 180 10, 549 2,138 10, 549 15, 818 I CD H 00 345 1,367 127, 391 158, 790 24, 761 16, 163 123, 076 146, 658 178, 814 213, 720 5,614 102, 938 143, 465 178, 639 + 164,776 1, 660, 762 1, 108, 190 3, 180, 715 3, 705, 442 783, 777 808, 505 832, 583 856, 843 910, 007 952, 934 852, 257 275, 607 2, 323, 872 2, 795, 435 2 H *4 > —169, 157 I o Federal Reserve Bank of Cleveland—Profit and loss account, 1926-85—Continued [In thousands] 1932 1933 1934 $116, 132 $2, 189, 139 $1, 605, 070 $1, 014, 646 $539, 572 262, 701 6,240 319, 843 3,277 98, 261 40, 216 707, 893 61, 758 488, 850 21, 514 268, 941 323, 120 138, 477 769, 651 510, 364 1931 Current net earnings Additions to current net earnings: Profit on U.S. Government securities sold Other additions Total additions 1935 K CO Deductions from current net earnings: Special depreciation allowances on bank premises. Reserve for losses Reserve for self insurance Building for Board of Governors All other deductions 250, 000 250, 000 250, 000 800, 000 700, 000 112, 593 56, 528 141, 003 211, 864 41, 600 94, 675 61, 807 306, 528 641, 003 1, 011, 864 741, 600 269, 075 Net deductions from current net earnings. 37, 587 317, 883 873, 387 + 28,051 + 241,289 Net earnings 78, 545 1, 871, 256 731, 683 1, 042, 697 780, 861 936, 513 858, 427 832, 746 789, 058 769, 096 772, 127 -57,375 - 8 , 156 281, 757 Total deductions Dividends paid Franchise tax paid U.S. Government. Paid U.S. Treasurer (sec. 13b) Transferred to surplus (sec. 13b) Transferred to surplus (sec. 7) 1 2 2 -857,968 180, 083 "~~8,~734 Banking Act of 1933 eliminated the provision in the Federal Reserve Act requiring the payment of a franchise tax. Deficit in earnings after payment of dividends, charged to surplus account. 3 Federal Reserve Bank of Cleveland—Profit and loss account, 1936-46 1937 1936 Current net earnings _ __ __ Additions to current net earnings: Profits on sales of U.S. Government securities Recoveries of and withdrawals from allowances for losses on industrial advances (net)__ ____ __ All other__ ___ Total additions _____ 1939 1940 00 $614, 067 $1, 216, 374 $692, 963 $985, 353 $1, 495, 336 559, 635 239, 359 816, 488 432, 876 1, 163, 699 »=_ 554 138 22, 460 24, 636 175, 872 560, 189 239, 497 838, 948 457, 513 1, 339, 571 W >1 tr Deductions from current net earnings: 10, 000 Reserves for contingencies ___ Losses and reserves for losses on industrial advances (net) _ _ Special reserves and chargeoffs on bank premises Chargeoffs and special depreciation on bank premises __ __ _ 225, 748 Prior service contributions to retirement system 185, 323 Assessment for building for Board of Governors Retirement system (interest base adjustment) _ Retirement system (interest base and increased benefits adjustments) ___ ____ All other__ _ _ ^ _ __ ___ 34, 279 Total deductions _ _ _ 455, 350 104, 839 Net additions or deductions (—) Net earnings 718, 906 14, 431 Paid U.S. Treasury (sec. 13b)__ ___ _ _ _ _ Dividends paid __ _ _ 752, 931 Transferred to surplus (sec. 13b) _ Transferred to surplus (sec. 7)_ _ __ - 4 8 , 456 Surplus (sec. 7) Jan. 1 14, 371, 246 Additions, as above _ __ -48,456 Transferred to reserves for contingencies Surplus (sec. 7) Dec. 31 1938 14, 322, 790 •3 H t. t> » W 20, 000 219, 906 131, 155 439, 812 23, 749 374, 810 -135,313 1, 081, 061 13, 476 773, 118 22, 473 482, 285 356, 663 1, 049, 626 227 799, 145 294, 467 14, 322, 790 294, 467 -294,467 14, 322, 790 1 321, 8381 224, 363 546, 201 -88,689 896, 664 10, 150 812, 926 ft) < W H 110, 824 913, 600 425, 971 1, 921, 307 15, 108 842, 330 250, 254 14, 322, 790 250, 254 - 2 5 0 , 254 823, 216 -290 73, 738 14, 322, 790 73, 738 - 7 3 , 738 1, 063, 869 14, 322, 790 1, 063, 869 -1,063,869 14, 322, 790 14, 322, 790 14, 322, 790 ui 1942 1943 1944 $763, 459 $1, 368, 068 $2, 558, 187 $5, 049, 229 $8, 852, 586 132, 273 333, 826 3, 537, 441 335, 184 336, 234 50 2,303 - 1 4 , 534 413 - 4 , 854 212 6,074 63, 778 132, 323 336, 129 3, 523, 320 330, 542 406, 086 1941 C u r r e n t n e t earnings__ Additions t o current net earnings: Profits on sales of U.S. Government securities Recoveries of a n d withdrawals from allowances for losses on industrial advances (net) _ All other _ Total a d d i t i o n s . _ _ _ Deductions from current n e t earnings: Reserves for contingencies _ _ _ _ _ _ _ __ __ Losses a n d reserves for losses on industrial advances (net) i 23, 600 Special reserves a n d chargeoffs on bank premises Chargeoffs a n d special depreciation on bank premises. Prior service contributions t o retirement system __ __ Assessment for building for Board of Governors-R e t i r e m e n t System (interest base adjustment) - __ _. R e t i r e m e n t System (interest base a n d increased benefits adjustments) _ All other __ _ 11, 157 + 1 2 , 443 Total deductions.__ _ _ _ 144, 766 N e t additions or deductions ( —)_ _ _ N e t earnings__ 908, 225 P a i d U.S. T r e a s u r y (sec. 13b) _ . 15, 458 Dividends p a i d . _ _ _ __ 869, 942 Transferred t o surplus (sec. 13b) _ __ _ _ Transferred t o surplus (sec. 7) _ _ . 22, 825 Surplus (sec. 7) J a n . 1. _ 14, 322, 790 Additions, as above 22, 825 Transferred t o reserves for contingencies _ Transferred from reserves for contingencies Surplus (sec. 7) Dec. 31 14, 345, 615 1 Net recoveries. 1945 3 l W H GO i 1, 242 3 00 381, 490 7,481 387, 729 -51,600 1, 316, 468 6,848 888, 550 3 803, 96, 399, 2, 623, 5, 181, 689 044 873 587 774 599 922, 163 421, 070 14, 345, 615 421, 070 4, 259, 012 14, 766, 685 4, 259, 012 -3,000,000 14, 766, 685 16, 025, 697 401, 924 401, 924 -71,382 4, 977, 847 967, 057 4, 010, 16, 025, 4, 010, -965, 790 697 790 184 19, 071, 303 123, 123, 283, 9, 135, 7, 1, 025, 057 057 029 615 177 112 3 8, 103, 326 19, 071, 303 8, 103, 326 6, 570, 488 33,745, 117 CD Federal Reserve Bank of Cleveland—Profit and loss account, 1946-55 1946 $8, 891, 006 Current net earnings - _ Additions to current net earnings: Profits on sales of U.S. Government securities (net) Recoveries of, and withdrawals from allowances for, losses on industrial loans (net losses) All other Total additions - Deductions from current net earnings: Reserves for contingencies Retirement system (salary computation adjustment) Chargeoffs and special depreciation on bank premises Retirement system (adjustment for revised benefits) Losses on U.S. Government securities sold (net) All other 1947 1949 1948 $8, 911, 719 $22, 507, 639 $22, 145, 081 1950 $18, 336, 686 255, 338 596, 016 2, 961, 697 3, 471, 928 -97 4,864 *i © 43 69 107, 433 22, 857 t 184, 973 255, 381 596, 085 3, 069, 130 3, 494, 785 28, 616 179, 676 26, 364 32, 643 31, 791 220, 944 178, 577 224, 183 109, 899 1,348 13, 001 332, 370 255, 483 109, 899 404, 108 44, 792 -147,397 -102 486, 186 2, 665, 022 3, 449, 993 Net earnings before payments to U.S. Treasury Transferred to reserves for contingencies Paid to U.S. Treasury (sec. 13b) Paid U.S. Treasury (interest on Federal Reserve notes) 8, 743, 609 8, 911, 617 22, 993, 825 3, 906, 750 24, 810, 103 3, 760, 963 21, 786, 679 7, 010, 672 16, 153, 370 17, 903, 138 18, 516, 074 Net earnings after reserves and payments to U.S. Treasury. Dividends paid _ » Transferred to surplus (sec. 13b) -_ 8, 742, 737 1, 094, 157 1, 900, 945 1,123, 393 -1,461 2, 933, 705 1, 138, 865 3, 146, 002 1, 156, 753 3, 270, 605 1, 213, 209 872 ft) a w a ft) < GO 1,896 Net additions or deductions (—) W 180, 206 97, 714 Total deductions o GO ft) > CO Transferred to surplus (sec. 7) Surplus (sec. 7) Jan. 1 7, 648, 580 33, 745, 117 779, 013 41, 393, 697 1, 794, 840 42, 172, 710 1, 989, 249 43, 967, 550 2, 057, 396 45, 956, 799 Surplus (sec. 7) Dec. 31 41, 393, 697 42, 172, 710 43, 967, 550 45, 956, 799 48, 014, 195 1951 Additions to current net earnings: Profits on sales of U.S. Government securities (net) Recoveries of, and withdrawals from allowances for, losses on industrial loans (net losses) All other _ Total additions _ Deductions from current net earnings: Reserves for contingencies_ Retirement system (salary computation adjustment) Chargeoffs and special depreciation on bank premises Retirement system (adjustment for revised benefits) Losses on U.S. Government securities sold (net). All other Total deductions Net additions or deductions (—). __ _ Net earnings before payments to U.S. Treasury Transferred to reserves for contingencies Paid to U.S. Treasury (sec. 13b) _Paid U.S. Treasury (interest on Federal Reserves notes) Net earnings after reserves and payments to U.S. Treasury. Dividends paid. Transferred to surplus (sec. 13b) Transferred to surplus (sec. 7) Surplus (sec. 7) Jan. 1 1954 1953 $27, 834, 986 $35, 392, 144 $37, 316, 509 $27, 290, 869 Current net earnings Surplus (sec. 7) Dec. 31 1952 . __ 1955 $25, 101, 843 188, 345 184, 975 45, 289 30, 189 27, 210 14, 693 11, 556 16, 315 30, 189 215, 555 199, 668 56, 845 16, 315 37, 072 36, 768 39, 472 28, 717 20, 806 1,454 74 1,380 30, 171 22, 260 160, 793 148, 481 9,904 5, 553 195, 457 42, 321 705 200, 970 , _« 4 a W W > W H GO GO .. . r - 1-6 5\ , 268 173, 234 - 1 , 302 26, 674 -5,945 27, 669, 718 35, 565, 378 37, 315, 207 27, 317, 543 25, 095, 898 23, 708, 414 30, 743, 128 32, 249, 472 23, 166, 338 21, 070, 509 3, 961, 304 1, 327, 030 4, 822, 250 1, 406, 069 5, 065, 735 1, 482, 436 4, 151, 205 1, 577, 114 4, 025, 389 1, 684, 251 2, 634, 274 48, 014, 195 3, 416, 181 50, 648, 469 3, 583, 299 54, 064, 650 2, 574, 091 57, 647, 949 2, 341, 138 60, 222, 040 50, 648, 469 54, 064, 650 57, 647, 949 60, 222, 040 62, 563, 178 8 > CO o> Federal Reserve Bank of Cleveland—Profit and loss account, 1956-68 Current net earnings _ Additions to current net earnings: Profits on sales of U.S. Government securities (net) __ Reimbursements for fiscal agency expenses incurred in prior years.. Transferred from reserves for contingencies (net) All other Total additions 1956 1957 1958 $40,113, 427 $54, 132, 429 $53,001,811 $63, 709, 370 14,874 114, 553 13, 848 16 502 H O 5,926 4,625 18, 656 9,083, 117 4, 506 >1 tr 30, 276 134, 052 32, 503 9, 104 125 24, 350 ' 1959 W W CO Deductions from current net earnings: Reserves for contingencies Retirement System (adjustmet for revised benefits) Chargeoffs on bank premises All other < 16, 896 18, 614 752, 928 17, 393 20, 147 1,742 2,510 558 38, 785 774, 052 17, 951 178 -8,510 -640,000 14, 553 9, 103, 947 40, 104, 917 53, 492, 428 53, 016, 364 72, 813 317 Paid U.S. Treasury (interest on Federal Reserve notes) Dividends paid__ 34, 468, 380 1, 806, 754 46, 416, 660 1, 918, 377 45, 918, 551 1, 995, 760 74, 774, 987 2, 150, 830 Transferred to surplus (sec. 7) Surplus (sec. 7) Jan. 1 Transferred from surplus (sec. 13b) 3, 829, 784 62, 563, 178 5, 157, 392 66, 392, 961 5, 102, 053 71, 550, 353 -9,906 — 4, 112, 500 76, 642, 500 Surplus (sec. 7) Dec. 31 __ 66,392,962 71, 550, 353 | 76,642,500 72, 530, 000 Total deductions Net additions or deductions (—) Net earnings before payments to U.S. Treasury XJi CQ 1 5H H > Current net earnings __ _ Additions to current net earnings: Profits on sales of U.S. Government securities (net) Reimbursement for fiscal agency expenses incurred in prior years__ Transferred from reserves for contingencies (net) All other __ 1960 1961 1962 $80, 521, 299 $66, 014, 056 $73, 036, 931 1963 $79, 320, 167 H 209, 320 294, 917 167, 498 26, 166 840, 170 817 1,157 50, 035 45, 949 1, 050, 307 296, 075 217, 533 72, 115 569 4,355 177, 976 1,415 1, 049, 738 291, 720 39, 557 70, 700 Net earnings before payments to U.S. Treasury 81, 571, 038 66, 305, 776 73, 076, 488 79, 390, 867 Paid U.S. Treasury (interest on Federal Reserve notes) > _ Dividends paid _ __ 76, 281, 883 2, 219, 154 56, 273, 169 2, 360, 707 66, 832, 373 2, 547, 615 73, 916, 924 2, 653, 643 Transferred to surplus (sec. 7) Surplus (sec. 7) Jan. 1 Transferred from surplus (sec. 13b) 3, 070, 000 72, 530, 000 7, 671, 900 75, 600, 000 3, 696, 500 83, 271. 900 2, 820, 300 86, 968, 400 75, 600, 000 83, 271, 900 86, 968, 400 89, 788, 700 Total additions w Deductions from current net earnings: Reserves for contingencies Retirement System (adjustment for revised benefits) Chargeoffs on bank premises__ All other Total deductions _ Net additions or deductions (—) Surplus (sec. 7) Dec. 31 __ _ > w GO 164 THE FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS The CHAIRMAN. Suppose you answer this question, please. If you were indicating in the order of importance, and I mean importance, the matter that takes u p most of your time, and the time of your officials and employees, what is the most important duty that is performed by the Federal Reserve Bank of Cleveland ? Mr. H I C K M A N . Well, the processing of information and the formulating of views having to do with economic conditions in the district, in the Nation, and the appropriate posture of monetary policy with respect to these conditions. The CHAIRMAN. Where do you get that information from? Mr. H I C K M A N . From a variety of sources including businessmen and industrialists in the district. And, of course, we also have an economic staff in our bank. The CHAIRMAN. And they are constantly calling people over the telephone or getting information from them in writing, or how would they get it? Mr. H I C K M A N . Visiting them, talking to them. The CHAIRMAN. YOU think that is the most important function your bank performs? Mr. H I C K M A N . That is; yes, sir. The CHAIRMAN. What about the check clearings? Doesn't it rank up pretty high? Mr. H I C K M A N . Well, it ranks u p high in terms of numbers of people. But I thought you were asking about importance from the point of view of the national welfare, sir. The CHAIRMAN. All right. From the standpoint of the national Federal Reserve System, that would be No. 1—getting information from local people as to the economic conditions and so forth ? Mr. H I C K M A N . Yes. The CHAIRMAN. I am talking now about the operations of the bank. Mr. H I C K M A N . I n the bank operations—I will be glad to give you some figures on that, sir. The CHAIRMAN. H O W many employees do you have, including officers ? Mr. H I C K M A N . We have altogether about 1,500 people in the three offices. The CHAIRMAN. Most of them are in the Cleveland office, are they not? Mr. H I C K M A N . A little over half of them, about 800, are in the Cleveland office. The CHAIRMAN. W h a t do those 800 people do the most? How do they spend their time the most ? On what ? Mr. H I C K M A N . I have a breakdown of the head count of these people in the different departments. The CHAIRMAN. I don't want that exactly. W h a t do they do that is considered the most important, that requires the most man-hours. W e will reduce it to man-hours. Mr. H I C K M A N . I have the percent of the total employees, but I don't have the man-hours. The CHAIRMAN. I know. But you know what takes up most of your time. THE FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS 165 Mr. H I C K M A N . Well, as to the number of employees—slightly under a third, sir, are in the The CHAIRMAN. Well, that is not responsive. I will yield to another member. And I will come back to you later on, and I will see if I cannot make it a little plainer. Mr. H I C K M A N . I t is a third of our people. The CHAIRMAN. Mr. Widnall ? Mr. V A N I K . YOU were about to tell us about slightly more than a third, is that correct ? Mr. H I C K M A N . 32.3 percent of our total employees are in the check collection department. The CHAIRMAN. That is responsive; yes, sir. Mr. H I C K M A N . I meant to be responsive. But I don't know the number of hours, because they work The CHAIRMAN. That is all right. T h a t is sufficiently close. Now, what is your next category, or next most important? Mr. H I C K M A N . The next most important category here is the general service functions of the bank. The CHAIRMAN. Y O U get paid for that, do you not ? Mr. H I C K M A N . Well, the general service functions involve the stockrooms, the maintenance of the bank, and things of that sort. The CHAIRMAN. I see. W h a t percent is that? Mr. H I C K M A N . T h a t is 16.8 percent. The CHAIRMAN. That makes nearly half—about 48 plus. W h a t is the next item ? Mr. H I C K M A N . Fiscal agency, 10.6 percent. The CHAIRMAN. All right. I will yield to Mr. Widnall. Mr. WIDNALL. Thank you, Mr. Chairman. I just have a couple of questions. Mr. Hickman, as a matter of fact, there are only a few dealers who will deal in and make a market for Government securities, isn't that so? Mr. H I C K M A N . Yes, sir. I t depends on what area you are talking about, sir. I n Cleveland, there are four at the present time. Mr. WIDNALL. S O that if anyone wants to buy or sell Governments, they must deal with these dealers ? Mr. H I C K M A N . Well, in theory, that is not quite correct, because I could sell a bond to this gentleman over here, if I knew that he wanted to buy a bond. But the bids and asks are channeled through the market, which is comprised of these 19 or 20 dealers, that Mr. Ellis mentioned here as the correct number. Mr. WIDNALL. A S a matter of fact, as I have understood the framework of the Federal Reserve System, the banks are under no compulsion to deal with any particular list of dealers, isn't that so ? Mr. H I C K M A N . A S agent for member banks; that is correct. But the Federal Open Market Account, acting for the Federal Reserve banks, the 12 banks in unison, under the orders of the Federal Open Market Committee, does deal with all the qualified dealers in the country. Mr. WIDNALL. I t does deal with all of the qualified dealers ? Mr. H I C K M A N . All of them, at one time or another; yes, sir. Mr. WIDNALL. S O there is no favorite son, so to speak ? 166 THE FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS Mr. H I C K M A N . N O , it depends on who has the low bid, the high ask—whoever it might be. If you are on the buy side, you want to get the low offer, and so forth. Mr. WIDNALL. But the reason you are limited to the number t h a t you do utilize is the fact that there is no one else that actually makes a market? Mr. H I C K M A N . That is correct. I t is a very risky business, and requires a fairly substantial capital to engage in it, and, of course, a great deal of skill. And there are very few people who wish to undertake this kind of enterprise. Mr. WIDNALL. So it is not really an unholy conspiracy that is going on when you just limit it to a few dealers ? Mr. H I C K M A N . No, sir. Mr. WIDNALL. That is all. The CHAIRMAN. Mr. Vanik? Mr. V A N I K . Mr. Chairman, I would like to ask Mr. Hickman, how many banks are there in the Cleveland district ? Mr. H I C K M A N . We have altogether, sir; 870 in the Fourth Federal Reserve District. Mr. V A N I K . W h a t is the total number of banks, including those not in the System? Mr. H I C K M A N . That is 870. This was the figure for 1963. Mr. V A N I K . And how many are in the System \ Mr. H I C K M A N . Of that number, we have 513 in the System. Mr. V A N I K . 513 ? Now, in your opinion, is it very important for the small banks to be associated with the System ? Mr. H I C K M A N . NO ; it is not. Mr. V A N I K . They can, after all, get their money out of the city banks? Mr. H I C K M A N . They can hold deposits—instead of holding them with the Fed, they can hold deposits with the correspondent banks in the city. Mr. V A N I K . W h a t is the real advantage that they have, if any, in membership ? Mr. H I C K M A N . The larger banks ? Mr. V A N I K . N O ; the smaller ones. Mr. H I C K M A N . I should say the primary advantage is the feeling that they belong to the Federal Reserve System, where they can obtain reserves in the event of emergencies. F o r example, the tobacco Mr. V A N I K . Can they obtain reserves in the event of an emergency from the Fed that they would not be able to get from their correspondent banks—the city banks? Mr. H I C K M A N . I n a period of great national stress, such as the 1930's, that is conceivable, sir. Mr. V A N I K . Yes. Now, you said something about—I have a question here—in the Federal Reserve building in Cleveland, we have some private tenants; is that right? Mr. H I C K M A N . That is correct. Mr. V A N I K . S O that in a sense you are engaged in a proprietary operation? Mr. H I C K M A N . T O that extent. THE FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS 167 Mr. V A N I K . You have an office building for general tenancies. Now, to the extent that you rent out private space in the building, don't you feel that you ought to pay something to the local communities in lieu of taxes for at least that part of your operation which is a proprietary function? Mr. H I C K M A N . Well, we do pay general property taxes in Cleveland. We do, sir; yes. The tenants are Government agency tenants. Mr. V A N I K . YOU have some that are private ? Mr. H I C K M A N . We have one or two. I think we have the ScrippsHoward, a small office of Scripps-Howard there, as I recollect. Mr. V A N I K . There are less than I thought. I knew at one time there were quite a few. Mr. H I C K M A N . We have the Internal Kevenue Service. Mr. V A N I K . That is all right. Mr. H I C K M A N . The Comptroller of the Currency is in there; organizations of that sort. Mr. V A N I K . Yes. Mr. H I C K M A N . We do pay general property taxes Mr. V A N I K . The question that I am driving at is to the city. eventually, when we get our new building in Cleveland, it is conceivable that we might be able to consolidate all of our Federal facilities in either the Federal Eeserve bank building or the new office building, so we can avoid the scattering around throughout the entire metropolitan area. W h a t are your space demands now ? Are you contemplating any expansions, or do you find your space satisfactory ? Mr. H I C K M A N . We have 12 floors. We have something like 500,000 square feet of space in our three offices, and about 250,000 square feet at Cleveland. About 50,000 square feet is available for tenants and the rest is for our own requirements. I have the figure. I t is 500,097 square feet at our three offices. Mr. V A N I K . All right. Now, let me ask you t h i s : W h a t is the total cost in dollars of the check clearance operation ? Mr. H I C K M A N . Total cost in dollars ? Mr. V A N I K . You said it was30 percent? Mr. H I C K M A N . Yes, we have that figure right here. I had it right here a minute ago, on that same sheet. Mr. V A N I K . While Mr. Hoy is looking for that Mr. H I C K M A N . I have it right here, sir. The total cost of the check operation is $3,725,000, out of total expenses of $17,548,000; $3.7 million. Mr. V A N I K . Yes. Now, what part—what would this figure—how would this relate to the total cost of the check-handling function by the banks in the Cleveland district? I n other words, as we consider the whole business of commercial accounts, what percentage of the total cost of this check handling would be represented by what you do at the clearinghouse ? Does this represent 30 percent of it ? Mr. H I C K M A N . Well, the total cost—a very rough estimate obtained by discussions with bankers in the district for the national scene— would be around $3 billion cost to the commercial banks for handling their part. Mr. V A N I K . How much? Mr. H I C K M A N . $3 billion. Mr. V A N I K . $3billion? 168 THE FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS Mr. H I C K M A N . Yes, sir. Now, the Federal Reserve Bank of Cleveland's district has about one-tenth of the banking assets in the country in it. So that it would be around $300 million. Mr. V A N I K . I am trying to orient this in my mind. W h a t would you estimate would be the cost in the Cleveland district? Mr. H I C K M A N . I would say roughly $300 million. Mr. VANIK. T O handle checks ? Mr. H I C K M A N . By the commercial banks; yes. Mr. V A N I K . I am just trying to figure out this operation. The checks are issued, they are circulated, they go to the bank, and then they get to the clearinghouse, and you sort them all out, and get everybody's balances calculated. I t seems to me—I don't know, but it seems like you do about a third of the work for about $3.7 million. I cannot quite see how the rest of it should cost so much. I am trying to determine whether or not the commercial banks are passing on to the consumer—there are some 65 million people that have checking accounts now—I want to know if they are passing on to the consumer some of the advantages of the reduced costs of check handling brought about through the data processing systems and the computer systems that are now in vogue. Mr. H I C K M A N . I think they will over a period of time. The competitive process, as you know, w-orks over a period of time. Mr. V A N I K . I n the Cleveland district, for example, what is the charge to the individual account holder—what is the charge that is made for each check, for each item ? How does it vary ? Mr. H I C K M A N . I t varies—I don't have the schedule. Mr. V A N I K . What is the peak on it ? Mr. H I C K M A N . I t varies with the size of the account and the activity of the account. Debits and credits are charged at a different rate. And that is all related to the average balance in the account, as I understand it. Mr. V A N I K . Well, does it ran^e as high as 10 cents an item or higher? Mr. H I C K M A N . I think it could range higher; yes, sir. Mr. VANIK. Yes, it ranges higher. Now, is it possible that you could provide for the record a variation of the schedule in the Cleveland district on check handling charges— in other words, the maximums—and get the minimums—so that we have some idea here as to the range, the competitive range, as you say, in the cost of these services ? Mr. H I C K M A N . We would be glad to do it. Mr. V A N I K . Because the cost of check handling is an item that every consumer must face. And I am anxious to see that these charges are related in some measure to the actual cost of the service to the bank. Mr. H I C K M A N . Mr. Vanik, may I say that we will be glad to provide that information. Of course, the banks also compete in many other ways. Mr. V A N I K . I would like to know the extent of their competition. F o r example, in the Cleveland area Mr. H I C K M A N . Through their loan and investment processes. Mr. V A N I K . Yes. I would like to know the extent of the competition. I n other words, I would like to know what is the range— what is the competitive range in the city of Cleveland, what is the THE FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS 169 competitive range in the city of Akron, what is the competitive range in Pittsburgh, and perhaps some rural area. So that we have an opportunity to get a cross section. I t seems that in the rural areas, and in other places, that these things are done for almost nothing. And in the cities, where there is a tremendous volume, the cost goes up to 10 cents an item and even higher. Mr. H I C K M A N . Yes, it may do that. Mr. V A N I K . And, at the same time, I would also like to have a cross section of the cost of official drafts. I f a person in my community, for example, has to send a check to the registrar of motor vehicles to get a license number, he pays 30 cents or more for a $11 check. I t seems to me—it doesn't seem in any way to relate itself to the sservice, because a man comes in and brings in his $11, there is no risk to the bank, they write out a piece of paper, they charge him 30 cents, so that he can send a proper check down with his application for a motor vehicle license plate. I t seems to me that these costs are getting to be a little bit out of line with reality. And it also seems to be considerable uniformity in the charge. I haven't been able to personally find this high degree of competition that you have talked about. And I would like to have some evidence of it submitted for the record, if you can. The CHAIRMAN. Without objection—you will submit the information for the record. Mr. H I C K M A N . I will be glad to do that, although I don't believe I said there was a high degree of competition. Mr. V A N I K . YOU said there is competition. Mr. H I C K M A N . There is. Mr. V A N I K . I would like to see evidence of the competition. Mr. H I C K M A N . I think the competition is mainly on the side of availability of funds, the searching for investment outlets, loan outlets. Mr. V A N I K . If I want to open a checking account, I don't want to do it where it is going to cost me $50 a year. You show me where it can be done for $25. I want to see if there is some range of choice in where I can open my account, because the average person doesn't care which bank. They are all insured, they are all solid. The choice doesn't mean so much to him. H e is concerned in getting this service at the lowest practicable cost. (The information referred to follows:) SCHEDULE OP SEKVICE GHAEGES ON CHECKING ACCOUNTS AND OFFICIAL CHECKS CLEVELAND High, medium, and low range, as follows: Bank A Regular checking accounts: 6 cents for each check written during the month. 4 cents for each check written after 100 checks in the month. 3 cents for each item deposited during the month. 2 cents for each item deposited after 100 items in the month. Offsetting credit of 12% cents for each $100 of the average balance on deposit in the checking account for a month and a maintenance charge of 50 cents is made. 28-680—64—vol. 1 12 170 T H E FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS Money order r a t e s : Cents $10 a n d u n d e r 15 $10.01 to $50 20 $50.01 to $100 25 $100.01 to $250 30 $250.01 to $500 40 $500.01 to $1,000 50 No charge is m a d e to a n established depositor for a n official check covering funds w i t h d r a w n by the depositor to effect a t r a n s f e r of funds. Bank B Regular checking a c c o u n t s : 6 cents for each check p a i d u p to 500 during t h e month. 4 cents for each check paid over 500 d u r i n g t h e month. 3 cents for each item deposited u p to 500 d u r i n g the month. 2 cents for each item deposited over 500 d u r i n g t h e month. A credit allowance p e r $100 of a v e r a g e balance i s given personal accounts a t r a t e of 15 cents a n d business accounts a t r a t e of 18 cents a n d a maintenance charge of 75 cents is made. Money order and official check c h a r g e s : Cents $10 or less 20 $10.01 to $50 30 $50.01 to $100 35 $100.01 to $1,000 45 Bank G Personal a c c o u n t s : 6 cents for each check paid u p to 100' during t h e month. 4 cents for each check paid over 100 during t h e month. 10 cents for each deposit m a d e during t h e month. A monthly charge of 50 cents is made for m a i n t a i n i n g and analyzing t h e account a n d for p r e p a r i n g and mailing a statement. A monthly of 1 2 ^ cents per $100 is m a d e on average collected balances of $100 and over. Business a c c o u n t s : 6 cents for each check paid u p t o 500 d u r i n g t h e month. 4 cents for each check p a i d over 500 during the month. 3 cents for each item deposited u p to 500 d u r i n g the month. 2 cents for each item deposited over 500 during the month. A monthly charge of 50 cents is m a d e for m a i n t a i n i n g and analyzing t h e account and p r e p a r i n g a n d mailing a statement. A monthly allowance i s m a d e based upon average funds in t h e account available for investment (average realized balance less required reserves) computed a t an a n n u a l r a t e of 2.67 percent. R a t e s for cashiers checks or d r a f t s : Cents $10 or less 15 $10.01 t o $50 20 $50.01 to $100 25 $100.01 to $1,000 30 AKRON Bank A R e g u l a r checking accounts : 6 cents for each check w r i t t e n during month. 4 cents for each check w r i t t e n after 100 checks in t h e month. 3 cents for each item deposited during t h e month. 2 cents for each item deposited after 100 items in t h e month. Maintenance charge of 50 cents p e r m o n t h if balance is u n d e r $200 a n d if over $200 a n allowance is m a d e a t t h e r a t e of 10 cents for each $100 of a v e r a g e balance. Money order r a t e s : Cents $10 a n d u n d e r 10 $10.01 to $50 15 $50.01 to $250 25 THE FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS 171 Charges for official checks : Cents Up to $50 10 $50.01 and over 25 No charge is made for an official check to an established depositor unless requests appear to be an abuse. BankB Regular checking accounts: 6 cents for each check written up to 500 during the month. 4 cents for each check written over 500 during the month. 3 cents for each item deposited up to 500 during the month. 2 cents for each item deposited over 500 during the month. Maintenance charge of 50 cents is made per month and on accounts with average collected balances of $100 or more, an allowance of 10 cents per month per $100 of collected balances will be made to reduce service charges. Charges for official checks and New York drafts: Cents Up to $100 25 Each additional $100 up to $1,000 10 Each additional $1,000 10 No charge is made to an established depositor if number of checks requested is reasonable. Bank C Regular checking accounts: 6 cents for the first 100 checks paid each month. 4 cents for all checks paid over 100 each month. 3 cents for the first 100 checks deposited each month. 2 cents for all checks deposited over 100 each month. Maintenance charge of 50 cents is made per month and on accounts with average collected balances of $100 or more, an allowance of 10 cents per month per $100 of collected balances will be made to reduce service charges. Inactive accounts maintenance charges monthly: Cents Less than $100 balance 25 $100 to $199 balance 15 Over $200 balance 0 Charges for money orders and official checks: Cents Up to $10 10 $10 up to $50 - 15 $50 up to $100 20 Over $100 25 All drafts on correspondents 25 PITTSBURGH Bank A Regular checking accounts service charges computed as follows: If the minimum balance in the account at any time during the T e month is ^ charge will be— Under $100 75 cents plus 6 cents for each item.1 $100 to $149 57 cents plus 6 cents for each item. $150 to $249 39 cents plus 6 cents for each item. $250 to $349 21 cents plus 6 cents for each item. $350 to $449 3 cents plus 6 cents for each item. $450 to $549 6 cents for each item in excess of 3 free ones. $550 to $649 6 cents for each item in excess of 6 free ones. $650 to $749 6 cents for each item in excess of 9 free ones. $750 to $849 6 cents for each item in excess of 12 free ones. $850 to $949 6 cents for each item in excess of 15 free ones. $950 to $1,049 6 cents for each item in excess of 18 free ones. 1 Each check written and each check or $200 of cash deposited is considered an item. Three additional free items for each $100 of minimum balance. Any charge of 25 cents or less will not be made. 172 THE FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS Charges for official checks and drafts: For each check, draft, or money order for a customer, 20 cents. For each check, draft, or money order for a noncustomer, 50 cents. If the amount exceeds $250 an additional 20 cents is charged. Credit allowance is computed at the rate of 2.5 percent per annum on the average loanable balance (after float and reserve). Bank B Regular checking accounts: 1. Each month an earning allowance is made of 18 cents for each $100 of the minimum balance in the account. 2. Activity charges made: [In cents] Deposit items First 500 items Next 500 items, Over 1,000 items _ 3 2M 2 Charge items 6 5 4 3. Maintenance charge 50 cents monthly. Charges for official checks and drafts: Certified checks, cashiers checks or drafts 25 cents each. Bank G Regular checking account charges and allowances computed as follows: Earning credit: 1. Short analysis rate—18 cents per $100 on minimum balance—each calendar month. 2. Long analysis rate—18 cents per $100 on collected balance—each calendar month. Extent of analysis: 1. Short analysis—accounts having less than 200 deposit items or less than 400 total items per calendar month: (a) Earning credit: (1) 18 cents per $100 minimum balance each calendar month. (&) Activity count: The schedule of charges for both debit and deposit items each 6 cents. 2. Long analysis—accounts with 200 or more deposited items or 400 or more total items per month. (a) Earning credit: 18 cents on each $100 of average daily collected balance, after deducting float determined as follows: (&) Float: (1) Compute by uniformly using 2-day collection time. (2) If not equitable for any account use actual collecting time, (c) Activity count: Items deposited and debits to the account tabulated and priced separately, based upon the following two schedules: Items deposited: First 500 items, $0.03 each. Next 500 items, $0,025 each. Over 1,000 items, $0.02 each. Debits to the account: First 500 items, $0.06 each. Next 500 items, $0.05 each. Over 1,000 items, $0.04 each. Charges for official checks and drafts are made at the rate of 20 cents for personal money orders and 25 cents for cashiers checks to noncustomers. BankD Regular personal checking accounts: If at least a $200 balance is kept, the personal checking account will cost nothing. There will be no service or maintenance charge. If at least a $200 balance in any month is not kept, a single service charge of $2 will be made against the account. THE FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS 173 Special personal checking accounts: Books of 20 checks will be sold for $2 each. No maintenance charge or service charge will be made. I t will only be necessary to keep a balance sufficient to cover checks written. Corporate checking accounts: The cost of items comprising the service charge is based on the following schedule: First 50 items cost 4 cents each. Next 50 items cost 3 cents each. Next 100 items cost 2% cents each. Next 100 items cost 2 cents each. Above 300 items cost 1% cents each. A minimum charge of 25 cents will be made on any account showing a loss for the month. The following example shows the number of items that would be allowed for the lowest balance in the account during the calendar month. Lowest balance during month Minimum charge Under $100 •$100 $200 $300 $400 $500 $1,000 Number of items allowed 18 4 8 11 15 19 38 $1 None None None None None None Banks in Akron, Cleveland, and Pittsburgh, and all commercial banks in the larger cities generally offer special checking account facilities to the depositor Tvho ordinarily writes 10 or less checks per month. Such accounts are usually Teferred to as Checkmasters Budget Checking Accounts, Thrif tiChecks, Pay-asyou-go Checks, and other copyrighted names. In the great majority of instances these checks are sold at a cost to the depositor of approximately 10 cents each. The rules and regulations governing such accounts do not require minimum balances or other charges unless the account experiences unusual activity occasioned by the making of more than a reasonable number of deposits. SERVICE CHARGE SURVEY OHIO BANKERS ASSOCIATION, Columbus, Ohio, January 1962. To OB A Member Banks: Attached are the results of the recent service charge survey authorized by the OBA Bank Management Committee. This is the first comprehensive survey of charges conducted in Ohio banks for many years. The results provide a current checklist covering practically all miscellaneous services for which banks have established charges. So far as possible, we have tried to give a complete breakdown of charges in the various categories. In a few instances, the wide variance in fees has made it necessary to be somewhat general in this report. If there are any particular questions in regard to any sections of the report, the worksheets used in the recapitulation of the survey will be held in the association office so answers to such questions will be available. Of those banks reporting, nine banks indicated that they have no service charges on checking accounts although they do make charges for other services. While this report includes the range of actual charges made by Ohio banks, your attention is directed to the fact that these rates indicate charges and not actual costs. Any charges, to be realistic and fair to both the customer and the bank, should reflect costs determined by a cost-analysis study in your bank. The committee appreciates the cooperation of the more than 440 banks which returned their completed questionnaire. HOWARD B. STURGEON, Associate Secretary. 174 THE FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS REGULAR CHECKING ACCOUNTS FLAT SERVICE CHARGE 104 banks make a flat service charge. Charges are made as follows: Monthly: 4, at $0.25; 2, at $0.35; 11, at $0.50; 2, at $0.75; 2, at $1; and 1, at $2. Quarterly: 4, at $1; 3, at $1.50; and 3, at $3. Semiannually: 1, at $0.50; 1, at $0.75; 6, at $1; 6, at $1.50; 11, at $2; and 9, at $3. Annually: 1, at $2; 2, at $3. Miscellaneous flat service charges 3 banks charge semiannually per check written as follows: 1 to 30 checks, $1.50; 31 to 60 checks, $2.50; 61 to 100 checks, $3.50; 101 to 140 checks, $4.50; 141 to 180 checks, $5.50; over 180 checks, $0.02 each. 1 bank, $0.50 per month plus 3 cents a check. 1 bank, $0.50 per month plus 4 cents a check. 1 bank, $1 semiannually plus 2 cents a check. 1 bank, $0.75 per month if balance below $75. 1 bank, $0.75 per month if balance below $100. 1 bank, $0.50 per month if balance below $5,000. 1 bank, $0.50 per month if balance below $50. 1 bank, $0.75 per month if balance below $50. 1 bank charges $2 each 4 months. 1 bank charges $1 for each full statement. 1 bank charges $1 quarterly plus 2 cents a check for all over 50 checks. 1 bank charges $0.25 a month plus 2 cents a check for all over 12 checks. 20 banks did not furnish charges. C H A R G E S MADE ON A N A N A L Y S I S B A S I S 42 banks use average balances to determine charges. 295 banks use minimum balances to determine charges. 25 of the above 295 banks use average balances for their commercial checking accounts. 1 bank reported average balance used for accounts over $1,000. 1 bank reported average balance used for accounts over $4,000. 9 banks did not furnish charges. 23 banks make a maintenance charge of $0.25 per month; 30, at $0.35; 1, at $0.40; 1, at $0.45; 164, at $0.50; 1, at $0.54; 20, at $0.60; 38, at $0.75 and 32 make no charge. Miscellaneous monthly maintenance charges 1 bank reported $0.50 monthly charge if balance below $20. 5 banks reported $0.50 monthly charge if balance below $50. 1 bank reported $0.50 monthly charge if balance below $100. 1 bank reported $0.50 monthly charge if balance below $400. 1 bank reported $0.65 monthly charge if balance below $200. 1 bank reported $0.50 monthly charge entitles depositor to 5 free checks. 1 bank reported*$0.50 monthly charge entitles depositor to 16 free checks. THE FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS M I N I M U M SERVICE CHARGE PER 175 MONTH 192 banks reported no minimum monthly service charge. Other banks reported charges as follows: Minimum charge N u m b e r of banks 4 1 4 ___ 67 12 1 2 3 4 6 $0. 10 . 11 . 15 . 16 .20 .25 .35 .50 .75 . 10 .25 .25 .25 .25 .25 .25 .35 .35 .35 .50 .50 .50 .50 .50 .50 .50 .50 .50 .50 . 50 .50 .50 Includes free checks 0 0 0 0 0 0 0 0 0 1 0 1 2 3 4 5 1 3 6 1 2 3 5 7 10 16 20 Free items deposited 0 0 0 0 0 0 0 0 0 0 4 0 0 0 0 10 0 0 0 0 0 0 0 0 0 0 0 0)2 (3) ( 4) ( 6) () If balance below $50. 2 free checks per $100 of balance. 5 free checks per $100 of balance. 7 free checks per $100 of balance. 1 free check per $10 of balance. Miscellaneous minimum service charges per month 2 banks reported minimum charges as follows: $0.50 per month of balance below $50 plus $0.03 a check, Higher balances earn credit as follows: $100 to $250,3 free checks. $251 to $500, 5 free checks. $501 to $750,10 free checks. $751 to $1,000,15 free checks. $1,001 to $1,500,20 free checks. $1,501 to $2,000, 25 free checks. $2,001 to $2,500,30 free checks. $2,501 to $3,000,35 free checks. $3,501 to $4,001,40 free checks. 176 THE FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS Three banks reported: Minimum charge per month Balance Under $50 _ $51 to $100 $101 to $150 $151 to $200 $201 to $250 $251 to $300 __ __ Items earned 1 3 5 7 9 11 $0.50 .50 .50 .50 .50 .50 __ All over, at $0.03 per item. Two banks reported as above except minimum charge per month of $0.35. One bank reported for personal accounts as follows: Minimum charge per month Balance $450 to $500 $400 to $450 $350 to $400 $300 to $350 $250 to $300 $200 to $250 $150 to $200 $100 to $150 $50 to $100 $0.01 to $50 None None None None None $0.20 .40 .60 .80 1.00 __ _ Items earned 22 19 16 13 10 10 10 10 10 10 One bank reported: $0.03 per check charge, with two free checks a month regardless of balance, plus two free checks a month for each $100 balance. If balance below $100, $0.50 per month. ACTIVITY CHARGE FOR EACH CHECK PAID Thirteen banks reported no activity charge, others reported as follows: 10 at $0.02 per check; 103 at $0.03; 2 at $0.03% ; 62 at $0.04; 92 at $0.05; 18 at $0.06; and 2 at $0.07. Miscellaneous activity charges for checks paid Charge per check Number of checks . 04 all over. 3 $0.05 1st 500 1 $0. 05 1st 300; $0. 04 all over. 2 $0.051st 100; $0.04 all over. 1 $0. 05 1st 200; $0.02 all over. 1 $0.05 1st 200; $0. 03 all over. 1 $0. 051st 25; $0. 04 all over. 3 $0.06 1st 100; $0.04 all over. 1 $0.061st 200; $0. 04 all over. 2 $0. 06 1st 500; $0.04 all over. 3 $0. 04 1st 500; $0.02 all over. 1 $0.04 1st 200; $0. 03 all over. 1 $0.04 1st 200; $0.02 all over. 1 $0.041st 100; $0. 03 all over. 1 $0.031st 500; $0. 02 all over. 1 $0.041st 50; $0.03% next 50; $0.03 next 100; $0.02 all over 200. 1 $0. 05 1st 100; $0. 04 next 100; $0.02 all over 200. 1 $0. 05 1st 100; $0. 03 next 400; $0.02 all over 500. 1 $0. 05 per check if minimum balance $500 or less. 1 $0. 07 per check if minimum balance $500 or less. 1 $0.05 1st 500; $0. 04 next 1,000; $0.03 all over. 7 Reported business accounts charged as follows: $0.05 1st 100; $0.04 next 100; $0.03 next 100; $0.02 all over 300. THE FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS ACTIVITY CHARGE FOR EACH CHECK 177 DEPOSITED One hundred thirty-four banks reported no activity charge; others reported as follows: On U.S. and foreign checks Of the banks, 2 charge $0.01 per check; 2 at $0.01% ; 5 at $0.02; 4 at $0.02% ; 59 at $0.03; 23 at $0.04; 31 at $0.05; and 3 at $0.06. Charges only for foreign checks deposited Of the banks, 4 charge $0.02; 1 at $0.02% ; 22 at $0.03; 13 at $0.04; 9 at $0.05; and 1 at $0.06. Miscellaneous activity charges for checks deposited Number of banks 1 4 3 1 3 4 1 1 1 1 1 1 1 1 Charge $0.0iy 2 1st 5,000; $0.01 all over. $0. 03 1st 100; $0. 02 all over. $0.03 1st 500; $0. 02 all over. $0. 04 1st 100; $0. 03 all over. $0.04 1st 200; $0. 02 all over. $0.04 1st 500 j $0.02 all over. $0.04 1st 200; $0.03 next 300; $0. 01 all over. $0. 05 1st 100; $0.03 next 400; $0.02 all over. $0.04 1st 50; $0.03% next 50; $0.03 next 100; $0.02 over 200. $0.02% per check accounts with balances over $1,000; $0.06 under $1,000. $0.02 business accounts only. $0.04 business accounts only. No charge if balance above $200; $0. 05 if below. $0.05 if balance below $500; over $500, $0.05 1st 100 checks; $0.03 next 400; $0. 02 all over. EARNINGS CREDIT Twelve banks reported no earnings credit given: Other banks reported credits as follows: Basis: Number of banks Average balance 237 Low balance 40 Median 5 Earnings credit rate in cents per $100 of balance: 1 bank pays $0.03; 6 at $0.05; 1 at $0.06; 5 at $0.08; 1 at $0.09%; 140 at $0.10; 25 at $0.12; 8 at $0.12%; 1 at $0.13; 8 at $0.14; 10 at $0.15; 1 at $0.18; and 5 at $0.20. Miscellaneous earnings credit Number of banks: 1 1 free check for each $10 of balance. 5 2 free checks for each $100 of balance. 2 4 free checks for each $100 of balance. 1 5 free checks for each $100 of balance. 1 $0.01 credit for each $10 of balance. 6 Give earnings credit after deduction for float. Several banks reported no allowance for credit for balance under $100; others $200, $300, $400, and $500. SERVICE CHARGE WAIVED One hundred and fifty-four banks waive monthly service charges as follows: 2 banks if charges are less than $0.05; 5 at $0.09; 61 at $0.10; 3 at $0.11; 2 at $0.13; 26 at $0.15; and 50 at $0.25; 1 bank makes no charge if fewer than 2 checks written; 1 if fewer than 3 checks; 1 if a $200 balance is maintained; and 1 if there is no account activity for the month. 178 THE FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS SPECIAL STATEMENTS Thirty-four banks reported charges for special statements: 1 bank charges $0.05 ; 18 at $0.25; 9 at $0.50; 5 at $1; and 1 at $1.25. HIGH VOLUME CHECKS Approximately 50 Ohio banks reported a special schedule of charges for activity and earnings credit. In every case, banks have reduced the activity charge on high volume checks. The formulas used, which are too numerous to list, call for a basic charge per item up to a certain number, then a reduced item charge. Earnings credit in most cases on high volume accounts is based on average balance. SPECIAL CHECKING ACCOUNTS Fee for each check posted Four banks reported at $0.02 each; 1 at $0.03; 3 at $0.05; 1 at $0.06% ; 2 at $0.07y2 ; 2 at $0.08; and 69 at $0.10. Books of special checks are sold as follows Of the banks, 1 sells 25 checks for $ 1 ; 3 sell 15 checks for $1; 2 sell 20 checks for $1.25; 13 sell 25 checks for $1.50; 3 sell 25 checks for $1.95; 4 sell 25 checks for $2; 1 sells 30 checks for $2; 22 sell 25 checks for $2.50; and 8 sell checks for printing cost only. Special checking account statements Twenty-four banks render statements monthly: 5 bimonthly; 81 quarterly; 3 semiannually; 14 when statement sheet is full; 11 on request; and 1 when 5 checks have been posted. Monthly maintenance charges on special checking accounts Eleven banks charge $0.25 per month; 2 at $0.35; 1 at $0.50; and 1 charges $2 each 6 months. Miscellaneous charge on special checking accounts Three banks reported charges $1 for NSF checks; 4 charge $1 for returned checks; 3 charge $1 for using wrong check; 8 banks reported charges for interim statements : 4 at $0.50; 2 at $0.25; and 2 at $0.20. MISCELLANEOUS SERVICE CHARGES CASH PAYROLLS AND LARGE CASH DEPOSITS A wide variance of charges was reported by a few banks: 4 banks charge $0.10 per $1,000; 12 at $0.25; 4 at $0.75; and 1 at $2. Other banks report charges per hour from $0.25 to $3. Wrapped coin charges range from $0,006 to $0.02 a roll. CERTIFYING CHECKS Eighty-eight banks do not charge for certification; 21 banks reported charges of $0.10; 1 at $0.12; 16 at $0.15; 1 at $0.20; 123 at $0.25; 29 at $0.50; 1 at $0.75; and 3 at $1. Miscellaneous charges for certification 2 banks charge $0.10 per $100.00. 2 banks charge $0.15 per $100.00. 2 banks charge $0.20 per $100.00. 1 bank charges $0.10 per $100.00 with $1.00 maximum. 1 bank charges $0.15 per $100.00 with $1.00 maximum. 1 bank charges $0.20 per $100.00 with $1.00 maximum. 1 bank charges $0.25 minimum with $1.00 maximum. 1 bank charges $1 per $100. CHECKS DRAWN ON OTHER B A N K S RETURNED UNPAID 184 banks do not charge. 1 bank reported charges of $0.15; 16 at $0.25; 14 at $0.50; 1 at $0.75; 17 at $1.00 and 2 at $2. THE FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS CLOSING C H E C K I N G AND S A V I N G S A C C O U N T S 179 PREMATURELY Checking accounts A few banks reported as follows: 4 charge $0.25; 15 at $0.50; 1 at $0.60; 11 at $ 1 ; 3 at $2. Period allowed before charging from 30 days to 6 months. 204 banks reported no charge; others did not answer. Savings accounts 14 banks charge $0.25 ; 5 at $0.35 ; 155 at $0.50; 2 at $0.75; 39 at $1 and 6 at $2. Period allowed before charging from 30 days to 6 months, with over 100 banks indicating 6 months. 133 banks reported no charges, others did not answer. INSUFFICIENT FUNDS Paying NSF checks 1 bank reported charges of $0.10; 43 at $0.25 ; 60 at $0.50; 98 at $1 and 7 at $2. Returning NSF checks 39 banks reported charges of $0.25; 92 at $0.50; 4 at $0.75; 133 at $ 1 ; 1 at $1.25; 3 at $1.50; 37 at $2; and 1 at $2.50. NIGHT DEPOSITORY Refundable deposit charges reported by 32 banks range from $0.75 to $9 per bag with 10 banks reporting $5 and 6 banks $3. Banks reporting fees on an annual basis are as follows: 3 banks at $3; 6 at $3.50; 2 a t $4; 22 a t $ 5 ; 15at$6; 20 at$10; and 11 at $12. 18 banks reported charges on a per-drop basis varying from $0.08 to $0.25 each drop. OFFICIAL CHECKS A complete recap of fees charged by banks for issuing cashier's checks, drafts, money orders and other official checks is too extensive to be included in this report. A general summary can be made as follows: Fees range from $0.10 per 100 and $0.10 for each $100 over this amount to $0.50 per $100 and $0.50 for each $100 over. Between these limits every schedule possible is charged; however, on careful analysis, the vast majority of Ohio banks reported a basic minimum fee of $0.15 for issuing an official check. OVERDRAFTS 188 banks indicated no charge for overdrafts. 22 banks reported a charge of $0.25 per overdraft; 45 at $0.50; 3 at $0.75; 65 at $1; 1 at $1.50; 4 at $2; 5 banks indicated a charge of 6 percent of the overdraft amount: 4 banks charge $0.25 per day; and 6 at $0.50 per day. STOP P A Y M E N T S Original order Charges reported on the original stop-payment order are as follows: 1 bank at $0.10; 31 at $0.25; 40 at $0.50; 28 at $1; 1 at $1.50; and 1 at $2. 1 bank reported a monthly charge of $0.25; 1 at $0.50 monthly charge; and 1 bank $1 a month. Renewal order 17 banks charge $0.25 for renewal orders; 19 at $0.50 and 14 at $1 while 2 banks charge $0.50 a month and 1 bank $1 a month. COLLECTION SERVICES Incoming and outgoing notes, drafts^ etc. As with official checks, banks reported a wide range of charges for collection of notes, drafts, etc., and a complete tabulation of all replies is impracticable. However, a vast majority (310) of the banks reported a basic fee of 1/10 of 1 percent on the amount of the transaction. In these 310 banks which reported this basic fee, there is little uniformity in the minimum and maximum fees charged. The minimum fees range from $0.10 to $ 1 ; and the maximum fees from $0.50 to 1/10 of 1 percent. 48 banks reported no charge for this service. 180 THE FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS U N I T E D STATES A N D OTHER BOND COUPONS 19 banks reported charging $0.03 per coupon collected; 3 at $0.04; 72 at $0.05; 21 at $0.10; 15 at $0.25; and 3 at $0.50. Miscellaneous charges for bond coupons 8 banks charge $0.15 per $100 of coupons. 4 banks charge $0.50 per $100 of coupons. 3 banks charge $0.15 per $1,000 of coupons. 5 banks charge $0.50 per $1,000 of coupons. 10 banks charge $1 per $1,000 of coupons. 32 banks charge 1/10 of 1 percent of the amount. 5 banks charge $0.10 per envelope. 3 banks charge $0.15 per envelope. 14 banks charge $0.25 per envelope. RENT OR MORTGAGE P A Y M E N T S 8 banks charge $0.50 per payment; 2 at $0.75; 9 at $ 1 ; 2 at $1.50 and 1 at $2. Miscellaneous charges for rent or mortgage payments 1 bank charges $0.35 minimum to $1 maximum. 1 bank charges $0.50 minimum to $1 maximum. 1 bank charges $1 minimum to $2 maximum. 1 bank charges 1/10 of 1 percent. UTILITY COMPANY P A Y M E N T S 1 bank receives $0.02% per payment; 2 at $0.03; 1 at $0.04% ; 55 at $0.05; 5 at $0.06; 18 at $0.10. Miscellaneous fees on utility company payments 1 bank receives $0.15 per $100. 1 bank receives $0.25 per $100. 1 bank receives $25 per year. 1 bank receives $14 per month. 3 banks receive $25 per month. 1 bank receives $0.25 for 4 payments. 1 bank receives 2 percent of the payment. 1 bank receives $1 per $1,000. TRANSFERRING F U N D S BY WIRE 8 banks reported charging for this service per transfer as follows: 1 at $0.30; 1 at $0.35; 1 at $0.40; 3 at $1; 1 at $1.25 and 1 at $1.50. UNCOLLECTED F U N D S Only 4 banks indicated fees for paying checks on uncollected funds. One bank reported a $0.50 per item charge; 1 at $1 and 2 at $2. ACCOUNT RECONCILEMENT Punched card checks 1 bank charges $0.01; 3 at $0.01% and 1 at $0.05. Paper checks 1 bank charges $0.01; 1 at $0.01% and 3 at $0.02%. ESCROW SERVICES Minimum charge for escrow services: 1 bank reported $5; 1 at $20; 2 at $25; l a t $40; and 2 at $50. LOCK BOX Simple photostat plans 3 banks charge $0.10; 2 at $0.15; and 1 at 1% percent. THE FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS 181 LATE PAYMENTS ON INSTALLMENT LOANS Charges based on percentage and/or maximum charge 2 banks charge 5 percent with a $1 maximum late payment fee. 84 banks charge 5 percent with a $3 maximum late payment fee. 5 banks charge 5 percent with a $5 maximum late payment fee. 6 banks charge 6 percent with a $3 maximum late payment fee. 2 banks charge 8 percent with a $2.50 maximum late payment fee. 12 banks charge 5 percent no maximum charge. 7 banks charge 6 percent no maximum charge. 2 banks charge .25 as a late payment fee. 3 banks charge $1 as a late payment fee. 12 banks charge $3 as a late payment fee. 2 banks charge $5 as a late payment fee. 1 bank charges $0.50 per day. 1 bank charges $1 for each 5 days of delinquency. Minimum service charge on short-term loans Number of banks 3 ... 22 5___ 84 13 64__. 17 49__. 6 _ Minimum charge $0. 25 .50 .75 1.00 1.50 2.00 2.50 i 3.00 4.00 Number of banks 30 1 1_._ _ 3 2 1 1 1 (percent) Minimum charge $5.00 $6. 00 $7. 00 $7.50 $10. 00 $11. 00 $15. 00 7 SAFE DEPOSIT BOXES Six Ohio banks reported having no safe deposit boxes for rent; 393 banks do not require a key deposit; 8 banks require deposits of from $1 to $3. If lost, one bank charges $0.50; one at $1; and one at $2. Annual rentals charged by Ohio banks vary more than charges for any other service. Rents for the smallest boxes ( 1 ^ by 4% inches and 2% by 5 inches) range from $1.50 to $6. The average charge is $3.25. From the smallest to largest boxes, rentals range up to $200 for a 24- by 24-inch chest. The average charge for the largest boxes is $12. Although it would be very difficult as well as of doubtful value to list every rental reported, it would seem from a careful study of the questionnaire that a typical range of $3 to $15 is the prevailing charge in Ohio banks. BANK MANAGEMENT COMMITTEE, OHIO BANKERS ASSOCIATION. HOWARD B. STURGEON, Associate Secretary. Mr. VANIK. I have one further question on the economic reports of the bank, which I appreciate very much. Mr. HICKMAN. Thank you. Mr. VANIK. And I think this is a very good service. But it seems to be primarily oriented toward the business community. And I was wondering why this economic report, if it is going to be truly that, and if it is going to be a fully useful service, why it shouldn't also include some of the other information. Why shouldn't it develop into more of a community service, and tell us more about the plant migrations, the countless numbers of people that are being thrown out of employment by automative processes in the community, the 182 THE FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS concentration of unemployment in the Federal Reserve district. Information could usefully indicate whether or not it is in the labor market area as constituted, or whether it is in the central urban city. I feel that if your economic report could be broadened in this respect, it would have wider community usage, and guide more people than merely the business community. I would like to have it guide the manpower agencies, the retraining agencies, and some of the other forces that are concerned with the problems of the unemployed and the undertrained people, and the displaced. Mr. H I C K M A N . We do report in Cleveland weekly, in press releases weekly, the unemployment statistics, the employment figures. Mr. V A N I K . All you do is simply take a total given to you by the local labor office. But I would like a guide Mr. H I C K M A N . Then we have a survey—we have just put out— based on Government records, it is true, analyzing developments in the different regions throughout the area, which has been very helpful, I think, in this type of planning. Mr. V A N I K . Yes; it has. Mr. H I C K M A N . We put out agricultural reports biweekly. And we try to cover as broad a range as we can. But I must say that I am sure we don't cover everything. Naturally, we try to concentrate on the things that are of some major import in this policymaking process that we have a small p a r t in. Mr. V A N I K . Well, I want to say that I consider this function a very important and useful service by the bank. I use it, I refer to it. I t tells me in some way why you should belong and participate in some of the organizations that you do. I am asking that you widen the scope of that, so that it has more community usefulness. Thank you. The CHAIRMAN. F o r the benefit of the members of the committee, we expect to have, of course, all 12 of the Presidents of the Federal Reserve banks, Boston, New York, Philadelphia, Cleveland, Richmond, Atlanta, Chicago, Denver, St. Louis, Minneapolis, Dallas, and San Francisco. This gentleman, the President of the Federal Reserve Bank of Cleveland, happened to be first. The members of the staff called the different Presidents of the Federal Reserve banks, and tried to determine from them when it would be most convenient to appear. And we have arranged their appearance in the order of their request as much as possible. Now, after all the members of the committee have been recognized for 10 minutes, then we will start back, and the members will not have a limit on their time, because this is very important. The 12 Presidents of the Federal Reserve banks—I think it is very important that we interrogate each one of them as long as we should in order to get the information that will be helpful to us in determining what has happened to the Federal Reserve System in the last 50 years, and also to determine what should be done with the bills that are now pending before this committee. The CHAIRMAN. Mr. Harvey ? Mr. HARVEY. Am I correct that the volume of checks has been increasing constantly in recent years ? THE FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS 183 Mr. H I C K M A N . Yes, it h a s ; roughly at the rate of 5 percent per annum. Mr. HARVEY. H O W long has that increase been taking place ? Mr. H I C K M A N . We have trend lines going back 30 or 40 years. I don't have the full sweep of it. I t has been going on certainly since the establishment of the Federal Reserve System. The Federal Reserve System has had a great deal to do with the encouragement of the use of checks. Mr. HARVEY. So, the fact that the commercial banks have not raised check charges indicates that at least the cost of this increased volume is not being passed on to the depositor; is that correct ? Mr. H I C K M A N . That is correct; yes. Mr. HARVEY. I have no further questions. The CHAIRMAN. Senator Pepper ? Mr. PEPPER. Thank you, Mr. Chairman. Mr. Hickman, how many stockholders do you have in your bank ? Mr. H I C K M A N . That is the number of member banks—513. Mr. PEPPER. NOW, our information is that you send out something over 8,000 copies of your 1962 annual report at a cost of something over $5,000. Mr. H I C K M A N . T h a t is right. Mr. PEPPER. Was there any cheaper way in your opinion whereby you could have disseminated the same data to your stockholders ? Mr. H I C K M A N . Well, the banks in the district get this truncated statement here, the actual financial statement, which contains the balance sheet and the income statement of the bank. The annual report itself contains a good deal more than that. I t contains the economic review of the year, the situation in the major industries, the major events, a log of the year, the effects on monetary policy, and so forth, which is designed for the general use of the people in the district. I have a copy of the 1963 annual report here, sir. I don't have a 1962 report, but I think this would give you a little idea, if you look at it. I t is an attractive document. And we are very proud of it. I think it is a good way of getting information across about what we do, what we are interested in, what we try to take account of. Mr. PEPPER. May I ask you to define in your own words, if you will, what is the function of the Open Market Committee—what is the objective of its function ? Mr. H I C K M A N . Well, as I understand it the principal objective of the Federal Open Market Committee is to review the economic situation and financial situation, the balance-of-payments position, and so forth, and in the light of that, to make periodic—that is, every 2 or 3 weeks—adjustments in the volume of bank credit, marginal adjustments in the volume of bank credit, appropriate to those emerging trends in economic and financial conditions. Mr. PEPPER. Are they primarily concerned with the purchase and sale of Government bonds ? Mr. H I C K M A N . U.S. Government securities—bills, notes, and bonds. That is correct. Mr. PEPPER. NOW, is the objective of that function to maintain a stable market in Government bonds or to support the value or the market of Government bonds at the face value of the bonds ? 184 THE FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS Mr. H I C K M A N . Well, the purpose of it is, as I have said, to provide the proper amount of bank credit. Mr. PEPPER. Beg pardon ? Mr. H I C K M A N . The function of the committee is to provide the appropriate amount of bank credit, so that the economy can grow at a sustainable rate. If the economy is lagging behind, of course, you would have a decline usually in bond yields, a rise in bond prices, because there would not be much demand for credit. On the other hand, if you were to have exuberance in the economy, rising prices, an outflow of gold and that sort of thing, you would have rising bond yields and falling bond prices. Mr. PEPPER. I S the function of the Open Market Committee to maintain a sort of support price program—in which you consider bonds as a commodity in the marketplace? Mr. H I C K M A N . They are a type of intangible asset traded in the marketplace. But we do not attempt to peg the price of bonds, although that was, as you know, the policy of the system during the war and the early postwar years, u p to early 1951. Mr. PEPPER. Well, I remember, Mr. Hickman, during World W a r I the great patriotic appeal which was made to the people of our country to buy bonds, the little people as well as the large people, financially. And a lot of people took their savings and bought Government bonds, feeling that they were making a patriotic contribution toward the waging of the war. Mr. H I C K M A N . T h a t is right. Mr. PEPPER. A little while later the value of those bonds declined very severely, and those people who bought those bonds for a patriotic purpose lost a great deal of money, having put their faith in their country. Now, is that, you think, the way it should be ? And does the Open Market Committee tend to prevent the recurrence or the happening of that sort of thing ? Mr. H I C K M A N . Well, I think that the nonmarketable bond that was used in World W a r I I was an excellent device for avoiding a repetition of that most unfortunate experience—the dumping of bonds in the early postwar years after World W a r I. Mr. PEPPER. ThaJt did not happen with respect to World W a r I I bonds? Mr. H I C K M A N . Well, to some extent it did, although quite a few of those were nonnegotiable, nonmarketable—the 2%s, I believe, were not marketable instruments. Of course, all the E-bonds were the same general type. Mr. PEPPER. S O Mr. H I C K M A N . The smaller investors held those. The larger investors, the large life insurance companies and the long-term investors in marketable bonds I think had some idea of what they were up against. Mr. PEPPER. Well, at what price is the purpose of the Open Market Committee to maintain the Government bond market ? Mr. H I C K M A N . We have no price objectives on Government bonds. Mr. PEPPER. Well, what is the principle that governs your decision? THE FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS 185 Mr. H I C K M A N . Our decisions are governed by an attempt to provide the appropriate amount of bank credit, so that we will have a sustainable growth in our economy, maximum employment, maximum purchasing power, stability in the foreign exchanges, and so forth. Mr. PEPPER. Well, is it the functioning of the Open Market Committee which determines the bond market for Government bonds in the United States ? Mr. H I C K M A N . Well, to some extent we have something to do with it. There is no doubt about that—because we are a buyer and seller of Government bonds in large amounts ? Mr. PEPPER. Actually, I had understood that what you do is for the purpose of stabilizing the bond market or giving it value, and I assumed therefore that what you did determined what the value of the Government bond market was, or the Government bonds of the country, at different times. And I was trying to determine what guides you, in making the decision as to—at what point you will fix the value of a Government bond. Mr. H I C K M A N . That is not our primary objective, sir. Our primary objective is to provide the appropriate amount of bank credit so as to finance a sustainable expansion in our economy. Mr. PEPPER. Well, then, so far as the Open Market Committee is concerned, you are not an instrumentality for maintaining a minimum value or stable value for the U.S. bonds % Mr. H I C K M A N . Ordinarily we are not. There have been periods when the objective of the System was to peg the Government bond market. That was in the period from about 1942, as I recollect, through 1951. Mr. PEPPER. That was at one time during that period the policy of the Open Market Committee ? Mr. H I C K M A N . That is correct. And during that period, of course, after the war, we had a very great inflation. F r o m the end of the war, 1947 to 1951, bonds were sold to the Federal Reserve System in very large volume. And this became part of the monetary reserves of the banking system. And the banks loaned the money out, inflated the money supply, and this caused prices to rise. Actually, wholesale prices in that period went up about 70 percent, or something like that. Mr. PEPPER. S O you no longer peg the bond market as you did up to 1951? Mr. H I C K M A N . That is correct. Mr. PEPPER. And the effect that you have now by your functioning upon the bond market is an incidental effect. Mr. H I C K M A N . That is correct. Mr. PEPPER. YOU are primarily concerned with Mr. H I C K M A N . With the Employment Act of 1946. Mr. PEPPER. With the health of the economy. Mr. H I C K M A N . According to the Employment Act of 1946—we try to do what we can in this area to promote the objectives of national economic policy as outlined in the Employment Act. Mr. PEPPER. I am afraid my time is up. Thank you very much. The CHAIRMAN. Mr. Bolton? Mr. BOLTON. Thank you, sir. I would just like to tell Mr. Hickman I am sorry that my plane was late getting back from Ohio and I was not here to hear the beginning of his testimony. I have no questions at this time. 28-680H-64—VOL 1 13 186 THE FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS The CHAIRMAN". Mr. Minish ? Mr. M I N I S H . Thak you, M r Chairman. Mr. Hickman, last summer Chairman Martin told us that a marked deterioration of credit had taken place in the financing of the construction of multifamily apartment projects, shopping centers, motels, and similar types of commercial establishments. May I assume you would agree with this observation? Mr. H I C K M A N . I think that a deterioration occurred. Mr. M I N I S H . I t did occur. Mr. H I C K M A N . I t did occur. Mr. M I N I S H . Don't you think it would have an effect on the economy by throwing a lot of people out of work ? Mr. H I C K M A N . I f it had been allowed to continue unabated, I think it would have culminated in unsound credit conditions, bankruptcies, and unemployment. I think that fortunately the rate at which the credit supply was expanding has decreased of late, and as a result there has been less of this deterioration. And I hope, with the "salad oil" scandal and the rest of it and the warning signals flown as a result of that, that we will perhaps have improved credit standards. Mr. M I N I S H . The chairman of our committee, Mr. Patman, has requested of Chairman Martin the minutes of the Open Market Committee for the years of 1960, 1961, 1962, and 1963, turned over to the committee. How do you fell about that ? Mr. H I C K M A N . Well, I am not on the Open Market Committee, you understand, so I have no Mr. M I N I S H . Aren't you an alternate member ? Mr. H I C K M A N . I am an alternate member. B u t I don't vote on this. Mr. M I N I S H . Do you have any feeling on it at all ? Mr. H I C K M A N . Yes, I have some feelings on it. I can tell you what my feelings are at the moment. I have not had a chance to study this thing in detail. I have read these minutes only since about I960. I don't recall what is in them. But the minutes do contain a great deal, particularly of late, having to do with our relations in the swap transactions with foreign countries, and the problems that they are having—just as we are having—in sustaining the value of their currencies internationally. This is confidential information; and it would be damaging to us, if it became public. So I should think that, subject to perhaps the deletion of this material, it would be appropriate for people to have it—except, perhaps, the minutes for 1962 and 1963. I think when you go back to 1960 and 1961, then it might be possible, after this material is deleted, to have these documents distributed. Naturally I think they should be open to everybody, not just this committee. Mr. M I N I S H . W h y are you against the 1962 and 1963 ? Mr. H I C K M A N . I am afraid that the thrust of monetary policy would become apparent to everyone in the market, and this might have an adverse effect on our currency, on the bond market, and so forth. Or it might have a favorable effect. I t might cause bond prices to rise. I t might be used by speculators in all sorts of ways. But I THE FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS 187 would like to study this whole matter before I make a final conclusion on it, because I really haven't had a chance to examine these records from this point of view, in their entirety. Mr. M I N I S H . That is all, Mr. Chairman. The CHAIRMAN. Mr. Brock? Mr. BROCK. Thank you, Mr. Chairman. Mr. Hickman, I think Mr. Pepper raised the point of the previous actions of the Open Market Committee in pegging the price of Government bonds. Now, the market as established today—has not the price of Government bonds been dependent completely upon loan demand in this country ? Mr. H I C K M A N . Supply and demand. Mr. BROCK. I t is supply and demand. And as your demand for loans increases, it does have a direct relationship to the yield and the price of the bond. Mr. H I C K M A N . T h a t is right. Mr. BROCK. If the Open Market Committee were to try to peg the bond market at any particular level for some particular reason, monetary policy to protect the Government debt, or whatever purpose it had, what would be the effect if we attempted to peg the market— how would it affect our actions in sustaining the economy, as you put the goal ? Mr. H I C K M A N . Well, if you would attempt to hold yields at some given level below the natural market level, the holders of Government bonds would sell the bonds to the Federal Reserve, the pegging authority. This would, of course, create reserves. Mr. BROCK. But could it not get into a situation whereby attempting to control the bond market you might be doing the exact opposite to the economy that you were trying to achieve ? Mr. H I C K M A N . T h a t is quite correct, sir. I t might be. I t would depend upon the circumstances, of course. Mr. BROCK. Wouldn't it quite often be true ? Mr. H I C K M A N . Quite often it would be true. I think the ambient conditions would govern whether or not the economy would move in the proper direction. If we had inflationary tendencies latent in the economy, and if we would peg bond prices, this would result in a sharp runup in bank reserves. Using an expansion ratio of 8 to 1, this would result in a large increase in demand deposits, and money in circulation ; it would have an adverse effect, of course, on the price level and cause price inflation in the country. This would, in turn, cause an adverse flow of gold, put pressure on the foreign exchanges, and thus damage the country, under those circumstances. Mr. BROCK. T h a t is the point. I think it has been suggested by some that we are not being fair to the average American about charging too much interest. And if we try to put a ceiling on interest, would we not have quite a tendency to run up prices, and in effect vitiate his purchasing power, in perhaps even a more destructive manner than by charging higher interest. Mr. H I C K M A N . Yes; I think that is correct, Mr. Brock. You can control the Government bond market, and lose control of the price level, or you can let the Government bond market fluctuate in response 188 THE FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS to supply and demand conditions, and hope to have some measure of control over the price level. And that is roughly what we try to do, while considering at the same time employment and growth in real gross national product, and so forth—doing what we can to encourage growth in those areas. Mr. BROCK. Thank you very much. The CHAIRMAN. Mr. Hanna ? Mr. H A N N A . Thank you, Mr. Chairman. Mr. Hickman, I presume that you are actually paid out of the income of the bank, just as it takes care of all of the rest of its costs, is that right? Mr. H I C K M A N . That is correct; yes. I am paid out of the income of the bank. And, of course, the officers' salaries of the bank are approved every year by the board of directors, and then by the Board of Governors. Mr. H A N N A . The Board of Governors Mr. H I C K M A N . The Federal authority in Washington. So, while we are paid out of our income, the level of spending in this area, as well as in others, is controlled by the Government. Mr. H A N N A . I n that framework of reference, do you consider that you are in a sense a Government or civil employee, or an employee of private enterprise activity ? Mr. H I C K M A N . Well, I would say that I am half one and half the other. A Federal Eeserve bank is a quasi-governmental organization. I t is controlled by the Government, and the capital is supplied by the banking System. The directors are part Government directors, part bank directors, part businessmen. And so you have this mixture of the public and private. And I, as an officer of the bank, feel that I am responsible first to the directors; but I hold my job, of course, with the consent of the governing body in Washington. Mr. H A N N A . NOW, in that regard, it is fairly clear from your testimony that you are fully aware, as I suppose most well-informed people are today, that the decisions you make in the office that you hold affect not only the private sectors of our economy, but the public as well. That is a fair statement; is it not ? Mr. H I C K M A N . Yes, that is correct. Mr. H A N N A . Now Mr. H I C K M A N . Of course, I think that all of us are part of the public, the economy, in a very broad sense. There is no such thing as public and private really in this general sense. We are all p a r t of this great country. We profit as the country^ profits, and we suffer as the country suffers. We are all interested in both the Nation and the individual. Mr. H A N N A . Of course, that only takes meaning when you get down to particulars. Mr. H I C K M A N . That is right. Mr. H A N N A . NOW, in the conclusions that are made now in the functions of the Federal Reserve System, in which you participate, in what way does the public condition and the information about the public agencies and their particular concerns get to you when you make these decisions? THE FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS 189 Now, as I understand it, each one of the Presidents of a Federal Reserve bank has an area in which he, as you told us, draws his material from the industries and commerce in the area. And he takes that information to the large body. Do you have any avenues from which you draw information from public bodies throughout the United States and here in Washington, in a like manner? Mr. H I C K M A N . Oh, yes; we do, sir. Mr. H A N N A . Are you Mr. H I C K M A N . The Federal Eeserve Board itself, of course, has its own production figures. The Department of Commerce has the gross national product figures. The Department of Labor has the figures on prices. And so it goes. And we use all this. And then we use local area data supplied by Government agencies frequently— as well as data supplied by business enterprise, by consumer surveys, by department stores, and so forth. Mr. H A N N A . NOW, in talking about particular decisions that you make, do you feel that you—any particular primary allegiance either to the member bank stockholders or to the directors of your particular bank, or to the Board of Governors? Where do you feel—first of all, do you feel that you have a primary allegiance ? Mr. H I C K M A N . I think our primary allegiance is to the people as a whole, to the Nation. T h a t is our primary allegiance. Mr. BROCK. Will the gentleman yield just at that point ? Mr. H A N N A . Yes; I would be glad to, Mr. Brock. Mr. BROCK. Mr. Hickman, the question has been raised about this allegiance—perhaps because the banks contribute to the funds of the Federal Reserve, and, therefore, your salary comes from the banks, so that there perhaps should be some form of allegiance to the member banks. I s it not true that in a practical sense, the large banks have to belong to the Federal Reserve, they have no real alternative ? Mr. H I C K M A N . That is correct. Mr. BROCK. A n d they have to contribute these funds. I t is in no sense any form of control, nor could it be. Isn't that pretty well true ? Mr. H I C K M A N . Well, there is no control whatsoever as far as banker domination. As I tried to indicate in my statement earlier, I was selected by a committee, containing no bankers. And these people happened to be looking around for someone with an economic background, financial background, and some practical experience. And they came to the Board of Governors in this particular case, were referred by the Board to the research staff, who mentioned my name. I knew only one banker in the whole Fourth Federal Reserve District before that time, and he happened to be a brother of a former President of the Federal Reserve Bank of New York, Mr. Harrison, Ray Harrison. Mr. H A N N A . To clarify the position of at least one member of this committee, I am laboring under no illusion that there is pressure coming from the banks to the Federal Reserve. If I had any inclination or feeling, it would be to entertain the possibility that there is a substantial amount of pressure from the Federal Reserve to the banks. So I would look at your function in that relationship, rather than the one indicated. 190 THE FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS Mr. H I C K M A N . T h a t is in general the proper balance to it. I might add one other factor. Our funds, of course, do not come from the banks. Our capital initially came from the banks. But our funds come primarily from our decisions to hold Government securities and the amounts that we hold. And this is completely unrelated to anything that a private banker might Mr. H A N N A . I think that is a fair clarification. Because the money doesn't go from the banks to the Federal Reserve. Mr. BROCK. I understand that. Mr. H A N N A . Most of the flow is the other way, as far as monetary advantage. I n regard to the basic determination here as to whether there should be an increased responsibility to the Government, are you satisfied that there is a sufficient responsibility to the Government and its policies at the present time with regard to the Federal Reserve System ? Mr. H I C K M A N . I certainly am. My qualifications were examined very carefully by the Board in Washington. And, of course, as a members to be of the Federal Open Market Committee, I am sworn to uphold the laws of the country, and so forth. And I consider myself a public official, when I take on public responsibilites. Mr. H A N N A . I gather from your statement that you more or less hinge that on the fact of your relationship with the Board here in Washington—that that relationship is Mr. H I C K M A N . Well, the Federal Eeserve Act itself, which you gentlemen have created and written, give me this quasi-public, quasiprivate set of responsibilities. Mr. H A N N A . And you trace your relationship with the governmental function through the Federal Eeserve Board here in Washington, and the act setting them up, as an act of this Congress? Mr. H I C K M A N . And the Federal Open Market Committee, which is also set u p by the act. Mr. H A N N A . You indicated a couple of things I would like to clarify. First of all, we have been talking about these dealers, the 19. I think it would be helpful if you could give us, or put in the record, how many such dealers actually are there. I mean, these 19 represent 19 and what? You said I think that you don't have to deal with these 19, which assumes you could deal with others. How many others are there ? Do you have any idea ? Mr. H I C K M A N . Well, I think that any brokerage firm in the country—any brokerage firm could take an order for Government bonds. Mr. H A N N A . Let's talk about particulars. How many are actually in the business? Mr. H I C K M A N . Making the market? Mr. H A N N A . Yes. Mr. H I C K M A N . I think it is either 19 or 20. And I will be glad to put the proper number in the record. Mr. H A N N A . I see. I think it is 19 that we have really been talking about. Mr. H I C K M A N . I t used to be 16. I didn't know that it had been increased by three. Mr. H A N N A . Who increases the number, when it increases? How does this increase come about ? Somebody take the initiative ? THE FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS 191 Mr. H I C K M A N . I t happens in response to profit opportunities in this area. When profit opportunities improve, people seeking profits put capital up to engage in an enterprise. And they go into it. They put up an adequate amount of capital, and have the proper knowledge and know-how to trade in these securities. Mr. H A N N A . Does that mean that standards are set, and as soon as they qualify for the standards, they are in business ? Mr. H I C K M A N . S O far as I know—as long as they have the knowhow and sufficient capital to support their operations, they are free to compete. I t is a completely open kind of thing. There are no entry controls on it. Mr. H A N N A . I think, Mr. Chairman, it would be helpful if we had those standards—if there are actual open fixed standards by which anybody can qualify to get into this business—I think we can probably determine what kind of screening process there is, if we know what those standards or qualifications are. The CHAIRMAN. If you will pardon me, I think Mr. Martin could give us the whole information. We have gone into this at one time in the Joint Economic Committee. And I don't think we had any problem. But I am interested in you placing in the record, Mr. Hickman, the number of dealers that you do business with that are not the recognized dealers. You might just insert all the dealers that you do business with. Mr. H I C K M A N . There are four, and they are recognized dealers. The CHAIRMAN. P u t their names in the record. Will you do that, please? Mr. H I C K M A N . I would be glad to. I think I can supply it now pretty well. The CHAIRMAN. That is all right. Just put it in the record. Mr. H I C K M A N . First Boston Corp., Blyth & Co., Inc., Solomon Bros. & Hutzler, and C. J . Devine & Co. The CHAIRMAN. Mr. Taft? Mr. TAFT. Mr. Hickman, are you familiar with the discussions that have gone on in this committee about legislation pending relating to changing the procedures for auditing a Federal Reserve bank ? Mr. H I C K M A N . Yes, Mr. Taft; I am. Mr. TAFT. D O you have an opinion on that legislation, or the desirability of it? Mr. H I C K M A N . Well, I have rather mixed emotions about it. I think that as president of a bank I welcome an audit. We want to have our bonds counted and our money counted, and so forth and so on. And we have that in our organization now. Now, I think that the GAO type of audit, on top of that, would certainly do no harm. I t seems to me that these people are public spirited people, they are competent people, and if they don't know the ins and outs of banking, and so forth, I think thev could quickly learn. So that if it were a pure and simple audit, verifying our assets and determining whether our transactions conformed with the standards as set up by the Federal Reserve Board, and the standards set up by our directors, this would be a very appropriate thing. My doubts about the procedure would be that this might be an entering wedge for comparing what we do with some other set of standards, such, for example, as are used in the standard Government bureau. 192 THE FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS Now, I think that it would be very difficult for us to operate under those standards. We are a different kind of an animal. W e are quasi-public, quasi-private institutions. We have standards that take on part of the measures appropriate to a Government agency and others that are appropriate to a business enterprise. So it is the possible attempt of the GAO to alter the standards that would give me pause. And, of course, in addition to that, I think we spend some $2 million on our present continuous audit. As you know, we have a continuous audit. I n addition, we report quarterly to the Board of Governors our expenses, broken down functionally and by type. The Board also puts in its examiners once a year. The general audit function alone costs in the neighborhood of $2 million. And, of course, if you pile the GAO audit on top of that, it would just be additional expense. I have been thinking about a possible alternative. I know you gentlemen are searching for the appropriate thing. My idea would be to have certified public accountants come in and conduct annual audits for this committee. This might be a way of maintaining the quasiindependence of the system from the body politic. Mr. T A F T . Isn't this already done? Mr. H I C K M A N . N O , it is not, sir. I t is done for the Board. But I am talking about the individual banks. The Board is examined by Haskins and Sells, I believe, at the present time. But the banks are audited by their own general auditors, who, for example, in the case of the Federal Eeserve Bank of Cleveland, report not to me, but to our Board of Directors, independently of me, every month, and then they report any exceptions to the Board of Governors. I n addition, the Board of Governors annually sends in its own staff of examiners, and the Board examiners are accompanied periodically by certified public accountants who observe the audit procedures, and so forth, to see whether they are appropriate. So we have a sufficiency of audits. One more would not do any harm, provided it didn't alter in any way the standards of the system. Mr. TAFT. Thank you very much. The CHAIRMAN. Mr. Hickman, I wanted to ask you a few questions. I want to discuss with you the price support of Government bonds and your statement that the Federal Eeserve banks get their capital from the member banks, and whether or not you get your pay from the member banks, or if the member banks pay anything at all to the Federal Eeserve System—if they are not, on the contrary, the beneficiaries of the System. And also about your expenditures. You know the Government of the United States is pretty careful about agencies and representatives and employees of the Government paying out Government money. If I understand correctly, the source of 99 percent of the income of the Federal Eeserve System comes from interest on Government bonds. Is that about your information ? Mr. H I C K M A N . That is correct. The CHAIRMAN. I n other words, you make probably 1 percent in carrying out the Federal Eeserve Act as it was originally intended. And the Open Market Committee has the exclusive power to deal in THE FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS 193 Government bonds. You deal in them only with the permission of the Open Market Committee. Now, the Federal Open Market Committee has purchased $33 billion worth of Government bonds, which they have in a little vault over in the New York Federal Reserve Bank. They purchased those bonds with Government credit. They paid not a penny for them, nothing except just a flick of the pen that created the money. They buy those bonds—which, of course, are secured by the property of all the people, especially their incomes, and guaranteed by the taxing power that they will be paid. But you pay not a penny for those bonds. I was over there here awhile back, and we went back where the bonds are normally held, and I said, " I want to see your whole portfolio of U.S. Government bonds." They said, " I t is there"—and pointed to a little stack about the size of this book here, 5 or 6 inches high. They said, "Beach up there and get one." I reached up and got one, and it was $500 million. So it doesn't take many $500 million bonds to mount up to $33 billion. The point is that the Open Market Committee clips those coupons, they collect the money from the Treasury, which is paid by the taxpayers of the United States, and the Open Market Committee takes that billion dollars a year, w^hich is interest on the $33 billion, and they distribute it to the 12 Federal Reserve banks in proportion to their size, or some formula. That is correct; is it not ? Mr. H I C K M A N . That is correct. And we also turn around and pay it back to the Treasury again. The CHAIRMAN. Well, let's get to that. Now, last year the Federal Reserve collected—1962, 1963, about the same—over a billion dollars. Now, in 1962 your bank only earned $215,000 in discounts and advances. T h a t is about the only thing your bank does to earn money; is it not, except get this money from the Open Market Committee ? Mr. H I C K M A N . Well, of course we have the liabilities, you understand. We pay for U.S. obligations by setting up claims on our bank. This is the credit of the Federal Reserve Bank of Cleveland. We owe this money, we owe it to the member banks. The CHAIRMAN. YOU owe what ? Mr. H I C K M A N . Deposit balances, their reserves The CHAIRMAN. I am not talking about the reserves. Mr. H I C K M A N . That is what we create when we buy the Government bonds. The CHAIRMAN. I am talking about your earning power. The only thing you have to earn money on is discounts and advances—except a few minor items. Mr. H I C K M A N . That is correct, ouside of our earnings on U.S. obligations. The CHAIRMAN. And you earn about $300,000 a year on that. But your bank spends $15 million a year. So where do you get that other money ? 194 THE FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS The point is it comes from the Open Market Committee in New York, when they clip coupons, they get a billion dollars, they send your bank about—let's see, last year you were listed as earnings from payments, about $73 million. You got that just like a farmer gets a peacheck—it just came to you from the New York Federal Reserve Bank. Now, you didn't do anything to earn that money, did you ? W h a t did you do to earn that $73 million ? Mr. H I C K M A N . W h a t did I personally do to earn it ? The CHAIRMAN. Yes—or your bank. Mr. H I C K M A N . I am afraid I did very little personally. The CHAIRMAN. Or your bank. You see, it came to your bank. I t is not you personally. What did your bank do ? Mr. H I C K M A N . The bank, just as a commercial bank The CHAIRMAN. W h a t is that? Mr. H I C K M A N . The commercial bank lends money or buys Government bonds. The CHAIRMAN. I am not talking about that, my dear sir. Let's get down to definitions. When the Open Market Committee— which has all the discretion in buying and selling Government bonds— when they buy enough bonds to collect a billion dollars' interest a year, and then they send you your part at the end of the year, 99 percent of what you class as earnings—what have you done in Cleveland to earn that money ? Mr. H I C K M A N . Well, we have assumed the liabilities. The CHAIRMAN. Where are the liabilities ? Mr. H I C K M A N . The liabilities are on the balance sheet. The CHAIRMAN. Well, you are not answering my question. Mr. H I C K M A N . $4,600 million worth of liabilities here. The CHAIRMAN. I know. B u t you Mr. H I C K M A N . We assumed the liabilities. The CHAIRMAN. YOU have to pay a large part of this money into the Treasury. Now, under this system, this billion dollars is collected from the taxpayers, distributed to the 12 Federal Reserve banks, in proportion to their size—I assume that is the formula, that is the way that is indicated—and then you spend the money that you want to spend, usually about $200 million a year, and then you turn the rest of it over to the Treasurv, do you not ? Mr. H I C K M A N . Our net expenditures were not $200 million, but were $15 million. The CHAIRMAN. Well, I am talking about the System as a whole. Mr. H I C K M A N . The System as a whole—yes. The CHAIRMAN. Anyway, you agree that what the Federal Reserve doesn't spend out of that billion dollars, goes back into the Treasury. Mr. H I C K M A N . Yes. The CHAIRMAN. That is correct, is it not ? Mr. H I C K M A N . That is correct most of the time. The CHAIRMAN. I n other words, the money you spend is Government money. If you did not spend it, it would go into the Treasury, would it not? Mr. H I C K M A N . That is correct. The CHAIRMAN. All right. THE FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS 195 Now, then, that being true, you should be careful about those expenditures, should you not ? Mr. H I C K M A N . I think we are most careful, sir. I think we get full value for every dollar we spend. The CHAIRMAN. YOU don't do anything with the money that a postmaster would not do with the stamp money. Mr. H I C K M A N . I think we do a better job on personnel matters in Cleveland than the postmaster does. And we have figures to show it. I would like to get them into the record here, to show you that we are paying for the same jobs 4 % percent less on the average, we are paying much less in the way of pensions. We have 40 percent less vacations. I n other words, we are doing a more efficient job than the Government agencies operating in Cleveland. The CHAIRMAN. I n other words, you are not wasteful, you are not extravagant. Mr. H I C K M A N . T h a t is correct. The CHAIRMAN. And you are less wasteful and less extravagant than any of the other Government agencies, is that correct? Mr. H I C K M A N . I think we get a lot more out of the dollar than the Government agencies do in Cleveland. And I have something here, Mr. Chairman—it is only a page and a-half—that I would like to get into the record on this matter of expenditures in general. The CHAIRMAN. Well, let me ask you some questions first. You want to read it now ? I would not deny you that privilege. Mr. H I C K M A N . N O ; just so I can get it in at some point. The CHAIRMAN. I t will be put in the record if we don't get to it. Mr. WIDNALL. Mr. Chairman, could we have the benefit of it now ? The CHAIRMAN. Certainly you may. Mr. Widnall would like you to read it. Go ahead and read it. Because here is the point I am making, Mr. Hickman, the Government has turned over money to your System without cost to the System at all. And then you pay what you want for expenses, and all kinds of salaries, everything. And then the balance goes over to ttie Treasury. If we were to adopt that theory, say, for other employees, like, we will say, Members of Congress, 535 Members of the House and Senate, the Government could allow each Member of Congress to have, say, $5 million in bonds, the same way, he would get $200,000 a year interest on those bonds. And he would spend what he needed for his salary and his office staff and everything else, and then turn the rest of it over to the Treasury. That is a comparable situation—whether you agree to it or not. So go ahead and read your statement. Mr. H A N N A . Mr. Chairman, if they are underpaying their help worse than the Post Office, I think we ought to get it into the record Mr. H I C K M A N . Well, I have something here, Mr. Hanna, on that. Maybe we are paying them too little. The CHAIRMAN. T h a t won't take you long, will it, Mr. Hickman ? Mr. H I C K M A N . I t is a little over a page and a half, sir. The CHAIRMAN. Y O U think it is important that we hear it here ? Mr. H I C K M A N . I would like to have it in. The CHAIRMAN. G O ahead and read it, because I have a number of questions. 196 THE FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS Mr. H I C K M A N . You asked me earlier what I have been doing, and this is one of the things I have been doing. Mr. Hoy has copies of this, I believe, sufficient for most of the committee members. ±t contains a few simple charts. I would like you to look at those before I start this. I will begin to read this, if I may. The paper is entitled, "Employee Compensation—Salary and Nonsalary." I n reviewing the program of salary and nonsalary benefits at the Federal Eeserve Bank of Cleveland, I have reached the conclusion that the bank has done an effective job. On the whole, it has conducted a well-thought-out program which has achieved good results in terms of a low rate of turnover, at a cost which is in line with costs incurred by other organizations, including the Federal Establishment. Nonsalary benefits are an integral part of the personnel program of t h e bank aimed at enabling the bank to attract and keep qualified workers in a highly competitive market. I n order to promote a high esprit de corps, efficient and productive operations, and a low turnover, t h e bank tries to be selective in its employment, thorough in its training, fair in its rewards, and to create the feeling that this is a good place to work. The expenditures for nonsalary benefits supplement a salary scale which is conservative but competitive in the local market. Chart 1 shows that the scale of salaries at the Federal Reserve Bank of Cleveland ranges slightly below the average of salaries paid for comparable jobs oy employers participating in this bank's annual salary survey. The salary grade classification of jobs at the bank differs from that utilized by the civil service. Consequently, any comparison with Federal agency jobs must be made using job descriptions rather than job grade classifications. Our comparisons (chart 2 ) , indicate that, except for those jobs in the lower and higher grades where our salaries are substantially under Government levels, average salaries paid for comparable jobs appear to be consistent with each other. A list of the benefits provided by the bank and of their cost is shown in table A. These benefits include such items as retirement and social security, sick leave, paid vacations, paid holidays, share of the cost of operating the cafeteria, hospitalization and medical expenses, educational opportunities, and a limited number of recreational activities referred to as "employee relations." You will observe that the total expenditures for employee relations account for less than 0.8 percent of the total cost of all benefits for the bank and is 0.2 percent of our payroll. This item includes recreational activities such as sports, and social activities such as our annual dinner dance. The employees contribute or pay for part of the cost of some of these benefits; for others, the bank pays the entire cost. I n establishing these benefits, the bank is influenced to a great extent by community practices. The amounts shown in the table are the costs borne by the bank. While we have not seen actual figures for U.S. Government employees in the form in which figures for this bank are presented in table A, we do know that in some areas the Federal establishment has more generous provisions than we do. F o r example, vacations in 1963 averaged more than 40 percent longer than at our bank. (The comparison in annual leave policy of the Federal Reserve Bank of THE FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS 197 Cleveland with the U.S. civil service is shown in table B.) Moreover, it appears that retirement benefits furnished to Government employees are substantially more costly. Judging from the contributions which the Board of Governors has to make in order to finance benefits which are equivalent to those provided by the civil service retirement system on a fully funded basis (more than 16 percent of payroll), it would appear that the true cost of such benefits to the Federal Government for its employees would be substantially greater than the combined cost of the retirement system benefits and social security for a Federal Reserve Bank (approximately 12 percent of payroll). These items, retirement, social security, and vacations, account for more than half of our total benefit costs. I t has been clearly demonstrated in study after study that turnover is one of the costliest problems with which any organization has to deal. Our bank has done a good job in keeping this turnover down. Turnover at the Cleveland Federal Reserve has generally been lower than in other banks in the same labor area. I n recent years, our turnover has ranged between 15 and 16 percent. Turnover at other banks in Cleveland has ranged between 15 and 26 percent in the same period. For the Nation as a whole, turnover in banks has been estimated to average 30 percent or more. (From a report on a survey conducted in 1963 by a committee of the Minneapolis-St. Paul chapter of National Office Management Association and published in the August 1963 issue of Advanced Management—Office Executive.) I t is my hope and my intention to keep our turnover low. Various types of nonsalary benefits have been tried by the bank's management over the years, and those now provided are judged to be most effective and worthwhile in supporting worker morale and in improving working relations and efficency. Having only recently become chief executive officer, I have not had time to review and form my own opinion on all of them. Whatever my final decision, it will be based on my judgment as to what is most worthwhile in achieving the results that we want—a spirit of loyalty and j>ride in the organization and willingness to work for the constant improvement of our operations and performance. We shall go after results rather than form, precedent, or appearance. We seek a staff of competent, satisfied workers, and a low rate of turnover. All this, I believe we have. Mr. WIDNALL. Mr. Chairman, at this point I suggest the rest of it be submitted for the record. The CHAIRMAN. Without objection, it is so ordered. (The charts referred to follow:) 198 THE FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS E X P L A N A T I O N OF C H A R T S CHART 1 Over 8,400 rates on 53 clerical, maintenance, supervisory, and personnel jobs were obtained from 38 companies in the Cleveland area as of March 1, 1963. These 38 companies represented banks, utilities, government agencies, and industry. To determine a line of best fit, a second degree curve was established by using the method of least squares. This curve is depicted on chart 1 by means of a solid line. The dotted line represents the midpoints of the Federal Eeserve Bank of Cleveland structure. As of January 1,1963, the average salaries paid in the 16 grades were 3 percent below the midpoints. As of January 1,1964, average salaries paid were 2 percent below midpoints. In order to avoid confusion with civil service salary grades, letters were used to denote the 16 salary grades of this bank ( A = 1 , B = 2 , etc.) THE FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS 199 CHART 1 F e d e r a l R e s e r v e Bank of Cleveland January 28, 1964 Comparison Between Bank Salary Structure and Average Rates Reported by 38 Cleveland Companies - 1963 Annual Salary $16,000 14,000 /1 f / 12,000 // A / / . / 10,000 ./< 8,000 -s ,/s ' ,s 6,000 4,000 ^ *r B C J" ^^ 2,000 A D E F G H I J K L M N O P Salary Grade P r e s e n t Salary Structure of the F e d e r a l R e s e r v e Bank of Cleveland 1963 Average Rates Reported by 38 Cleveland Companies 200 THE FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS CHART 2 As in chart 1 the dotted line represents the midpoints of the Federal Reserve Bank of Cleveland salary structure. The solid line is based on actual salaries paid to about 850 Federal employees in the Cleveland area. Instead of using the method of least squares for computing the salary curve, a line of best fit was established by plotting the average rates reported for the 850 workers and then drawing the curve freehand. I t is estimated that for the reported jobs, average salaries paid by the Federal Reserve Bank of Cleveland were about 4.5 percent below the average salaries paid by Government agencies for the same jobs. THE FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS 201 CHART 2 F e d e r a l R e s e r v e Bank of Cleveland J a n u a r y 28, 1964 Comparison Between Bank Salary Structure and Average Rates Reported by F e d e r a l Agencies in Cleveland - 1963 Annual Salary $16,000 14,000 V 12,000 ' 10,000 / , / f / 8,000 JS 6,000 > ^ £' 1 ^ ^ 4,000 ^ ****"^"^ 2,000 A B C D E F G H I J K L M N O P Salary Grad* P r e s e n t Salary Structure of the F e d e r a l R e s e r v e Bank of Cleveland United States Government Agencies (Cleveland) 2S-GS0—G4—vol. 1 14 202 THE FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS TABLE A.—Federal Reserve Bank of Cleveland, supplementary benefits—Salary and nonsalary, 1962 Type of benefit Cafeteria Education Employee relations Group life insurance Holidays Hospitalization and medical services Retirement Sick and special leaves with pay Social security Unemployment insurance Vacations Total Bank cost $96, 32, 19, 49, 326, 171, 752, 158, 217, 205, 422, Percent Percentage of of distribution payroll 355 659 458 006 162 090 298 651 786 185 645 1. 1 .4 .2 .6 3.8 2.0 8.8 1.9 2.6 2. 4 4.9 3.9 1.3 .8 2.0 13.3 7.0 30.7 6.5 8.9 8.4 17.2 2, 451, 295 28.7 100.0 TABLE B.—Comparison of annual leave policies for 1964— •U.ti. civil service and Federal Reserve Bank of Cleveland Length of service Less than 3 years' service From 3 to 10 years' service _ From 10 to 15 years' service From 15 to 25 years' service 25 years' service and over__. Federal Reserve Bank of Cleveland U.S. civil service 13 20 20 26 26 NOTE.—Average vacation computed for Federal Reserve Board, 1963, 14.8 days; average vacation estimated for civil service,1 21.0 days. 1 Source: U.S. Civil Service Office, Cleveland, Ohio. The CHAIRMAN. NOW, Mr. Hickman, here is a list of several types of items, some of which could put a postmaster in jail for a long, long time if he paid for them with Government funds. The fact remains that these expenses were paid with Government funds, and that neither the bank's internal auditors stopped the payment, nor that the Board examiners even commented on them. This seems to me to be adequate proof for the need of the GAO to see what the taxpayers' money is used for in the Federal Reserve System. It starts off here, the first page, an annual dinner dance, 10-piece orchestra, 1 comedian, $125; 620 dinners, $4,325; orchestra, $435; centerpieces, flowers, $261; invocation, $25. Door prizes and wraps insurance, $150. Total, $5,406. Then you have lots of retirement dinners—four retirement dinners, entrance fees to baseball leagues, fees for men and women's bowling leagues, tickets to bowling banquets, trustees dinners, and bowling THE FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS 203 banquet, Cleveland Athletic Club, 32 dinners, retirement, $32 for Corona cigars. Mr. WIDNALL. Mr. Chairman ? The CHAIRMAN. Silver trays. If it is all right, I will p u t this in the record. Some of it, I think would be legitimate. B u t some of it I don't see how you can afford to spend public money for. I will call your attention to one or two more. On page 2 there is the officers' dining room. That is the amount stated. Annual dinner dance, another annual dinner dance, $4,432, including orchestra, and all the things that go with it, including liability insurance, dinners, and punch, and gratuities—$438.24. A n d different dinners, 25-year parties, a thousand dollars, children's Christmas party. I am certainly not against a children's Christmas party. A lot of things in here I am not against. Flowers for sick or deceased employees and relatives, birthday lunches, retirements, ping pong balls and paddles, Softball games, women's fashion magazine, sterling silver trays, smorgasbord party— that is $1,800—smorgasbord party. So I just suggest that I place all this in the record at this point. Is there any objection ? Mr. BOLTON. Mr. Chairman, would you yield for a question ? The CHAIRMAN. I yield for a question. Mr. BOLTON. Doesn't this exactly bring out, I think, your point, and also the point of some of the other members of the committee, regarding whether or not there should be a GAO audit; namely, that the reason you have brought up these figures is because you feel that the policy management of the bank itself has been misdirected ? I n other words, the real reason that you want a GAO audit is to look into the policy of the operation of the System as contrasted to checking the accuracy of the figures. The CHAIRMAN. I cited these cases as exhibits demonstrating that money has been loosely spent, and extravagantly spent. A n d I would not say corruptly, because I don't believe they had any corruption in mind. I certainly would not accuse them. Mr. H A N N A . Not in bowling or children's parties. The CHAIRMAN. Let me add two or three more here, and then I wrill yield. Now, you take care of the $4,000 item, graduate study allowance for students at the University of Kentucky. I cannot conceive of paying students at the University of Kentucky $4,000, or $3,500, at the Ohio State University. And items like that. Tuition refunds for satisfactorily completed courses. Tuition and dormitory fees for employees at the University of Wisconsin Graduate School of Banking. Fees for the attendance of three employees at a graduate school of banking. Five-day executive action course— $750. And then tuition reimbursement to bank employees, $3,067. Some of the courses were Western civilization, metropolitan politics, and ethics. Problems in sales management, introduction to philosophy, English Renaissance $427 to employees attending a graduate school of banking at the University of Wisconsin. $210, tuition, materials, of an employee at a conference on employment interviewing; 204 THE FEDERAL RESERVE SYSTEM AFTER FIFTY TEARS $3,856, partial contribution to Cleveland Chapter of American Institute of Banking. I cannot conceive of how you could spend $3,856.11 of the people's money for any such purpose as that. Maybe you know of some reason. $330 for the Ohio School of Banking. $720, Stonier Graduate School of Banking. $1,125 tuition refunds to employees. Courses completed: Shakespeare, public opinion, sociology of occupation, history of economic growth. We could use some of that latter. $1,500 annual dues for the American Bankers Association. Why should you spend public money to join the American Bankers Association? Now, that is a private concern. And $5,000, contributions to Cleveland Chapter of American Institute of Banking. And $330 to the Eobert Morris Associates—that is another banking group. $317 annual dinner of group 9, Ohio Bankers Association. $350 subscription to National Industrial Conference Board. $350 annual dues to the American Management Association for the first vice president. Purchasing association, national office of management, subscription to National Industrial Conference Board, $350. Cleveland Association of Credit Management. Why do you want to pay a hundred dollars to join that? $350 membership of one of the officers in the American Management Association of 1962. And a purchasing agents' group. The annual dues of the Cleveland Farmers Club. You only paid $50 in that, I notice. Paid to Cleveland's Clearinghouse Association its proportionate share of the costs of educational program of the Cleveland Chapter, American Institute of Banking—now, this is a staggering figure for that purpose—$5,018.50; and $5,190.96 paid to the Cleveland Clearinghouse Association. Annual dues for the Cleveland Association of Credit Management. F o r the Cleveland, Ohio, City Directory, $465. The bank states it is used to identify persons they wish to contact. Annual subscription of the Labor Law Reports, $195. $220, Installment Credit Guide. $300, Federal and State Tax Services. $395, Congressional Legislative Reporting Service. Now here are luncheons, $1,143. Tickets to annual dinners, 75 lunches for schoolteachers at $4 each, $300. $759 for officers dining room. $114, dinner for directors. $546 to the Annual American Institute of Banking Banquet. And many items like that. $705, free meals in officers dining room during May 1963—$705 a month. Golf and dinner party at Cleveland conference. $526.50, tickets to annual A I B banquet. $297, dinners at Mount Vernon Country Club for bank directors. $619, open house—pastry, punch, coffee/punch cups, cocktail napkins, yellow plastic spoons, and so forth—$619. Lunches for high school students, $180. $369, dinners to—at the Elyria Country Club for bank directors. $320, Union Country Club. $483, roundtable dinner. $387, bank directors industrial roundtable. $549, meeting of the industrial directors. $1,048 paid to the Portage Country Club, Akron, Ohio, for expenses of a dinner meeting of the bank directors and leading bankers and industrialists in the Akron area. $245, luncheon meeting at Akron. $305, lunches for high school and college students, J a n u a r y 1962. THE FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS 205 Mr. H A N N A . Mr. Chairman, I don't want to interrupt your recitation of those things, but it did strike me suddenly that the chairman here is allying himself in some ways with the position that I thought I saw the Republicans taking about backdoor spending. I t is true it is a rather sophisticated approach, which is probably developed uniquely by them. But it is, after all, a taking of the Government's money for carrying on an activity, and then after the fact making arrangements with the Treasury, is it not? The CHAIRMAN. Well, there are no arrangements made. That is the part that is difficult to understand. You see, in 1957 I brought out some figures on the banks, and then I hadn't gone into it since that time. But last time when we started last year, we took the audits, and none of it was in the audits—not a bit of this in the audits at all. Mr. H I C K M A N . I t should not be. The auditors criticize items that are unauthorized. These are all authorized. The CHAIRMAN. I know they are authorized. That is the point I want to make. Mr. H I C K M A N . We have the authorizations right here, which I would like to get in the record, if I may. The CHAIRMAN. My contest is, or my point is, that your Board of Directors would authorize the expenditure of U.S. Government funds for things like this. Now t i e Federal Reserve System in 50 years has never been audited by the U.S. Government. The Federal Eeserve System, in 50 years, has never been audited by any independent auditors selected by anybody except themselves, which was a self-audit. Therefore, we ought to look into these practices occasionally. And when I attempted to go into it last year, I learned that none of this kind of expense was reported to the Board of Governors. I ran into a dead end. Our investigative staff said it was just not reported. Then I asked for the working papers of the Federal Reserve Board examiners. I got the working papers of the examiners, and there was no mention of this type of expenditure on their working papers. And we had to send two investigators to three banks to actually get the information from the banks' files. So this kind of spending certainly hasn't been brought out to the public view. I t has not been approved by anyone connected with the Government. If the money hadn't been spent this way, just like the stamp money of the postmasters, it wTould go over into the Treasury. That is the point I am making. I t is back-door financing really at its worst. You see, no congressional committee ever looks at it, no independent auditor ever looks at it. Nobody is looking over their shoulders. They just take a billion dollars of the Government's money every year, and spend as much of it as they want to. And then turn the rest of it over to the Treasury. Mr. BOLTON. Mr. Chairman—just as a comment—I take it then you would be in favor of my bill to see to it that all the committees of Congress and the Capitol Architect's Office are also audited by the GAO. The CHAIRMAN. Well, I am in favor of audits, myself. I n fact, I don't think the Federal Reserve should resist audits, but they have. 206 THE FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS Mr. WIDNALL. Mr. Chairman, as you were reading that list, and came to the Corona Corona item, I couldn't help but think of our own committee trip to the Federal Eeserve in New York, where as I recall all the smokers on the committee were perfectly willing to take those Corona Coronas. And I think that many, many times—if this is guilt of some kind, we are certainly guilty of guilt by association, because we have been perfectly willing to participate in the dinners ourselves. The CHAIRMAN. Well, that was a very small item. Mr. WIDNALL. Some of these small items that you are talking about, we ought to be just as zealous about on Capitol Hill. W e are still obtaining 75-cent haircuts at the expense of the taxpayers. The CHAIRMAN. I didn't get any Corona cigar. I don't smoke cigars. I am not accusing anybody else who did. If they want to take a cigar anybody offers them, it is perfectly all right—anything up to a 12-pound ham, I believe. I think that was decided one time years ago—somebody asked what size it should be, and somebody said a 12-pound ham. Now, here is something else. Standard Government travel regulations allow up to $16 per day for meals and lodgings for Government employees. This amount is regularly exceeded by employees of the Bank. The examples are at New York, 3 days, $26. Pennsylvania, $26. A whole page full here of examples, all of them way above, from $8 to $10 more than the Government allowance. And this is Government money. So the question is, it is not understandable to me why the Board and the President would approve things like that. Now, would you like to make a comment on this, Mr. Hickman ? Without objection, I will put this in the record at this point—the whole thing. (The information referred to follows:) CLEVELAND Employee parties, etc. $5, 406. 40 Annual Dinner Dance: 80341 10 piece orchestra 80342 1 comedian 80522 630 dinners 80523 65 flower centerpieces 80525 1 invocation 80525 Liability insurance 80664Door prizes and wrapping 80667 81095 Singers 115 guests paid 82037 82133 80028 81038 81677 82026 515 employees free 210. 00 Retirement dinner, 42 attended. 185. 87 Retirement reception. 106. 92 24 retirement book covers, gold stamped. 119. 00 Retirement dinner, 34 attended. 61. 00 Entrance fee, AIB baseball league. 425. 00 Fees for men's and women's bowling leagues. $435. 00 125. 00 4,325.40 261. 00 25. 00 24.27 150. 34 60. 00 5, 406. 01 708. 40 4, 697. 61 T H E FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS Employee 82427 81499 81701 82265 $37. 126. 120. 462. 75102 81621 32.00 490. 10 82290 80082 80458 32.00 86.30 465. 50 75055 75056 75054 75057 75058 75232 75490 35 00 76 59 parties, 207 etc.—Continued 15 baseballs. 21 tickets for bowling b a n q u e t . Trustees dinner, 14 persons. Annual bowling b a n q u e t a t Cleveland Athletic Club, 78 persons a t t e n d e d . 100 Corona Corona cigars. 32 dinners a t retirement p a r t y for W . D . Fulton a t Union Club. I n conjunction with t h e joint board of directors' meeting. 100 Corona Corona cigars. E n g r a v i n g on 6 silver t r a y s for retiring directors. Seven 14-inch sterling silver t r a y s . 4, 432. 66 Annual dinner dance on J a n . 27, 1962: Orchestra Dancers Dinner music Door prizes and favors Liability insurance 52 bouquets table flowers 225 boutonnieres 350 corsages Lighting equipment 520 dinners 20 gallons punch Gratuities (15 percent) 400. 150. 150. 146. 25. 26. 33. 105. 36. 2, 831. 90. 438. 00 00 00 28 54 00 75 00 05 80 00 24 4, 432. 66 76217 79543 79036 79160 79984 77511 78841 79286 79968 77618 78119 78308 78590 77713 79843 79700 78325 76667 74781 75291 76099 74743 75553 140. 53 Dinners for trustees of t h e Federal Reserve Club of Cleveland. 26. 00 24 ping-pong balls and 12 ping-pong paddles. 1, 009. 22 Annual 25-year p a r t y , Cleveland Athletic Club: Orchestra Barbershop q u a r t e t Songbooks Insurance Dinners (120) Flowers $125. 25. 5. 24. 769. 60. 00 00 00 27 95 00 Total 1, 009. 22 558. 11 Children's Christmas p a r t y . 151. 71 Flowers for sick or deceased employees and relatives. 115. 23 Birthday lunches, September-October 1962. 129. 50 R e t i r e m e n t dinner for Mr. Flinkers, 37 people a t $3.50. 21.54 36 ping-pong balls a n d 6 ping-pong paddles. 52.96 Dinners for 7 employees a n d families. 90.00 15 tickets for A I B softball b a n q u e t . 13.00 Subscription t o Vogue (the women's fashion magazine). 35.00 10 luncheon tickets sponsored b y $110,000 Cleveland Open Golf T o u r n a m e n t , et al. 350. 65 Annual retirement dinner for directors a t Union Club, 14 directors a n d 10 officers a t t e n d e d . 465. 50 7 sterling silver t r a y s . 1, 816. 22 411 employees a t smorgasbord p a r t y . 411. 54 74 dinners a t t h e Cleveland Athletic Club (bowling b a n q u e t ) . 384. 08 Flowers for sick a n d deceased employees. 85.52 B i r t h d a y lunches for employees during December 1961. 85.00 R e t i r e m e n t dinner for Mr. Johnson. 208 THE FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS Employee 2008 2002 2051 2045 2024 2015 7996978971 parties, etc.—Continued $66. 00 Umpires and scorers' fees for A I B softball games. 1, 004. 15 (less $438 paid by participants), a n n u a l golf t o u r n a m e n t . There were 73 participants. Tuition payments Various 4, 000. 00 Annual g r a d u a t e s t u d y allowance for students a t University of K e n t u c k y . Yearly allowance. Various 3, 500. 00 Annual g r a d u a t e s t u d y allowance for s t u d e n t a t Ohio State University. Yearly allowance. 105. 10 2 additional black and white sound prints of t h e film "A D a y 74631 a t Federal Reserve Bank of Cleveland." 300. 00 2 registration fees for clinic, Principles, Techniques a n d 77759 Skills in Manuals Writing. 78491 150. 00 Registration fee seminar, " D a t a Processing for Personnel Department." 2122 200. 00 Fee for a t t e n d a n c e a t confrence held by Personnel Research and Development Corp. a t Oberlin, Ohio, S e p t . 23-28, 1962. 79099 360. 00 3 registration fees for a 40-hour systems a n d procedures training course. 990. 00 Tuition refunds for satisfactorily completed courses b y Various employees. Some of t h e courses were: Public Speaking. English Literature. Introduction to Art History. Shakespeare I. Philosophy of Religion. 990. 00 Tuition a n d dormitory fees for 2 employees a t University of 81139 Wisconsin G r a d u a t e School of Banking. 750. 00 Fee for 5-day Executive Action Course a t American M a n a g e 81103 m e n t Association in New York. 250. 00 5-day course by American M a n a g e m e n t Association on " H o w 82536 To Write Shorter a n d Better R e p o r t s . " 74655 1, 090. 00 Fees for a t t e n d a n c e of 3 employees a t t h e Stonier G r a d u a t e 75425 School of Banking. 250. 00 Fees for a t t e n d a n c e of 1 employee a t t h e N A B A C School for 75342 B a n k Audit a n d Control. 3, 067. 00 Tuition reimbursement t o b a n k employees. Some of t h e 75152 75177 courses w e r e : 75209 Western Civilization I. 75298 Metropolitan Politics a n d Ethics. Problems in Sales M a n a g e m e n t . 77263 Introduction t o Philosophy. 77334 English Renaissance. Various Calculus I I . 427. 00 Fees for a t t e n d a n c e of 2 employees a t t h e g r a d u a t e school of 76100 b a n k i n g a t t h e University of Wisconsin. 210. 00 Cost of tuition a n d materials of an employee a t a conference 76106 on e m p l o y m e n t interviewing. 50.00 2 employees membership in t h e Cleveland C h a p t e r of t h e 76977 Systems a n d Procedure Association. 74.00 Registrations a t t h e International Association of Personnel 76153 W o m e n Conference. 76318 3, 856. 11 P a r t i a l contribution t o Cleveland C h a p t e r of American 77594 I n s t i t u t e of Banking. 330. 00 Registration fees (3) a t Ohio School of Banking. 80351 100. 00 Registration fee, Personnel Techniques Seminar, University 80103 of Michigan. 720. 00 Registration fees (2) Stonier Graduate School of B a n k i n g . 80554 T H E FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS Tuition 80777 80828 Various 209 payments—Continued $740. 00 Registration fees (2) Stonier G r a d u a t e School of Banking. 1, 125. 00 Tuition refunds t o employees. Among courses completed were: Shakespeare I I . Public Opinion. Sociology of Occupation. History of Economic T h o u g h t . Dues, etc. 77712 77529 70563 81428 77920 78384 79098 75193 77545 79841 80004 80011 80214 80489 80845 81840 82366 74601 74604 74638 75358 75669 76570 80676 81926 77909 78058 79666 77708 79158 79166 79665 1, 600. 00 Annual dues for American Bankers Association. 100. 00 Membership dues, Financial Public Relations Association. 5, 018. 50 Contribution to Cleveland Chapter of American I n s t i t u t e of Banking. 561. 00 Membership dues, N A B AC. 310. 00 P a i d to R o b e r t Morris Associates. 250. 00 Subscription to Real Property I n v e n t o r y of Metropolitan Cleveland. 350. 00 Subscription to National Industrial Conference Board. 75.00 Subscription to National Bureau of Economic Research, I n c . 35.00 Dues for counsel in Ohio State Bar Association. 350. 00 Annual dues in American M a n a g e m e n t Association for 1st Vice President. Bank's membership. 35.00 Annual dues in Purchasing Association of Cleveland. 105. 00 Dues, 1963, National Office M a n a g e m e n t Association. 350. 00 Subscription t o National Industrial Conference Board. 50.00 Dues, Cleveland Farmers' Club. 100. 00 Dues, Cleveland Association of Credit M a n a g e m e n t . 50.00 Dues, Systems a n d Procedures Association of America. 350. 00 Membership of 1 of officers in American M a n a g e m e n t Assoc i a t i o n for 1962. Bank's membership. 35.00 Membership dues of employee in Purchasing Agents' Association of Cleveland, Inc. 360. 00 Membership dues of 6 employees in Cleveland C h a m b e r of Commerce, 1962. 50.00 Annual dues of t h e Cleveland F a r m e r s ' Club. 5, 190. 96 Paid t o Cleveland Clearing House Association as proportionate share of t h e cost of t h e educational p r o g r a m of t h e Cleveland Chapter, American I n s t i t u t e of Banking. 100. 00 Annual dues for t h e Cleveland Association of Credit M a n agement. Subscription t o a news clipping service a t 10 cents per clipping. T h e charge for J a n u a r y 1963 was $201.80. News clippings are of particular interest t o officers a n d b a n k examiners of t h e Cleveland Federal Reserve Bank who frequently correspond or visit with bankers t h r o u g h out t h e S t a t e . 465. 00 For t h e Cleveland, Ohio, Cjty Directory. T h e b a n k states t h a t it is used t o identify persons who m a y wish t o contact t h e b a n k for information and t o locate addresses for mailing purposes. 195. 00 Annual subscription 1962-63, Labor Law Reports published b y Commerce Clearing House, Inc. 220. 00 Subscription t o Installment Credit Guide, Sept. 1, 1962, t o Sept. 1, 1964, published by Commerce Clearing House, Inc. 300. 00 Subscriptions t o Federal and S t a t e t a x services for 1 year, published b y Commerce Clearing House. 120. 00 24 subscriptions t o S t a n d a r d & Poor's Corp. Bond Guide for 1 year. 120. 00 Annual subscription t o Real E s t a t e Analyst Service. 395. 00 Congressional Legislative Reporting Service for t h e 1963 regular session of t h e 88th Cong. 1, 143. 94 Dinner and luncheon for b a n k officers, directors and employees a t t h e Athletic Club in Columbus, Ohio. Columbus industrialists and bankers were guests. 210 T H E FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS Luncheons, 78600 78601 79630 80211 80557 etc. Dinner meeting of Group Nine, Ohio Bankers Association; 29 employees of t h e b a n k a t t e n d e d . 300. 00 75 lunches for schoolteachers a t $4 each. 76.00 N A B A C , Cleveland Conference Dinner meeting, 16 b a n k employees. 759. 00 J a n u a r y 1963 charges for officers dining r o o m : 379 stafflunches a t $1 $379. 00 190 guest lunches a t $2 380. 00 $367. 50 Paid by officers 81376 840. 00 75074 25.00 75677 114. 58 75585 546. 00 81038 293. 23 81751 81752 81434 81849 237. 444. 312. 233. 81853 385. 00 82094 420. 00 82037 82369 74911 74913 120. 00 386. 25 95.00 53.00 82146 82504 79.00 43.75 82637 80953 81087 18.00 526. 50 58.00 76452 297. 66 76514 77139 438. 75 619. 41 78415 78873 66.50 23.75 80 00 19 75 Cost t o b a n k M a r c h 1963 charges for officers dining room: 344 staff lunches a t $1 248 guest lunches a t $2 759. 00 389. 00 370. 00 $344. 00 496. 00 Total Paid b y officers 840. 00 350. 00 Cost t o bank 490. 00 4 dinner reservations for a dinner meeting of R o b e r t Morris Associates. Dinner meeting of 7 directors a n d 4 officers a t t h e Union Club. 84 tickets to t h e a n n u a l American I n s t i t u t e of B a n k i n g b a n q u e t . 7 officers and 75 other employees a t t e n d e d . Lunches for high school a n d college s t u d e n t visitors during F e b r u a r y 1963. B a n k directors-industrialists dinner meeting. B a n k directors-industrialists dinner meeting. Lunches for high school s t u d e n t visitors during M a r c h 1963. B a n k directors-industrialists dinner meeting a t Coshocton Town a n d C o u n t r y Club, Coshocton, Ohio. B a n k directors-industrialists dinner meeting a t Salem Golf Club, Salem, Ohio. B a n k directors-industrialists dinner meeting a t Westbrook C o u n t r y Club, Mansfield, Ohio. Teacher t o u r dinners a t $2.50 each, during April a n d M a y . Meals in officers dining room during M a y 1963. 19 tickets t o a Cleveland Chamber of Commerce luncheon. 13 tickets for employees t o a dinner sponsored by t h e Cleveland Conference of N A B A C . Golf a n d dinner p a r t y N A B A C Cleveland conference. Annual meeting a n d Spring Golf p a r t y a t Elyria C o u n t r y Club of Robert Morris Associates. 5 reservations. 4 luncheon reservations, Cleveland C h a m b e r of Commerce. 81 tickets a t $6.50 for annual A I B b a n q u e t . Dinner meeting N A B A C , Cleveland conference, 12 employees attended. 66 dinners a t M o u n t Vernon C o u n t r y Club for b a n k directors, Industrialists R o u n d Table, M o u n t Vernon, Ohio. Lunches for visiting high school students. Open house, J u n e 6, 7, 1962: P a s t r y (4,826 pieces) $386.08 P u n c h (51 gallons) 51. 00 Coffee (100 gallons) 70. 00 P u n c h cups (1,800) 13.36 Cocktail napkins (3,200) 7. 04 Yellow plastic spoons (1,400) 5. 25 Wax paper (3 packages) . 90 Labor 85. 78 Total 14 dinners, Cleveland chapter N A B A C . 5 dinners, Cleveland chapter N A B A C . 619.41 THE FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS 211 Luncheons, etc.—Continued 79423 74642 $73. 25 15 dinners, Cleveland chapter NAB AC. 180. 00 Lunches for high school students, cub scouts, and mothers, 76675 369. 37 68 dinners at the Elyria Country Club for bank directors and 76830 320. 74 56 dinners at the Union Country Club of New Philadelphia, December 1961. industrialists roundtable meeting, Elyria, Ohio. 76831 483. 75 76438 387. 20 76450 549. 03 75756 63. 00 76720 1, 048. 45 76738 245. 89 76938 79.00 74622 82.50 75081 305. 00 Ohio, for a meeting of the bank directors-industrialists roundtable, New Philadelphia, Ohio. Bank directors-industrialists roundtable dinner meeting for 75 at the Wooster Country Club, Wooster, Ohio. 88 dinners at a meeting of the bank directors-industrialists roundtable at the East Liverpool Country Club. 80 dinners at a meeting of the bank directors-industrialists roundtable at the Fort Steuben Hotel. Tickets so that 18 officers could attend a luncheon sponsored by the Cleveland Chamber of Commerce and American Industrial Development Committee, Inc. Paid to the Portage Country Club, Akron, Ohio, for expenses of a dinner meeting of the bank's directors and leading bankers and industrialists in the Akron area. Luncheons and meeting rooms for joint board meeting at Akron, Ohio. Golf and dinner party sponsored by NABAC, Cleveland conference. 12 employees and 1 guest of the bank attended. 3 registrations at the Northern Ohio Personnel and Executive Conference. Lunches for high school and college student guests in January 1962. Travel Standard Government travel regulations allow up to $16 per day for meals and lodging to Government employees. This amount is regularly exceeded by employees of the bank. Examples are: Voucher 1803 1912 1949 1961 1984 1989 1837 1934 At New York, N.Y., for 3 days, about $26 per day. A day at Skytop, Pa., about $26. 3 days at Atlantic City, N.J., about $30 per day. A day in Washington, D.C., at $49.10. Includes suite for conference president's meeting room. 3 days at Atlantic City, N.J., at about $19 per day. A day in New York, N.Y., for $23.35. 2 days in Chicago, 111., at about $22 per day. 2 days in Washington, D.C., at about $22 per day. 7527o} 4 d a y s i n N e w Y o r k > N Y > a t a b o u t $ 1 9 p e r d a y * 75648 3 days in Pittsburgh, Pa., at about $19 per day. 77254 4 days in Washington, D.C., at about $21 per day. 1789 4 days in New York, N.Y., at about $23 per day. The total includes 2 dinners for guests. 1790 2 days in New York, N.Y., at about $23 per day. 1795 A day in Washington, D.C., at $24.15. 2040 A day in New York, N.Y., for $20.85. 2093 3 days in Washington, D.C., at about $28 per day. Includes suite for conference president's meeting room. 2208 2 days in Washington, D.C., at about $22 per day. 76247 4 days in Washington, D.C., at about $27 per day. 2134 2 days in New York, N.Y., at about $26 per day. 78122 4 days in Washington, D.C., at about $23 per day. 78693 3 days at Bretton Woods, N.H., at about $24 per day. 78123 4 days in Washington at about $23 per day. 2060 4 days in Washington at about $21 per day. 2120 4 days in Atlantic City, N.J., at about $20 per day. 79050 4 days in Atlantic City at about $34 per day. 2154 2 days in Washington," D.C., at about $22 per day. 79272 4 days in Washington, D.C., at about $23 per day. 79458 2 days in Washington, D.C., at about $24 per day. 212 THE FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS Trave I—Continued 79538 2 days in Washington, D.C., at about $25 per day. 2279 2 days in Chicago, 111., at about $22 per day. 2307 2 days in Washington at about $48 per day. Includes suite for conference president's meeting room. 2325 2 days in Washington at about $23 per day. 81533 3 days in New York at about $28 per day. 2407 3 days at Atlantic City, N.J., at about $32 per day. 2345 2 days at New York, N.Y., at about $24 per day. 82137 4 days at New York, N.Y., at about $24 per day. 82399 4 days at New York, N.Y., at about $25 per day. 2302 8 days in New York, N.Y., at about $26 per day. 80054 2 days in New York, N.Y., at about $22 per day. Mr. BOLTON. May I ask, then, at that point, that the authorizations for those expenditures be put in the record immediately following ? The CHAIRMAN. Certainly, I would love to have it in there. Mr. H I C K M A N . That is what I would like to put in the record. We have a set of materials here showing the Board of Governors authorization for Federal Reserve bank expenditures. As a matter of fact, we come well within the general authorization. The authorizations are here. And, in addition, I would like to put in the justifications for these. We have provided all of this to the committee before. The CHAIRMAN. Without objection, we will put in the justifications. (The documents referred to follow:) (H) EXPENDITURES OF FEDERAL RESERVE BANKS 1 #3181. Cafeteria. [May 14,1946, S-912, Sec. of Bd. to Presidents of all F. R. Bks.] * * * * * * * * * * the Board will offer no objection to a Federal Reserve Bank's absorbing up to one-half of the cost of operating its cafeteria, as shown by the functional expense report, Form F.R. 634. * * * * * * * #3186. Submission of annual budgets to Board. [Feb. 4,1947, S-958, Sec. of Bd. to Presidents of all F. R. Bks.] Now that the war is over the Board has decided to ask the Federal Reserve Banks to resume the submission of annual budgets which were temporarily discontinued in 1942 upon the recommendation of the Presidents' Conference, because of the difficulty of estimating in advance the cost of the various war activities they were constantly being asked to perform. Some of the Banks have continued to operate under a budget procedure although the submission of a budget to the Board was not required. As you know, Congress and the President have indicated an intention recently to scrutinize more closely the expenditures of the various departments and agencies of the Federal Government. I n the Legislative Reorganization Act of 1946 Congress evidenced its intention in this respect by directing the Comptroller General "to make an expenditure analysis of each agency in the executive branch of the Government (including Government corporations) which, in the opinion of the Comptroller General, will enable Congress to de1 Source : Federal Reserve Loose-Leaf Service. THE FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS 213 termine whether public funds have been economically and efficiently administered and expended." Eesponsibility for supervision and control of the costs of operating the Eeserve Banks, including expenses incurred by them as fiscal agents of the United States, is shared by the boards of directors and officers of the Banks and the Board of Governors. As the agency of the Government charged with responsibility for general supervision of the Eeserve Banks, the Board should be able to demonstrate whenever necessary that it is in a position to and does adequately supervise expenditures of the Eeserve Banks for salaries and for other purposes, This subject was discussed during the last meeting of the Chairmen's Conference, and the Board desires to discuss the matter with the Presidents at the time of their next conference in Washington. While the procedure followed by the Eeserve Banks in preparing the budget will depend upon the internal organization of the Bank or branch, it is essential that it be prepared in such a manner that persons in charge of the respective units may be held responsible for expenses incurred therein, and that the budget be reviewed and approved by the senior management and the board of directors. [July 13, 1962, S-1837, Sec. of Bd. to Presidents of F. R. Bks.] As you were informed in the Board's telegram of June 29,1962, the Board has approved revised procedures under which the Federal Eeserve Bank budgets are to be prepared and submitted to the Board. A number of proposals designed to simplify and improve Eeserve Bank budgetary procedures were set forth in a memorandum sent to Mr. Fulton as Chairman of the Conference of Presidents with the Board's letter of April 16, 1962 and the revisions that have been adopted are in conformance with those approved by the Conference of Presidents at its meeting on June 18,1962. These provide for: 1. Submission of budgets by either departments or functions. 2. Submission of two budgets each year, one covering the period January 1-June 30 and the other covering the period July 1December 31. 3. Comparisons of budget estimates with actual expenses for the same period one year ago. 4. A budget report form showing by departments or functions the average number of employees and total expenses for the base period and for the budget period, and the amount and percentage change in expenses. 5. Limiting explanatory material accompanying the budgets to the reasons for (a) the significant developments resulting in substantial gross increases or gross decreases in departmental or functional expenses, and (b) changes in the number of employees in Grade 12 and above expected at any time during the budget period, as compared with the number of such employees on the last day of the base period. 6. Elimination of the budget experience reports. Under the revised procedures, statements covering evaluation of activities of certain functions, membership dues and donations, and five-year projections of bank premises projects need not be submitted with the semi-annual budgets. 214 THE FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS The first budget to be prepared under the revised procedures is to cover the period January 1-June 30,1963, and it should be submitted to reach the Board not later than November 22,1962. The Accounting Manual will be revised to reflect the changes in the Reserve Bank budgetary procedures as outlined above. This letter supersedes the Board's letter of October 4,1956 (S-1604), contained in F.E.L.S. 3186. LFeb. 7, 1963, S-1863, Sec. of Bd. to Presidents of F. R. Bks.] Among the changes in the Reserve Bank budgetary procedure set forth in the Board's letter of July 13, 1962 (S-1837), was the provision that the six-month budget estimates were to be compared with the same period one year ago. Experience with the budgets for the first half of 1963 has revealed that this procedure was not as effective as was hoped. Much of the material submitted w^ith these budgets related to changes that had already occurred, or were expected to occur, between the close of the base period (first half of 1962) and the beginning of the budget period. Accordingly, the Board believes that budgets could be made less complicated and more revealing of prospective developments if they were compared with the current rate of expenditures, rather than with the same period of the previous year. As you probably know, the possibility of this change in procedure was discussed informally with the various Reserve Banks and it appears that some of the Banks are in favor of making the change at this time while others have reservations. The informal discussions also indicated that there are various ideas as to how to determine the current rate of expenditures for the purpose of budget comparisons. Under these circumstances, the Board is of the opinion that possibly experimentation with current rate comparisons on a voluntary basis would be helpful. Therefore, if your Bank is interested in comparing its budget with the current rate of expenditures, the Board would be pleased to receive your budget for the second half of 1963 on this basis. If you adopt this procedure— (1) Your current rate of expenditures may be determined by whatever method your Bank considers to be most appropriate. Please explain briefly in a statement accompanying the budget the method used for this determination. (2) I n order that comparative figures on a uniform basis may be obtained for the System as a whole, please show in addition to the current rate of expenditures the actual expenses (by departments or functions) for the second half of 1962. However, explanations should be confined to the differences between the current rate of expenditures and the budget estimates, and should not take into account differences between actual expenses for the second half of 1962 and the budget estimates. If for one reason or another your Bank would prefer not to adopt the current rate of expenditures comparison procedure at this time, your budget for the second half of 1963 may be prepared in the same manner as that submitted for the first half of the year. THE FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS 215 #3187. Discretionary expenditures. [Jan. 16, 1945, S-826, Sec. of Bd. to Chairmen and Presidents of allF.R.BJcs.'] Recently a Federal Reserve Bank inquired informally whether, in the case of a director who was retiring after a substantial length of service, there was any objection to an expenditure of Bank funds for a suitable memento of his service. Another Reserve Bank recently proposed that recognition in some tangible form involving the expenditure of Bank funds be made to employees who had completed 25 years of service with the Bank. The Board has felt that in its consideration of such questions and similar questions affecting officers and employees of the Federal Reserve Banks it must take into account the peculiar relationship of the Reserve Banks to the Government. They do not have the same status as privately owned corporations which are voluntarily created by and operated for the benefit of their stockholders. They were set up by Congress to perform functions prescribed by Congress for public purposes. Stock holdings and dividends thereon are strictly limited, the owners of the stock being somewhat like holders of preferred stock in other corporations, while the residual interest in the assets of the Banks is in the Federal Government, which, therefore, may be regarded in effect as the owner of all the common stock. In view of this situation, the provisions of the law, and the fact that the Reserve Banks are not accountable to the Federal budget and accounting authorities, the Board feels that Congress has placed upon it a substantial measure of responsibility for the expenditures of the Federal Reserve Banks. The Board therefore feels that it must be prepared to justify the Reserve Banks as well as itself in the event of criticism from Congress or other Governmental sources on the ground of claims that expenditures had been made in disregard of the Government's residual interest. On the other hand, the regional and decentralized character of the System under a corporate form of organization with a board of directors and executive officers in each of the twelve districts, together with the absence of provision for any direct Governmental appropriations for the support of the Federal Reserve Banks, should be regarded as evidencing an intention that there should be some room for latitude on the part of the local organization in determining what is reasonable and proper in particular circumstances, subject to the general supervision of the Board of Governors. I n the light of these considerations, the Board has reviewed the question of the expenditures which may be considered as more or less directly related to the conduct of the affairs of a Reserve Bank 216 THE FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS and this letter supersedes and cancels the following letters on the subject: Loose Leaf Service X-4211 dated 12/13/24 X-4290 dated 3/16/25 #3180 X-7276 dated 10/20/32 #3182 X-9069 dated 12/28/34 #3183 X-9823 dated 2/19/37 #3184 S-148 dated 3/6/39 #3185 dated 7/22/44 #3187 I n the attached memorandum specific reference is made to certain types of expenditures. The Board is confident that the Reserve Banks will exercise their discretion with respect to the expenditures authorized in this letter and the attached memorandum in full recognition of their responsibilities as stewards of public funds. As stated, none of the expenditures need be submitted to the Board in advance for approval. The Board will rely upon its examiners to note such expenditures during the course of their regular examinations and report as to any cases which they feel should be brought to the attention of the Board. If in the review of any such report it appears that a particular expenditure is of a questionable type, the Board will then take the matter up with the particular bank concerned. [Jan. 16,1945, S-826-a, Enclosure with S-826] Memorandum Regarding Certain Types of Expenditures Supplementing Board's Letter of January 16,1945, S-826 Mementos to retiring directors The practice of making some appropriate parting presentation is not unusual among corporations and other organizations and the fees received by Federal Reserve directors for attendance at meetings are not large in view of the service which they are called upon to render without other remuneration. Accordingly, the Board considers that the question of what memento or token, if any, should be given to retiring directors in commemoration of their service in the public interest may properly be left to the good judgment of the remaining directors. Reasonable expenditures for this purpose, therefore, will be regarded as meeting with the approval of the Board. Expenditures for welfare and educational work, etc. As stated in the Board's letter of December 13,1924 (X-4211), the Board is of the opinion that Federal Reserve Banks have the right to make appropriations from their funds for the purpose of welfare and educational work among the employees of the respective Banks. They may also pay for official luncheons, dinners, and meetings and for entertainment of local and out-of-town visitors and groups incidental thereto when such entertainment is on an official, rather than a personal, basis. Such expenditures should be kept within a reasonably low limit. I n case of doubt as to whether a particular expenditure is a proper one, the matter should be referred to the Board. THE FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS 217 Minor expenditures for testimonials, etc. Some questions have been raised in the past as to minor expenditures of Reserve Banks for testimonials, floral offerings, and similar purposes. The Board believes that the board of directors of each Reserve Bank should be free to exercise its discretion in authorizing such expenditures in reasonable amounts. Recognition of long service Reasonable expenditures for service certificates, pins, emblems, or other tangible marks of recognition of long service may be considered as directly related to the conduct of the Bank's affairs if authorized as part of the employee relations program approved by the directors. Gifts to retiring employees Expenditures for gifts to employees at time of retirement are not believed to be proper charges to Bank funds. The institution as such has made provision for the retirement of employees through its payments to the Retirement System and accordingly, the Board does not approve of the expenditure of Bank funds for gifts to employees at the time of retirement. Expenditures for purposes not directly related to the conduct of the BanWs affairs I n a number of instances the Board has had occasion to state that it can not authorize expenditures of Federal Reserve Bank funds by way of donations to further purposes no matter how worthy which are not directly related to the conduct of the affairs of the Banks. The Board continues in this belief. This position relates to such cases as contributions in response to appeals for national and community welfare and charitable funds. [May 13. 1946, S-911, Sec. of Bd. to Chairmen and Presidents of aMF.R.Bks.] In a letter dated January 16, 1945 (S-826), addressed to the Chairmen and Presidents of the Federal Reserve Banks, the Board reviewed the basic considerations involved in determining what expenditures would be regarded as sufficiently related to the conduct of the affairs of a Reserve Bank to be appropriate for the exercise of its discretion without advance approval by the Board. I n the memorandum attached to that letter the Board stated that it continued to be of the belief that it could not authorize expenditures of Reserve Bank funds by way of donations to further purposes, no matter how worthy, which were not directly related to the conduct of the affairs of the Banks. I t was further stated that this position applied to such cases as contributions in response to appeals for national and community welfare and charitable funds. However, several cases involving contributions to community projects have come to the attention of the Board which have caused the Board to feel that it was desirable to attempt a further clarification of its statement of policy. I n one instance, a Reserve Bank was solicited for a contribution toward the cost of a park in a city in which a branch of the Reserve Bank was located to be dedicated as a memorial to residents of the city who had served in the war. The contribution would be at the rate of $40 for each employee of the branch in the military service. 28-680—64—vol. 1 15 218 T H E FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS I t was obvious, however, that the branch of the Reserve Bank would receive no peculiar benefit, although the park might be of great use and benefit to the people of the community generally. Moreover, it was observed? there might numerous other civic projects throughout the district which might be based upon similar considerations. The Reserve Bank, upon reviewing the questions involved, came to the conclusion that it was not advisable to make the contribution and the Board of Governors concurred. I n another case, a Reserve Bank was asked for a contribution to a fund being raised locally to finance a national contest for the best plan and design for a large memorial which had been authorized by Congress. The project would cover several blocks of a blighted area in the city and the Reserve Bank was located one block from that area. Property owners in the vicinity of the area were being asked to contribute to the fund. Banking institutions, in particular, were contributing, and the Reserve Bank, as a property owner and landlord, felt that it also should participate. The improvement of the area, it was felt, would benefit the employees and other occupants of the Reserve Bank building and the people with whom they dealt. These benefits, however, would not be different from those accruing to others in the general vicinity. I n a third case, a request was made of a Reserve Bank for a contribution to a fund for the construction of a hospital which would serve principally the day-time employees in the business area in which the Bank was located and which would replace two other hospitals. One of the hospitals had been used by the Reserve Bank for medical services for its employees that could not readily be performed by the Bank's medical department, such as X-ray work, emergency services, and compensation cases, and it was felt that the value of the hospital facilities to the Bank's employees would be greatly enhanced by the new building. Substantial contributions w^ere being made by commercial banks in the general area served by the hospital. The proposed contribution, however, would not entitle the Bank or its employees to any special benefits or privileges different from those that would be available to any one else. I t was also understood that none of the Governmental agencies in the vicinity could make, or had made, any contribution. The latter two cases especially presented difficult questions in view of the discretion with respect to expenditures which has been left to the Board and the Federal Reserve Banks under the terms of the Federal Reserve Act and the fact that the law places the Federal Reserve Banks in a different position from that of Governmental offices in the cities in which Federal Reserve Banks and branches are located. This difference is recognized by the provisions of the Act which make Federal Reserve Bank buildings subject to taxation and which, as stated in the Board's letter of January 16, 1945, evidence an intention on the part of Congress that there should be some room for latitude on the part of the Banks as corporations in determining what is a reasonable and proper expenditure in particular cases. The Board has also recognized the difference in approving expenditures by the Reserve Banks for hospitalization and surgical benefits for employees which are not available to employees in the field offices of the Government. THE FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS 219 Notwithstanding these considerations however, the Board can not escape the conclusion that, because of the special relationship between the Federal Reserve Banks and the Government and the Government's residual interest in the assets of the Federal Reserve Banks, careful consideration must be given to what should be regarded as "necessary expenses" under Section 7 of the Federal Reserve Act, and that in determining the policy to be followed in these matters, the limitations on local Governmental offices should be borne in mind. Contributions of the types referred to above would be primarily for purposes of local community welfare, and local offices of the Federal Government are not authorized to make such expenditures. The Board feels that contributions of this kind are not for a purpose so directly related to the conduct of the affairs of the Federal Reserve Banks as to justify their being regarded as "necessary expenses" and accordingly that they should not be made by the Reserve Banks. [Mar. 21, 1962, S-1439, Sec. of Bd. to Presidents of all F. R. Bks.] One of the matters taken up with the Board of Governors at the time of the last Presidents' Conference was the suggestion that the Board give consideration to the possibility of changing the position which it had taken in the past and authorize the Federal Reserve Banks to make contributions to such organizations as Community Funds, Red Cross, and hospitals, such contributions to be at the discretion of their own Boards of Directors and in conformity with whatever broad directive the Board might issue. As you know, this matter has been presented to the Board on a number of occasions. I t was thoroughly reviewed in 1945 when its letter of January 16, 1945, S-826, was sent to the Chairmen and Presidents of all the Federal Reserve Banks. Subsequently, requests were received by Federal Reserve Banks for contributions of this kind and, after reviewing the matter again, the Board came to the conclusion that the existing policy should not be changed. The Chairmen and Presidents of the Federal Reserve Banks were so advised in the Board's letter of May 13,1946, S-911. I n 1950 one of the Federal Reserve Banks, in a thoughtfully worded letter, raised the question with the Board again and after reviewing the problem thoroughly the Board replied as follows: I n support of your proposal, you comment that with respect to such contributions the Reserve Banks do not differ greatly from other Federal and State-chartered institutions which recognize their community responsibilities in this manner. We recognize that in the communities in which the Reserve Banks are located, the public may tend not to distinguish between the Reserve Banks and other banks and business concerns which make such contributions, and that there may be some feeling that the Reserve Banks are shirking their responsibilities. We continue to believe, however, that the nature of the organization, purposes, and operations of the Reserve Banks is such as to make it very difficult, at best, to find a direct relationship between contributions for community welfare and the conduct of the affairs of the Reserve Banks which would justify a conclusion that the contributions are necessary expenses of the Reserve Banks; and it seems 220 T H E FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS to us that there is a substantial difference between the Reserve Banks and commercial banks in this respect. I n addition, the residual interest of the Government in the assets of the Reserve Banks and the disposition which is now being made of their earnings, raises further doubt as to the propriety of contributions by the Reserve Banks which are not made by Government agencies. You also point out that express statutory authority has been given to national banks and to (State chartered) corporations to make contributions of this nature. The fact that such specific authority was considered necessary in the case of national banks is itself a reason for questioning the authority of the Reserve Banks to make these contributions in the absence of a similar authorization. Moreover, you will recall that the original bill to authorize national banks to make such contributions contained a provision authorizing contributions by the Reserve Banks, but this provision was omitted from the bill which was finally enacted. I n order to take a liberal position today with respect to contributions by the Reserve Banks it would be necessary to disregard this legislative history, as well as the long-established position of the Board which might be considered an administrative interpretation of the law. While the question concerning the legal authority of the Reserve Banks to make these contributions cannot be answered with finality and there may be well-founded differences of opinion with respect to it, we believe that it is essential that a uniform position be taken by the Reserve Banks. Differences in policy among the Reserve Banks or the fact that a particular Reserve Bank made contributions in certain cities or for certain purposes and did not make other contributions would invite questions by the public and by Congress. The absence of other governmental controls and supervision under existing law places upon the Board and the Federal Reserve Banks a peculiar responsibility to be certain that any expenditures are clearly authorized by law and to be able to justify fully any item which may be questioned. I n view of the foregoing, the Board, while sympathetic with the motives which prompted your request, does not believe that it should depart from the position which it has taken in the past. I t is realized that the Federal Reserve Banks may have some difficulty in explaining the unique position they occupy in the local community and why they are different from local banks and business concerns. However, in view of the considerations set forth above, the Board does not believe that it should depart from the position it has taken in the past. [Feb. 6,1958, S-1647. Chairman of Bd. to Chairman and of attF.fi. Bks.] President As you know, the question of expenditures by the Federal Reserve Banks for membership dues and contributions has been considered and has been the subject of discussion during the past year by the Conference of Chairmen, the Conference of Presidents, and the Board, both severally and jointly. THE FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS 221 As a result of these discussions, the Board believes that there is a mutual understanding of the problem of handling such expenditures with due regard to the public-interest aspect of the Federal Reserve System, the general supervisory responsibilities of the Board, the regional character of the Federal Reserve Banks, and the responsibilities conferred upon the Bank Directors by Section 4 of the Federal Reserve Act. I t is recognized that certain expenditures might be very appropriate in a purely private business but would be inappropriate in the case of a Federal Reserve Bank in view of the public nature of its funds and operations. The Board feels that there is also mutual and general understanding throughout the System that expenditures for membership dues and contributions should conform to the general policy on "Discretionary Expenditures" as set forth in Item # 3187 of the Federal Reserve Loose-Leaf Service, and that memberships at Bank expense should be limited to those which can be justified either by the activities of the organization or by the benefits received by the Reserve Bank. I n view of these understandings, the Board believes that there is no need at this time for it to make a further delineation between appropriate and inappropriate expenditures, and that the interests of the System will be properly served if the Officers and Directors of the Individual Reserve Banks exercise their discretion to determine whether expenditures for membership dues and contributions are appropriate and "necessary expenses" within the meaning of Section 7 of the Federal Reserve Act. The Board also believes that it will be helpful, both to the Directors and to the Board, in reviewing proposed expenditures for membership dues and contributions to have future budget material include a list of the number and amount of such expenditures, and the justifications therefor. Accordingly, the Board's Accounting Manual will be revised as indicated in the attachment hereto. Again, I would like to express the Board's appreciation for the interest that has been taken in this matter by the Directors and Officers of the Federal Reserve Banks. The progress that has already been made in eliminating doubtful items has been noted with particular gratification. This letter is being sent to both the Chairman and the President of each Federal Reserve Bank. [Oct. 2, 1958, S-1673, Vice Chairman of Bd. to Presidents of all F.B.Bks.] This concerns the memorandum dated June 17, 1958, submitted by Mr. Erickson, Chairman of the Conference of Presidents, to the Board of Governors regarding the use of Federal Reserve funds for nonofficial entertainment of persons not in the employ of the Federal Reserve Banks. I t will be recalled that this memorandum was submitted following discussion of this matter at the Joint Meeting of the Board and the Presidents on June 17. The memorandum stated that "it is the unanimous opinion of the Presidents that inclusion of wives and husbands of Federal Reserve employees at appropriate Bank functions, such as A.I.B. conventions, Federal Reserve Bank annual dinners, Christmas parties and similar 222 THE FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS affairs, is an integral, necessary and highly desirable part of the Reserve Banks' personnel relations programs." The memorandum further stated that "the Presidents feel that a prohibition of this type of expenditure would not only work hardships on personnel activities but would restrict the Reserve Banks in filling their proper roles in the banking community." I n line with the general views set forth with regard to "Discretionary Expenditures" in Item #3187 of the Federal Reserve LooseLeaf Service, the Board believes that due consideration should be given to the public interest aspect of the Federal Reserve System when use of Federal Reserve funds for nonofficial entertainment of persons not in the employ of the Federal Reserve Banks is contemplated, and that expenditures of this nature should be limited to those which can be justified by the benefits received by the Reserve Bank and the Reserve System. I n the case of annual dinners, Christmas parties and similar affairs given by a Reserve Bank for its own employees, the Board agrees that the inclusion of the wives and husbands of the Bank's employees (and guests of unmarried employees) is a necessary and desirable part of the personnel relations program, and results in benefits to the Bank concerned. The Board is of the opinion, however, that any benefits derived from dinner parties given outside of the Bank for delegates from other Federal Reserve Banks, and their waives, attending conventions of organizations such as the American Institute of Banking would not be sufficient to justify the expenditure. [May 11, 1961, S-1791, Asst. Sec. of Bd. to Presidents of F.R. Bks.~\ As you know, Reserve Bank budget items for membership dues and contributions have been of particular concern to the Board in recent years. The interest and cooperation of the Reserve bank presidents and their boards of directors in reviewing these expenditures have been most helpful. Considerable progress has been made in minimizing the potentiality for criticism in this sensitive area. I n reviewing budget performance records for 1960, however, a new trend has been noted that might undermine some of the good already accomplished. Some payments that were budgeted in prior years under membership dues or contributions have now been reclassified in other expense categories. For example, in 1960 one Reserve Bank reclassified its payments to the following organizations and eliminated them from the supplementary statement of membership duesund contributions. National Industrial Conference Board Urban Land Institute Policemen, firemen, and postal clerks associations The Bank advised that after some deliberation the payments to the KTICB and the Urban Land Institute were considered to be de facto subscriptions to the publications of these organizations. I t considered disbursements to the policemen, firemen, and postal clerks associations to be payments for services rendered. There is considerable merit to the view that payments to organizations such as the N I C B do not fit exactly the definition of membership dues inasmuch as they do enable a Reserve Bank to receive certain THE FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS 223 publications not otherwise available. Nonetheless, the Board feels that payments of this type should be included in the supplementary statement of membership dues and contributions to avoid any possible interpretation of an effort to cover up such expenditures. Similarly, the Board recognizes that there may be local situations where contributions to groups or associations of public service employees might be considered "payments for services rendered." Previous reviews of such payments, however, have indicated that these services would be performed without such contributions and, in fact, most Reserve Banks do not make them. Where such payments are made, it is important that they be shown as a contribution and included in the supplementary budget statement. I t may well be that there are other instances of a similar nature that have not come to the Board's attention. Once payments are deleted from the supplementary statement, it is difficult to trace specific items. I t would be appreciated, therefore, if in preparing their 1962 budgets the Reserve Banks would include all membership dues and contributions in the supplementary statements. The Board will be glad to discuss any questions concerning items about which there may be some doubt as to whether they should be included. #3188. Rental and release of outside space. [Mar. 25, 1943, S-625, Sec. of Bd. to Presidents of all F. R. Bks.] Recently a number of the Federal Reserve Banks and Branches have found it necessary, in view of expanding operations, to rent outside space. Some of the Federal Reserve Banks have written the Board of such developments, but in order that information of this nature may be currently available, it is requested that in the future the Board be informed of leases entered into for the rental of outside space, including space used exclusively for fiscal agency activities, and of any case in which a building owned by the Bank but previously rented to outsiders is taken over by the Bank. The release of any such outside space should also be reported to the Board. I n this connection, it will be appreciated if you will submit a statement as to all outside space now occupied by your Bank and its Branches, showing the address, monthly or annual rental, number of square feet of space, and activities housed in such space. [April 11,1961, S-1789, Sec. of Bd. to Presidents of F. R. Bks.] This supersedes the Board's letter of March 25, 1943 (S-625; F.R.L.S. # 3 1 8 8 ) , which requested information regarding rental of outside space by the Reserve Banks. The Board now feels that information concerning space in Bank-owned buildings rented to tenants should also be obtained. Accordingly, it is requested that in the future the Board be informed of (1) leases entered into for the rental of outside space, including space used exclusively for fiscal agency activities, and (2) of space within a Bank-owned building leased to tenants. Renewals and terminations of leases should also be reported to the Board. I n connection with space leased for Bank use, data submitted should show location, monthly or annual rental, number of square feet of floor space or cubic feet of vault space, use of such space, and expira 224 THE FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS tion of lease. Concerning space occupied by tenants in Bank-owned buildings, please show name of tenant, number of square feet of space, monthly or annual rental, and expiration of lease. #3188.1. Leasing space in Federal Reserve buildings to outside tenants. [June 12,1953, Sec. of Bd. to Presidents of all F. R. Bks.\ The question of leasing space in Federal Eeserve buildings to outside tenants has arisen in connection with planning new branch buildings. Recently the Board had occasion to consider in an individual case whether, because of the nature of the business, a prospective tenant would be a suitable one for a Federal Reserve building. The Board has taken the position that in new Federal Reserve buildings—and this is also applicable, wherever practicable, to new additions to existing buildings—the design should be such that unused space could be leased to outside tenants. The Board believes that this is in accordance with sound business judgment. This is not to imply, however, that space reserved for future expansion or other space not needed for current operations should necessarily be rented out. I n some cases it might be preferable to close off the reserve space. Either course, it is believed, would be preferable to extravagant use of space which would properly subject the Bank or branch to criticism. Tn connection with the question of tenants, the Board is of the opinion that, as a general policy, space in a Federal Reserve Bank building should not be rented to banks, savings or loan associations, investment houses, security dealers, or other similar financial organizations dealing with the public. I n view of the building programs now under consideration at the Federal Reserve Banks and branches it appears desirable that the Board's views on these matters be made known to all Federal Reserve Banks. [Dec. 7,1959, Sec. of Bd. to Presidents of all F. R. Bks.~\ The Board's letter of June 12,1953 (F.R.L.S. #3188.1) concerns the leasing of unused space in new Federal Reserve Bank buildings or additions pending need of such space for bank operations. Recently a question was raised whether there would be any objection to finding tenants through real estate brokers. While each situation should be decided on its own merits, and in some instances it might be necessary as a last resort to pay real estate commissions, the Board is of the opinion that in general it would be preferable for the Reserve Banks to obtain their own tenants. [April 11,1961, S-1789, Sec. of Bd. to Presidents of F. R. Bks.] This supersedes the Board's letter of March 25, 1943 (S-625; F.R.L.S. # 3 1 8 8 ) , which requested information regarding rental of outside space by the Reserve Banks. The Board now feels that information concerning space in Bank-owned buildings rented to tenants should also be obtained. Accordingly, it is requested that in the future the Board be informed of (1) leases entered into for the rental of outside space, including space used exclusively for fiscal agency activities, and (2) of space within a Bank-owned building leased to tenants. Renewals and terminations of leases should also be reported to the Board. THE FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS 225 I n connection with space leased for Bank use, data submitted should show location, monthly or annual rental, number of square feet of floor space or cubic feet of vault space, use of such space, and expiration of lease. Concerning space occupied by tenants in Bank-owned buildings, please show name of tenant, number of square feet of space, monthly or annual rental, and expiration of lease. #3189. Employee hospitalization and surgical benefits. [Mar. 11,1946, Sec. of Bd. to Presidents of all F. R. Bks.] The Board of Governors approves the general program as recommended by the Presidents' Conference under which each Federal Reserve Bank would assume two-thirds of the cost of providing hospitalization and surgical benefits through individual, husband and wife, or family membership, as the case may be, in the Blue Cross Association or Associations (or other comparable nonprofit organizations) of its district for each of its officers and employees who may wish to avail himself of the privilege. The Board is prepared, therefore, to consider such proposals under the above program as the directors of the respective Federal Reserve Banks may approve. I n submitting a proposed program, please accompany it with a schedule of the benefits and costs and an estimate of the annual expense to the Bank. [Aug. 19,1952, Sec. of Bd. to Presidents of all F. R. Bks.] I n the Board's letter of March 11, 1946, the Federal Reserve Banks were advised that the Board had approved payment by the Federal Reserve Banks of two-thirds of the cost of hospitalization and surgical benefits of a group hospitalization program. I n line with this letter, the Banks submitted their plans for the Board's approval together with the estimated costs. Subsequent changes in benefits and costs have likewise been submitted to the Board. I n some instances recently, Federal Reserve Banks have submitted to the Board relatively minor increases in the costs of such plans. I n each of these instances the increased cost had been initiated by the Blue Cross organization, entailed no significant benefit increases, and left the Bank no alternative but to pay the increased rate or withdraw from the group. Where these circumstances exist, it is not necessary for the matter to be submitted to the Board of Governors for its consideration. However, it will be appreciated if you will advise the Board of any change in benefits and costs in order that Ave may have current information with respect to these items. I t is assummed that your Bank will obtain such clearance as is necessary from the proper stabilization authorities. #3190. Major medical plan for Reserve Bank employees. [June 2,1959, S-1699, Sec. of Bd. to Presidents of all F. R. Bks.] The Board of Governors approves the major medical plan for the Federal Reserve Banks as presented by the Presidents' Conference on May 26,1959, including the payment of two-thirds of the premium cost for their officers and employees, effective as soon as necessary ar 226 T H E FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS rangements are completed. Enclosed is a summary of the principal features of the plan for which Board approval is given. I n the interests of maintaining a uniform approach, it is understood tliat all Federal Eeserve Banks will keep their programs within the maximum benefits provided under the approved plan. #3191. Electronic equipment. Report on cost. Budgeting. [Nov. 16, 1961, S-1816, Sec. of Bd. to Presidents of F. R. Bks.] The movement of the Federal Reserve Banks toward the acquisition of computers and electronic check processing equipment has prompted the Board to re-examine the procedures under which expenditures for such equipment are reported to it. While some Banks have voluntary submitted to the Board rather complete information regarding their proposals to purchase or rent data processing equipment, there is now no stated requirement for such submissions. Under the present budgetary procedure, expenditures for this purpose need only be tentatively provided for in the budget for furniture and equipment purchases or rentals if they are anticipated when the budget is prepared or subsequently explained in the budget experience report if they were incurred without having been provided for in the budget. I n view of the costly nature of electronic equipment, the Board believes that it should be fully informed, before any firm commitments are made, as to the considerations leading to a decision to purchase or rent such equipment. Experience indicates that the present budgetary reporting procedures are not entirely satisfactory in this regard, mainly because the desired information is not available when the budget is prepared and the Board therefore does not always have an opportunity to give the matter appropriate consideration before the expenditures are made. Under somewhat similar circumstances, the Board has stipulated that its approval of budgetary provisions for major repairs and alterations to Bank buildings should not be construed as approval of the building project and that the Board should be advised specifically of such projects before they are undertaken. The Board recognizes that the primary responsibility for decisions with respect to the use of electronic equipment rests with the management of each Reserve Bank, and it has no intention of minimizing this responsibility. The Board feels, however, that a procedure generally similar to that followed for building projects would be desirable in connection with proposals to rent or purchase costly electronic equipment. Accordingly, it will be appreciated if your Bank will hereafter— (1) Continue to make the usual budgetary provision for all purchases or rentals of furniture and equipment that can be foreseen when the budget is prepared. (2) Advise the Board specifically, before making commitments that cannot be withdrawn without penalty to the Bank, of intentions to acquire any unit or system of office equipment having a purchase price of as much as $50,000 or a rental cost of as much as $4,000 per month. The information in this connection should THE FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS 227 indicate the kind and cost of the equipment, the benefits expected from its acquisition, and the effect it will have on operating expenses. Such information might well be a summary of the material presented to the Bank's board of directors at the time the acquisition was approved. (3) Observe the foregoing procedures in any case where a decision has been made to purchase equipment that was previously acquired on a rental basis. BOARD OF GOVERNORS, FEDERAL RESERVE SYSTEM, Washington, D.C., April 10,1963. DEAR S I R : I n its letter of November 16, 1961 (S. 1816) the Board requested that it be advised specifically before any Reserve bank made a firm commitment for the acquisition of any unit or system of office equipment having a purchase price of as much as $50,000 or a rental cost of as much as $4,000 per month. At that time this arrangement was felt to be desirable because of a belief that neither the budget nor functional expense reporting procedures were adequate to provide the Board with sufficient information concerning contemplated acquisitions of costly electronic equipment. Since 1961, however, the budgets have been changed from an annual to a semiannual basis; the functional expense reports have been expanded to show in each function all of the important costs applicable thereto; all of the Reserve banks now have data-processing computers, and all of them have also received the Board's approval to acquire at least one unit of electronic check-processing equipment; and the economic feasibility of selected applications of electronic equipment has been demonstrated and the banks have gained considerable experience in this field. I n the light of these developments the Board is now of the opinion that there is no longer any necessity for it to be advised before commitments are made to acquire any office equipment. Accordingly, special advice of contemplated office equipment acquisitions, as requested in the Board's letter of November 16, 1961, may be discontinued. I n the future the Board will rely on the budget reports for information concerning contemplated acquisitions of major units of office equipment, and on the functional expense reports for information with respect to the effectiveness of the use of such equipment. As indicated in its earlier letter, the Board believes that the primary responsibility for decisions concerning the use of electronic equipment rests with the management of each Reserve bank, and it assumes that careful attention will continue to be given to such matters. For the reasons set forth above, the Board's letter of November 16, 1961 (S. 1816), is revoked. Very truly yours, MERRITT SHERMAN, Secretary. 228 THE FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM, Washington, D.C., June 21, 1955. : The Board expects to review again with the Presidents while they are in Washington certain expenditures of the Federal Reserve banks. A copy of a self-explanatory letter being sent to the chairman of the Presidents' conference in this connection is attached. Sincerely yours, DEAR S I R W M . M C C . MARTIN, J r . BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM, June 21, 1955, Mr. C. S. YOUNG, Chairman, Conference of Presidents, care of Federal Reserve Bank of Chicago, Chicago, III. DEAR M R . YOUNG : The Board recognizes that it is difficult to lay down hard and fast rules to distinguish between appropriate and inappropriate expenditures. The Board continues to feel that decisions on certain Federal Reserve bank expenditures should be guided by the general principles set forth in its letter of January 16, 1945 (S. 826). These principles recognize that Federal Reserve banks have a special relationship to the Government. Unlike privately owned corporations, Federal Reserve banks were established by the Congress to perform essential public functions. Reserve bank expenditures, as of course you know, cannot be viewed in the same light as those undertaken by private enterprises. The Board is strongly of the viewpoint, as stated at meetings of the chairmen's and Presidents' conference, that the Federal Reserve banks themselves have primary responsibility for determining the appropriateness of expenditures and that they should be prepared to justify expenditures. As the Board stated in the 1945 letter, however. Congress has placed upon the Board a measure of responsibility for reviewing expenditures of the Federal Reserve banks. Attached to the 1945 letter was a memorandum specifically referring to certain types of expenditures which could be incurred without the approval of the Board. The letter concluded with the statement that the Board was confident that the banks would exercise their discretion in full recognition of their responsibility as stewards of public funds and that the Board would rely on its examiners to comment in reports of examination on any expenditures which they felt should be questioned. The memorandum mentioned such matters as mementos for retiring directors, expenditures for welfare and educational work, minor expenditures for testimonials, recognition of long service, gifts to retiring employees, and expenditures for purposes not directly related to the conduct of the banks' affairs. The procedures outlined above have worked satisfactorily and there have been few occasions when the Board has thought it necessary to question specific expenditures. While the Board sees no objection to paying reasonable costs of luncheons and dinners given in connection with meetings of directors and other appropriate meetings arranged by the Federal Reserve banks, it questions the appropriateness of expenditures for professional entertainment, tickets for the theater and similar outlays. THE FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS 229 At the forthcoming meeting with the Presidents the Board would like to review this subject again with a view to reaching a more definite understanding with respect to expenditures of this type. A copy of this letter is being sent to the chairman of the respective Federal Reserve banks. Sincerely yours, W M . M C C . MARTIN, J r . BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM, Washington, D.C.. December 21,1956. DEAR S I R : At the recent conference of chairmen, I expressed the Board's concern about the variety and nature of some of the provisions in the 1957 Federal Reserve bank budgets for membership dues and contributions. I also referred to this matter in the recent letters to the presidents of the Federal Reserve banks regarding the 1957 budgets. The Board's concern is that all such expenditures reasonably qualify as "necessary expenses" within the meaning of section 7 of the Federal Reiserve Act. For example, payments to the American Institute of Banking in connection with the development of employees are regarded as appropriate. However, the Board feels that there are questions as to amount or type of some of the other contemplated expenditures. As background for this letter and to show the wide variety in type and amounts which has caused the Board's concern, I am enclosing a memorandum listing the budget provisions of the Federal Reserve banks for membership dues and contributions during the coming year. Expenditures for membership dues and contributions come within the general category of "discretionary expenditures," and the Board's policy with respect to this general subject is outlined in No. 3187 of the Federal Reserve looseleaf service. The paramount criterion in considering such proposed expenditures is the unique nature of the Federal Reserve banks, rather than the practice of commercial banks and other organizations in the community. Since the Board's policy as outlined in No. 3187 of the Federal Reserve looseleaf service does not specifically refer to membership dues, the following guides regarding such expenditures are suggested: 1. Reserve bank expenditures for memberships should be limited to those organizations whose purposes are directly related to the work of the Reserve bank, or organizations in which the bank should be represented, such as appropriate financial, business, and agricultural organizations. This principle applies regardless of whether the membership is in the name of the bank or an individual. 2. Individual memberships in general professional associations should be regarded as personal memberships at the expense of the individuals, as distinguished from individual memberships in associations which arise out of employment at the bank and are appropriate expenses of the bank. Examples of the personal type of memberships are national, State, and local bar and medical associations; American Economic Association : American Statistical Association; Institute of Accountants, etc. 230 THE FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS A membership in such an organization, however, could be regarded as an appropriate bank expense, if membership is necessary to obtain desired publications for the use of the bank. Examples of membership arising out of employment at the bank are memberships in credit, personnel, management, and bank auditors' associations; Industrial Nurses Associations, etc. r>. Memberships in social, college, luncheon clubs, and other such organizations should be personal expenditures, as it is difficult to see how they are appropriate uses of Federal Reserve funds, even though it is recognized that the bank may derive some indirect benefits from such memberships. After you have had a chance to discuss this matter at a meeting of your directors, the Board will appreciate any comments you may care to make and your advice as to any action concerning the proposed expenditures at your bank. A copy of this letter is being sent to the president of the bank for his information. Sincerely, W M . M C C . MARTIN, Jr. JUSTIFICATION No. 1 Advisory service—Jarvis & Fisher, Inc. This service provides specialists on a consulting basis in the field of workmen's compensation and unemployment compensation under the Ohio and Pennsylvania State laws. For our purpose, it is much less expensive to employ such a consultant than to retain such a qualified person on our payroll. JUSTIFICATION NO. 2 Federal Advisory Council—Justification for expenses Section 12 of the Federal Reserve Act provides for the creation of a Federal Advisory Council, the members of which are selected annually by the board of directors of each Federal Reserve bank. The act provides that the members of the Federal Advisory Council shall receive such compensation and allowances as may be fixed by their respective boards of directors subject to the approval of the Board of Governors. Meetings of the Council are held in Washington, D.C., at least four times each year, and oftener if called by the Board of Governors. The act further provides that the Council may, in addition to the meetings above, hold such other meetings in Washington or elsewhere as it may deem necessary, and may select its own officers and adopt its own methods of procedures. The Federal Advisory Council has the power, as provided in the Federal Reserve Act, by itself or through its officers to— 1. Confer directly with the Board of Governors of the Federal Reserve System on general business conditions; 2. Make oral or written presentations concerning matters within the jurisdiction of the Board; and 3. Call for information and make recommendations in regard to discount rates,, rediscount business, note issues, reserve conditions in the various districts, the purchase and sale of gold or securities by Reserve banks, open market operations by said banks and the general affairs of the Reserve banking system. The fees and allowances for members of the Federal Advisory Council have been approved by the Board of Governors and the directors of this bank, and are comparable to those fixed for the directors of Federal Reserve banks. The representative from the Fourth Federal Reserve District is usually invited to attend joint meetings of our boards of directors. An annual payment of $450 is made by each Federal Reserve bank to cover the expenses of the secretary's office of the Federal Advisory Council. THE FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS 231 The Council is strictly an advisory body to the Board of Governors. The members are usually resident bankers in the districts from which they are selected. The Council constitutes a link between the Board and representatives of banking in the 12 Federal Reserve districts. JUSTIFICATION No. 3 Medical program for employees All prospective employees must meet certain minimum standards of health, and current employees receive periodical health examinations to detect any illnesses in early stages, permitting the employees to seek medical treatment before an illness may become a major sickness. Minor illnesses are taken care of by a doctor or nurse to minimize absences that might otherwise occur. Chest X-rays to detect tuberculosis are arranged for employees through county facilities which are free at Cleveland and Pittsburgh but require a nominal charge to the bank at Cincinnati. The bank provides these services on its premises with nurses in attendance during daytime working hours and a doctor in attendance at each office on a partial-day basis. In addition, the medical departments provide medical services in emergencies and, if hospitalization is necessary, transport the sick or injured to a hospital by the best means available. This program benefits the bank by tending to reduce turnover and absenteeism, and eliminates the possibility of placing individuals in jobs for which they are physically unfit. It also reduces the possibility of injury claims being filed against the bank. JUSTIFICATION No. 4 Consultant service—James A. Davidson & Associates This firm was retained to make a preliminary study of our eating facilities. Breakdown of kitchen equipment, much of which is over 40 years old and for which replacement parts can no longer be obtained, required the review of an expert in the food service field. The bank benefited by getting an unbiased report of our facilities with recommendations and specifications for replacements of equipment and rearrangement for efficiency of operations. JUSTIFICATION No. 5 Architect's services It is sound business procedure to engage the services of competent architects and engineers when extensive additions, alterations or repairs to buildings are contemplated rather than attempt to deal directly with contractors. Our building managements are not trained professionals in this area and must rely upon the advice of the architect. The architect's services include preliminary and final drawings, cost estimates, specifications, obtaining bids for specifications and inspection to determine that specifications have been observed. The following are some of the projects for which fees were paid in the period covered. Main office Assembly room.—Constructed to provide a meeting room for a maximum of 95 people. Meetings conducted by this bank are held for bankers, businessmen, economists, educators, scholars, and the bank's own staff. No regular meeting room was available and arrangements were always on a makeshift basis. This room was designed and constructed to meet this urgent need. Fallout shelter.—In order to carry out emergency responsibilities asigned to this bank under Executive Order No. 10480 and consistent with Government policy to make shelter areas available in present buildings wherever possible, certain areas of this bank, which are below street level, were prepared for use by employees as a shelter area if an emergency should occur. The plan does not interfere with the day-to-day operation of the departments located in the areas reserved for use as a shelter area during emergency periods. Services of the architects were required in connection with ventilating, plumbing, and electrical problems including standby generating equipment. Tenants' quarters.—Because of the arrangement of private offices and conference rooms in the area used by the Appellate Division of the Internal Revenue Service, it was necessary to have the architects plan a rearrangement of air ducts in order to get a more effective flow of air. 232 THE FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS Roof and Hashing.—In 1962, it was necessary to replace the roof and flashing which had been installed in 1923 because of the development of leaks which were causing internal damage. It was not economical to do any further patching. The architects drew plans and specifications and followed with inspections to make certain the specifications were observed. Rockwell entrance.—The only vehicle entrance into this building is from Rockwell Avenue into our security court which has been unchanged since 1923. The road is too narrow and lacks overhead clearance for many present-day vehicles. This requires trucks and automobiles to make a wide sweep into Rockwell Avenue when entering, which creates traffic problems. The architect has made preliminary plans for widening the entrance and for providing additional head room on the ramp. Guard station No. 5.—The protection department headquaters is the heart of our security program because all signal devices, alarms, and similar equipment are located there. There are only two possible entrances to this area, one of which is protected by an armorplate, bullet-resistant glass pass-through. Guard station No. 5 was designed and constructed to give similar security to the second point of entrance. Steam return and corrosion investigation.—Corrosion was taking place in the live and return steam lines which would be destructive to pipes, if permitted to continue, in addition to causing blocked traps, valves, etc. The architects, working with the manufacturer of the steam, recommended an amine coating process which would gradually disintegrate the corrosion which had been formed. They designed the necessary plumbing for injecting the amine solution. NCR room, third floor.—The architect's services included the plans for installation of a transformer and wiring and appropriate ventilation for the installation of a complement of National Cash Register equipment to process checks encoded with magnetic ink, as well as to provide for additional complements as delivered. Cincinnati branch Remodeling oil storage and civil defense program.—Architect's fee in connection with installation of four combination gas and oil boilers which replaced two obsolete stoker-fired coal-burning boilers in use since 1927, and alterations for various purposes. Water tank, diesel exhaust, pipe extension.—Architect's fee in connection with modification of existing exhaust from diesel generator to comply with city ordinance. Coin room motor vibration study.—Study made to eliminate vibration in basement slab of our coin division caused by air conditioning equipment and to check our coin division floor from structural weakness evidenced by a separation in the floor. Building washrooms.—Architect's fee in connection with renovating and remodeling of all washrooms in building to maintain value of building and improve employee and tenant relations. Fixtures obsolete and plumbing defective. Rifle range.—Architect's fee in connection with study of target range construction for training guards in more efficient use of firearms and protection of property. Air conditioning coin room.—Engineer's fee in connection with replacement of worn out air-conditioning equipment on basement floor. Fourteenth floor sewer line.—Architect's fee in connection with correction of faulty plumbing and unsanitary condition. JUSTIFICATION Xo. 6 Conference of Presidents The Conference of Presidents of the Federal Reserve banks is a nonstatutory organization within the framework of the Federal Reserve System. The Presidents meet approximately every 3 months, more frequently if necessary, in Washington, D.C., to confer on mutual problems of the Federal Reserve banks and the System. The objective of the Conference is to seek continuous improvement in and coordination of Reserve bank operations. The conclusions on the Conference may be discussed with the members of the Board of Governors and, where appropriate, are submitted to the Board in the form of recommendations for Board action. The Presidents' Conference works through its standing Committees and Subcommittees. Each President is assigned the chairmanship of one of the standing Committees and also serves as a member of other Committees. These include the Committees on Bank Supervision, Research and Statistics, Collection THE FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS 233 and Accounting, Discounts and Credits, Legislation, Emergency Operations, Fiscal Agency Operations, Bank Relations and Public Information, Systems and Procedures, Personnel, and Miscellaneous Operations. The Committees provide guidance and direction to their respective standing Subcommittees comprised of officers from the 12 Federal Reserve banks. Meetings of the Subcommittees are generally held at the Federal Reserve banks or the Federal Reserve Building in Washington, D.C. Reports of the Committees and Subcommittees are submitted to the Presidents for their consideration and discussion at the next meeting of the Conference, Secretary to Conference of Presidents The secretary is appointed by the Chairman of the Conference to serve for a 1-year term. The responsibilities of the secretary include preparing meeting agenda and minutes and maintaining the Conference's files. The secretary's expenses include payment for an extra room at the hotel which is used by the Presidents and Conference Committees for meetings and discussions held before and after the Conference meetings at the Board of Governors. COMMITTEES Membership on the various Committees consists of representatives from the Reserve banks. Some travel expense is necessary when meetings are held. Committee on Emergency Operations The Committee has the responsibility for suggesting and coordinating System emergency plans and programs, and the emergency organization structure required for all of the Reserve banks. This relates to the responsibility of the Board of Governors for the development of national security preparedness measures relating to monetary and bank credit policies and programs as outlined in the President's Executive Order 11094 of February 26, 1963, which superseded Defense Mobilization Order 1-20 of February 1956. This Committee is assisted in the performance of this work by its Subcommittee on Emergency Operations. Mr. Clyde Harrell, Vice President in charge of the Pittsburgh branch of this bank, has, for a number of years, served as the Chairman of this Subcommittee. In this capacity, it is necessary for him to meet with the other members of the Subcommittee to discuss matters pertaining to emergency preparedness of the Federal Reserve and member banks. These trips are necessary in fulfilling the System's obligation as outlined in the aforementioned Executive order. Insurance Committee of Federal Reserve banks The Insurance Committee of the Federal Reserve banks is a System Committee consisting of 1 representative and 1 alternative from each of the 12 Federal Reserve banks. It is the purpose of the Committee to consider common problems of the 12 Reserve banks relating to their acquisition and maintenance of insurance coverage or, where appropriate, to agreements among the Reserve banks to self-insure certain risks. Subcommittee on Electronics The Subcommittee on Electronics deals with the problems of using sophisticated electronic equipment intended to increase the efficiency (subject to economic considerations) of the operations of the Reserve banks. The travel expense under review was necessary to attend a meeting of the Subcommittee, held at another Reserve bank, for the purpose of considering various aspects of a study on the performance, capability and feasibility of proposed automatic currency sorting and counting equipment. Ad Hoc Subcommittee on Rationale Underlying System Relationships with Member banks The meeting of the subcommittee held May 3, 1963, at the Federal Reserve Bank of Chicago, Chicago, 111., was held pursuant to the instructions of the conference of Presidents of the Federal Reserve System. The specific assignment of the subcommittee was to consider : 1. The need for changes and improvements in the manner in which the Federal Reserve banks conduct their operating relationships with commercial banks. 2. What rationale should be used in determining whether services to, and relations with, member banks are appropriate. 28-680—64—vol. 1 16 234 THE FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS The following committees, conferences, and seminars are not directly responsible to the conference of Presidents, but operate within the Federal Reserve System. Federal Open Market Committee The President of this bank regularly attends the meetings of the Federal Open Market Committee and participates in the deliberations that are involved in the making of monetary policy. Practice is for the Vice President in charge of research to accompany the President to such meetings. The Vice President aids the President in keeping informed on international, national, and regional business and financial developments. When the President is a member of the Federal Open Market Committee (alternate years), the Vice President serves as an associate economist of the committee. Research Advisory Committee This Committee is comprised of the directors of research of all Federal Reserve banks and research officers of the Boards of Governors: it often meets following the meeting of the Federal Open Market Committee. The Committee is responsible for supervising assignments and projects undertaken by all other System research committees. It reviews recommendations made by other committees in the research area. It also discusses economic developments and problems and their relationship to monetary policy. System Committee on Call Reports This Committee was established as an ad hoc committee of the System Research Advisory Committee and meets periodically. The purpose has been to investigate the problems associated with changes likely to be made in the frequency and detail of the call report. The work of the Committee is specifically focused on the data needs of the Federal Reserve System and the reports that will be needed from member banks to offset possible gaps in banking data. System Committee on Education and Publications This Committee meets periodically and includes members from all Reserve banks and the Board of Governors. The purpose of the Committee is to provide guidelines for the preparation and dissemination of information by the Federal Reserve System, including all Federal Reserve banks and the Board of Governors of the Federal Reserve System, about economic activity and monetary policy intended primarily for use by educational institutions. President's Committee To Appraise Employment and Unemployment Statistics A nationwide study was conducted for the improvement of the collection and interpretation of statistics on employment. The Committee was composed of economists from Federal Government agencies, State and local government organizations, private enterprise, and educational institutions. A member of this bank's research staff was appointed to that Committee. The results of the work of the Committee were published in a study entitled "Measuring Employment and Unemployment," published in 1962. System Committee on Debits This Committee was established as an ad hoc committee of the System Research Advisory Committee to review an intensive study of data on debits to deposit accounts in banks with a view to improving their usefulness in monetary analysis. Committee on Business Analysis This Committee meets semiannually and includes members from all Reserve banks and the Board of Governors. The Committee conducts studies of the nonfinancial factors affecting the level and composition of business activity on a national basis. In addition, the Committee undertakes periodic reviews of both regional and economic conditions. System Committee on Computers in Research This Committee meets periodically for the purpose of coordinating the development of computer applications to research activities within the Federal Reserve System. Committee on Current Reporting Series This Committee meets semiannually and includes members from all Reserve banks and the Board of Governors. The purpose of the Committee is to implement System-wide data collection programs as authorized by the Board of Gov THE FEDERAL RESERVE SYSTEM AFTER FIFTY YEAKS 235 ernors. These programs include the conducting of studies to determine the most efficient methods of obtaining information, methods and techniques to be used, and the quality of statistical series now maintained by the Federal Reserve System. The Committee also prepares procedural hand books to assure a uniform collection of information throughout the Federal Reserve System. System Committee on Financial Analysis This Committee meets semiannually and includes members from all Reserve banks and the Board of Governors. The purpose of the Committee is to conduct studies on the structure and functioning of financial markets and to improve methodology for handling available financial data. The Committee's work covers the following areas : business finance, consumer finance, Government finance, real estate finance, financial intermediaries, and flows of funds in money and capital markets. System Committee on Seasonal Adjustments Seasonal adjustment procedures are applied to a large number of statistical series that are computed in the research department. An understanding of the best methods of computing seasonal adjustment through the use of electronic data processing equipment is necessary. The System held a 2-day conference attended by representatives of all of the Federal Reserve banks and Government agencies in Washington on this particular problem. CONFERENCES Attendance of Reserve bank personnel at conferences requires travel expense when meetings are held in other locations. Conference of General Auditors—Biennial Attended by general auditors and key audit personnel who meet with members of the staff of the Board of Governors to discuss problems, methods, and procedures. From the discussions, certain standardizations of procedures and minimum frequencies of audits and examinations are developed and agreed on. The discussions have been invaluable in the development of a more effective audit program, and in the development and maintenance of high level professional competence by those persons engaged in this work. Conference of representatives of bank examination departments, Federal Reserve banks The Division of Examinations of the Board requires the officers in charge of the bank examination departments of Reserve banks to meet at the Board's offices in Washingon, D.C., at least once each year. These annual meetings afford the occasion to be certain that new rulings and interpretations are understood and that they are being given uniform treatment by all bank examination personnel. Examination conference, Washington, in 1962 The conference attended by the assistant vice president in charge of our examination department was devoted to a review with the staff of the division of examinations of previously submitted reports and memorandums incident to bank mergers and consolidations. The Board was to point out certain areas in the examination reports.; the kinds of additional information that should have been included in order to make them more helpful in supporting considerations given; and judgments which must be made by the Board of Governors. System personnel conference .• . This is the annual meeting of the personnel officers of the 12 Federal Reserve banks. Each bank benefits by these meetings through the discussions and talks that are given. This meeting permits an exchange of ideas assisting materially in the development of each bank's personnel policies and in better coordination of those policies throughout the System. Interstate conference on labor statistics Attendance at this meeting was associated with Mr. Brunner's carrying out his assignment for the President's Committee to Appraise Employment and Unemployment Statistics. 236 THE FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS Federal Reserve bank examination trust conference It has been customary at the end of the midwinter trust conference to have a meeting of all trust examiners and Federal Reserve Board personnel who have attended the conference. This meeting ordinarily has been held in the offices of the Federal Reserve Bank of New York since the midwinter trust conference is held in New York. The meeting is conducted by a representative of the Board. The meeting affords the opportunity to review common problems, trust examination procedures, and to outline areas for improvement in the examination procedures. Midwinter trust conference Trust examiners and other representatives of the Federal Reserve Bank of Cleveland historically have been invited to participate in the trust conferences sponsored and conducted by the American Bankers Association. From time to time when the examination schedule has permitted it. trust examiners have been directed to attend the trust conferences. The benefits derived from attending such conferences have been multiple. The subjects discussed in the formal general assemblies and in the workshops cover matters of importance to the administration of trust department in a world subject to the pronouncement and rapid changes in law, structure, and economic conditions characteristics of postwar American finance. The greater knowledge a trust examiner has of the problems of trust administration and of solutions thereof, the more effective he can be in examinations of trust departments. The knowledge gained by an examiner at these conferences is put to use in the conduct of a formal examination itself and also in the discussions which follow an examination when areas for improvement in the administration of the department under examination are discussed with the department's administrative officers. Also, very important benefits are derived through personal contacts the examiners have at such meetings with the personnel of trust departments of banks which are located in the Fourth Federal Reserve District. It is frequently possible at such times to discuss informally particular internal problems and to secure their resolution more easily than might be possible at the time of a formal examination. SEMINARS Attendance of Reserve bank personnel at seminars requires travel expense when meetings are held in other locations. Seminar on reserve projections The purpose of the seminar on reserve projections was to better acquaint members of the research staffs of the Federal Reserve Board of Governors and of the various Federal Reserve banks with the methods of projecting member bank reserves for purposes of keeping the Federal Open Market Committee better informed on the interpretation of financial developments and on the conduct of open market operations. System meeting on foreign exchange reports Pursuant to Executive Order No. 6560 dated January 15, 1934, and Executive Order No. 1033 dated February 8, 1949, and Treasury Department regulations issued thereunder, banks and corporations in the Fourth Federal Reserve District engaged in transactions in foreign exchange, transfers of credit, and the export of coin and currency are required to file confidential reports with this bank on forms prescribed by the Treasury Department. Various types of reports are filed monthly, quarterly, semiannually, and annually with this bank on behalf of the Treasury Department and the Balance of Payments Division of the Federal Reserve Bank of New York, which is very closely identified with the Treasury Department in this activity. The data reported on these forms are an important part of the basic information used in the formulation of Government financial policies and in the preparation of statistics on the U.S. balance of payments. The meeting was attended by Federal Reserve bank people engaged in gathering statistical data and by representatives of the Treasury Department. The purpose of the meeting was— (1) to enable Federal Reserve bank technicians who handle the foreign exchange reporting in each Reserve bank to learn more about the many complex reporting problems involved; (2) to give Federal Reserve bank staff members an opportunity to obtain information on the bgackground, purpose, and importance of these reports; THE FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS 237 (3) to enable staff members of the Federal Reserve banks to benefit from the intensive work done at the Federal Reserve Bank of New York in this area, in conjunction with the Treasury Department; (4) to provide an opportunity for an exchange of information and to discuss the problems the Reserve banks encounter in collecting the data ; and (5) to enable the Treasury Department staff to discuss the role of the Treasury Department in the foreign exchange reporting filed and the contemplated introduction of new forms which would provide greater coverage and obtain a more precise analysis of money market flows. JUSTIFICATION NO. 7 Visits to branches by officers from main office The President and First Vice President visit the branches regularly in the discharge of their duties. Other officers also make such visits from time to time. These trips are justified because a firsthand, on-the-spot appraisal is needed for general supervision, review, appraisal, and control of operations. Correspondence and telephonic communication by themselves are inadequate. JUSTIFICATION NO. 8 Boards of directors Section 4 of the Federal Reserve Act provides that every Federal Reserve bank shall be conducted under the supervision and control of a boardi of directors, and said board of directors shall perform the duties usually appertaining to the office of directors of banking associations and all such duties as are prescribed by law. In general, the directors are responsible for the conduct of the affairs of the Reserve banks in the public interest. The Conference of Chairmen of the Federal Reserve Banks, in 1941, adopted a statement on the functions of the Federal Reserve banks. This statement also gave some indication of the broad general responsibilities of directors: "There should be no limit to the work of the Federal Reserve banks in the field of cooperation, education, and leadership. The good that the banks can do is limited only by the intelligence, courage, and leadership of their directors and officers. On the other hand, we must not underestimate the routine or operating functions and responsibilities of centrol banking as they form a vital part of the System. On the assumption that there will be further centralization with respect to fiscal and monetary policy and that the objectives of that policy will be different and novel, involving measures which will take on an increasingly explicit regional differentiation, it seems desirable that the Reserve banks be firmly established as centers of information, enlightenment, and leadership. They must be able to submit comprehensive information, wisely interpreted, on economic problems and regional trends. They must be able to act as centers for interpretation in their districts of national policy and methods in the fiscal and monetary area. They must be able to assume leadership in times of emergency, and to exert proper influence on national policy, especially from the point of view of regional considerations." The directorship of a Federal Reserve bank is a position of public responsibility and the directors elected and appointed should be in a position to make available to the bank a seasoned experience in business and public affairs and a broad knowledge of regional conditions and regional interests. While the directors have a responsibility for district policies, they also have an obligation to the formulation of national or System policies, and to their effective application in the district when adopted. In the performance of its obligations, the board of directors of the Federal Reserve Bank of Cleveland recommends changes in the discount rates; appoints and outlines the duties of executive personnel; receives reports and recommendations of the officers, and takes such action as it may deem appropriate on matters of bank policy pertaining to the operations of this bank, its personnel, and its relations with the public; determines the salaries of officers and employees (subject to the approval of the Board of Governors) : elects a member of the Federal Advisory Council; and appoints the majority of the branch directors. The directors are expected to bring to the discussion of these matters of policy the experience gained in their respective fields of private and public endeavor from the point of view of the public interest. The general justification for the expenditures of "public funds" for the boards of directors of the Federal Reserve banks must be based on the fact that the 238 THE FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS directors' are needed under our unique federated central banking system to give direction'on a regional basis to the individual banks. Specific justifications for certain items of expenditures are noted below. 1. Fees of directors.—The present schedule of fees and expenses payable to main ofiice and branch directors is— (a) Daily fee for attendance at directors meetings, committee meetings, or while otherwise engaged on official business for the bank (one fee to be paid for each day regardless of number of meetings) $75; (&) Subsistence allowance for directors residing outside the city (or its residential environs) in which the meeting is held or for any director traveling away from his home city on official business for the bank—$20 for each day or portion of day; and (c\ Necessary transportation expenses—actual amount. These expenditures are considered justifiable in light of the services performed by the directors individually and collectively as noted above. In some instances the cost of being a director far exceeds the remuneration paid by this bank. 2. Luncheons and dinners for directors.—Meetings of the board of directors are held on the second Thursday of each month. Except for occasional joint meetings of the main ofiice and branch boards, the meetings are held at the main ofiice building. After each board meeting the directors have lunch with the bank officers. On occasions where it is evident that time does not permit adequate discussion of items at the board committee meetings prior to the actual meeting of the board of directors, the committees may meet the evening preceding board day. Usually dinners are provided the directors at these meetings. The aforementioned luncheons and dinners are working sessions. Our directors are busy men, and to derive maximum benefit from their visits to the bank an attempt is made to utilize their talents while they are on the bank premises. During the past several years it has been the practice of this bank to hold joint meetings of the main ofiice and branch boards of directors at various cities in the fourth district. These meetings have been held in Pittsburgh, Cincinnati, Columbus, Youngstown, etc. On the Wednesday evening preceding the board meeting a dinner is held for the bank directors and businessmen in the city where the joint meeting is held. Approximately 125 guests attend the dinners to hear the chairman of the board of directors, the president of the bank, and when possible, a member of the Board of Governors speak on some phase of current business conditions and System operations. These dinner meetings are in keeping with the bank's program of keeping the public informed of the fourth district bank and System operations. At each meeting of the Board of Directors, whether at the main ofiice or in another city, members of the research staff present a report of national and local economic conditions. Because of the interest expressed by the directors in these reports, many have been published and distributed nationally. The reports are initially presented to aid the directors in the performance of their statutory duties and later published to keep the public informed of business conditions, and the work of the System. In addition to the President, first Vice President and members of the research staff, the Vice Presidents in charge of the branches also attend these meetings. They report to the Board on the operations of the branches and the general business conditions in the territories served by them. Occasionally, officers from the main ofiice also make reports to the Board. These direct reports assist the directors in the performance of statutory duties in such areas as recommending changes in the discount rate. The branch Vice President attended at least one meeting of the managing committee of this bank per month, usually on the day previous to the Board meeting. In this way they were able to review operating procedures with other members of management on a personal basis and were brought up to* date on main ofiice operations. 3. Meeting in Washington for new directors.—For a number of years the Board of Governors has sponsored a 2-day orientation meeting in Washington, D.C., in February or March, for newly appointed or elected directors to acquaint them with their statutory responsibilities. The new directors, elected or appointed for 3-year terms, participate in discussions which enable them to assume their duties more readily as a direct result of these meetings. In addition, they are made aware of the national scope of System operations, going beyond regional bounds of their district considerations. 4. Silver trays for retiring directors.—For many years it has been the custom to present to retiring directors an inscribed silver tray as a token of appreciation for the services they have rendered. This is a most modest gift for the public service willingly given by these men. THE FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS 239 JUSTIFICATION No. 9 Membership dues and contributions Expenditures for membership dues and contributions, as well as related travel and other expenses incurred in connection with seminars, conferences, workshop®, conventions, special schools, and dinner meetings by this bank in banking, professional, service, and other organizations, contribute significantly to the effective and efficient discharge of its responsibilities. Such expenditures are reviewed each time they are to be incurred in order to determine whether the desired benefits are being received by the bank. Memberships provide the opportunity for bank personnel to meet formally and informally with the business and banking leaders within the area, enabling the bank's staff to arrive at a more comprehensive understanding of business and economic conditions within the district. Memberships are the basis for relationships which permit a free flow of information and data. No payments are made for dues in social organizations or organizations whose activities are not related to the bank's activities or which do not supply the bank with information useful to the bank. In addition to its monetary responsibilities as the central bank, the bank provides numerous services for the commercial banks and the U.S. Treasury. In this capacity, the bank is constantly seeking better and more efficient methods for providing the varied services. Memberships are a means of keeping current with technological changes in 'all phases of the bank's operations. They provide a vehicle in the form of meetings, seminars, workshops, and conventions for keeping personnel alert to new techniques and procedures. The memberships range from professional organizations for economists to the more technical associations for persons working with high-speed data processing equipment. American Bankers Association The American Bankers Association is a trade association with a membership that includes 98 percent of the Nation's commercial banks. Its primary objectives are to promote the general welfare and usefulness of banks; to secure uniformity of banking action; to keep abreast on subjects important to banking and commerce; to improve banking practices; and to keep bankers current on customs and practices affecting the banking interests of the country. The association includes committees, divisions, and departments specializing in such areas as fiscal policies, Federal legislation, Government borrowing, monetary policies, country bank operations, credit policy, and economic policy. Ohio Bankers Association, Pennsylvania Bankers Association, West Virginia Bankers Association, and Kentucky Bankers Association The State bankers associations are organizations of high-level banking executives with the purpose of promoting more effective banking within each respective State. They hold group meetings, conferences, and schools relating to subjects important to bankers. The associations serve to disseminate information relative to changing banking services and techniques within their particular State. The States involved lie, either in whole or in part, within the Fourth Federal Reserve District. Ohio Bankers Association—Group 9 Group 9 is one of nine geographical divisions of the Ohio Bankers Association within the State. Its purpose is to promote better banking at the local level and to provide the opportunity for bankers within the group to become better acquainted. It includes the banks of Cleveland where the main office of the Federal Reserve Bank of Cleveland is located. Association of Credit Management The Cleveland and Cincinnati organizations are members of the National Association of Credit Management. This organization is an association of banking and industrial executives engaged in the field of credit management. The organization fosters the development of improved practices in credit administration. The interchange of ideas and information assists the bank in the administration and servicing of V-loans. Credit Association of Western Pennsylvania The association is composed of executives engaged in the field of credit. Its function is to promote a better understanding of credit problems within the Pennsylvania area. 240 THE FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS Bankers Club of Pittsburgh This is an organization of Pittsburgh bank officers and directors who meet periodically to discuss banking in the Pittsburgh area. American Economic Association The American Economic Association is an association of economists and statisticians. It publishes the American Economic Review, and the proceedings of the annual meeting which are of particular value to the research activities of this bank. The annual meeting provides economists from Government, educational institutions, and private enterprise an opportunity to discuss economic theory, economics problems, and economic analysis. Financial Public Relations Association The Financial Public Relations Association is an organization founded for the purpose of bringing together representatives of the Nation's banks to provide education and the exchange of ideas in the field of financial public relations, providing the public with a better understanding of the role of banking in the American economy. National Association of Bank Auditors and Comptrollers The association is composed of bank personnel directly related to the accounting and auditing functions. Its purpose is to provide a program of research and education for improving operating methods, auditing methods, accounting controls, and for standardizing practices, and management reports. In addition, the organization provides members with a better working knowledge of State, Federal, and international laws as applied to banks and banking. Robert Morris Associates Robert Morris Associates is a national organization with local chapters in large cities; local membership is a prerequisite for national membership. It is an association of bank credit men and lending officers with the objectives of improving methods of gathering, analyzing, and disseminating credit information ; promoting closer relationships between credit men; and doing basic research in credit financing, in credit risk, and related subjects. The information and the relationships developed is of great value to this bank in connection with the administration of the V-loan program. The Real Property Inventory of Metropolitan Cleveland The Real Property Inventory of Metropolitan Cleveland is a factfinding agency which assembles and publishes reports relative to housing, retail trade, income, and population characteristics within the area. It is the only source of such information. National Office Management Association It is an organization of office managers for the purpose, &£ promoting the application of scientific methods to office management in commerce and industry with the objective of increasing productivity, lowering costs, and improving quality. Purchasing Agents Association of Cleveland The organization holds monthly meetings to discuss and to hear recognized leaders in the field discuss timely subjects of interest to purchasing personnel. The membership includes a subscription to the Midwest Purchasing Agents magazine, which is a valuable source of information on the procurement of supplies. Cincinnati Building Owners and Managers Association This is an association of building owners and managers with the objective of promoting more efficient building management. They publish reports relating to service employees' salaries, rental rates, occupancy ratios, and costs of maintenance repair services which are of direct value to this bank in the rental of space in our Cincinnati branch building. It should be pointed out again that a considerable part of that building (approximately 50 percent) is operated as a commercial office building with tenants. Brookings Institution This is an independent organization devoted to research, education, and training in the areas of economics, government, administration, international relations, and the social sciences. Membership provides desired publications at a reduced rate. THE FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS 241 Cleveland, Cincinnati, and Pittsburgh Chamber of Commerce This is an organization of business and professional men. The activities include such functions as collecting and tabulating information relating to business activity and business developments, holding educational meetings, and carrying on programs which aid industry in the community as a whole. The participation by the bank in chamber activities aids the bank in obtaining information on business activity. Pittsburgh Personnel Association This is an organization of personnel executives who meet quarterly to discuss changing personnel techniques. Its purpose is to promote more effective personnel policies. Cleveland Farmers Club This is an affiliate of the Cleveland Chamber of Commerce and is responsible for activities related to agriculture. One of its principal objectives is to interpret agriculture to industry and industry to agriculture. The organization provides an opportunity for the bank's agricultural economist to associate with leaders in this area. This association helps the staff of the bank to keep itself informed of developments and problems of agriculture in Ohio. Cleveland Law Library Association The organization maintains a comprehensive library of law books and legal publications for the use of members. This permits bank counsel to have access to a collection of legal books and publications that would not otherwise be available. Cleveland Retail Credit Men's Co. The organization accumulates data underlying the credit records of the buying public of this area. Its services are used by this bank in connection with investigations of applicants for employment. National Industrial Conference Board This is an organization of business associations, trade associations, Government bureaus, colleges, labor unions, and libraries for the purpose of conducting research in economics, business management, and human relations. Publications and studies prepared by the National Industrial Conference Board are used extensively by this bank. Ohio State Bar Association This is an association of attorneys. The organization issues a publication which includes reports of the Supreme Court and courts of appeals opinions within a few days of the time that they are issued. This is the only source of such opinions until they are printed in bound volumes several months later. American Management Association This is an organization of professional management executives in industry, commerce, government, and educational institutions. Its purpose is to provide training, education, research, publications, and information services with a view to developing better management practices and facilitating the development of executive talent. Special Libraries Association This is an international organization of professional librarians and information experts who serve manufacturing concerns, banks, corporations, law firms, newspapers, research organizations, university libraries, Government bureaus, and other organizations in the fields of business, medicine, science, technology, and the social sciences. The membership provides the bank with an extensive source of data which may be obtained from member libraries. Systems and Procedures Association This is a professional organization of office management specialists engaged in standardization and simplification of office accounting methods in business and government. National Bureau of Economic Research, Inc. This is an association of economists, accountants, and statisticians engaged in analysis of business cycles, economic, social, and industrial problems. It conducts research in collaboration with agencies interested in national income and wealth, prices 'and pricing policy, banking and credit, and fiscal policy. 242 THE FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS Publications relative to research findings are available to members. Membership fee includes one copy of each publication. Additional copies may be obtained at a reduced rate. Pennsylvania Bankers Association—group eight Group eight is one of the geographical divisions of the Pennsylvania Bankers Association within the State. Its purpose is to promote better banking at the local level and to provide the opportunity for bankers within the group to become better acquainted. Its territory includes the city of Pittsburgh where one of the branches of the Federal Reserve Bank of Cleveland is located. JUSTIFICATION No. 10 Bank directors—industrialists meetings These dinner meetings, sponsored by the Federal Reserve bank in cooperation with the local banks, bring together bank directors and businessmen in a particular geographic area. The meetings are designed to present bankers with information regarding monetary and credit policies of the Federal Reserve System and to obtain up-to-date and practical information regarding business conditions in the communities where the meetings are held. These meetings provide a forum for public discussion of Federal Reserve System policies with this bank's officers and employees, and a reservoir of information on economic conditions in the district. Information obtained at these meetings is submitted to the president to aid him in discharging his responsibilities in the field of credit and monetary policy. (See justification No. 18 for overall program.) JUSTIFICATION NO. 11 Management training program The bank has a training program for middle and top management personnel. Each year a number of these persons attend graduate banking schools; personnel administration meetings and seminars; systems and procedures courses and meetings ; bank examination school; American Management Association conferences, seminars, lectures and classes; Federal open market training programs, foreign currency operations classes, etc. All of the key personnel of the bank attend staff discussion meetings over a period of 2 days, usually once each month except in the summer, held at one of the bank's three offices. The staff discussion meetings cover various operations and functions of the bank and the Federal Reserve System. At our Cincinnati and Pittsburgh branches, department managers participate in a training program of rotating managers between the two offices for limited periods to give the managers an opportunity of comparing and discussing operations which has resulted in more efficient operations at both offices. The expenditures for registration fees, travel and subsistence for persons included in the training program benefit the bank in the development of both the special and general knowledge and background of key personnel, including bank examiners, to enable them to discharge their duties more effectively and to assume greater responsibility as the need arises. JUSTIFICATION No. 12 Expenses for prospective employees College recruitment plays a major part in the acquisition of men with ability who could be trained for responsible jobs in the future. The persona who are interviewed and seem to meet the requirements of the bank are asked to visit the bank for further tests and interviews. It is the practice of companies to pay the transportation costs of the men who are invited. There is a twofold advantage by interviewing these men in the bank: (1) a much better appraisal can be made of their qualifications and this in turn permits a better judgment to be exercised in the selection of these people, and (2) the applicant himself has an opportunity to see the bank in operation. This enables him to exercise better judgment in deciding whether to accept or reject an offer of employment. Both of these factors result in a lower turnover cost and fewer less desirable individuals. THE FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS JUSTIFICATION No. 243 13 Board of trustees—retirement system The retirement system of the Federal Reserve banks was established in 1934 to provide retirement benefits for employees. It is administered by a board of trustees made up of the president and one elected representative from each Reserve bank plus one member of the Board of Governors and a representative elected by Board employees. Travel expenses incurred by a trustee are for the purpose of enabling him to attend the annual or special meetings of the Board of Trustees and meetings of committees which assist in the administration of the retirement system as provided in the rules and regulations. The representative of the employees is elected every 3 years. At election time the branches send representatives to attend a nominating committee meeting at main office. This gives proportionate representation to the employees at all offices. Seminars are held periodically at the main office to discuss retirement jprograms and these are attended by branch representatives. JUSTIFICATION No. 14 Bank-otvned automobiles and auto rental The results of a survey made by bank indicated that it is more economical at Cleveland to purchase and operate five passenger automobiles, driving each about 215,000 miles per year and trading every other year, than to lease five autos. When more than five are required at any given time, the employee driver may drive his own car at a mileage rate or rent one of the Chevrolet class. In view of existing transportation needs, it is more economical to rent or pay mileage than to own more than five cars. These cars are used by officers and employees who visit banks, business establishments, educational institutions, and attend bankers and professional meetings throughout the State, and for transportation of official visitors and, when necessary, of directors. Both branch offices presently maintain three automobiles for the reasons outlined above. JUSTIFICATION No. 15 American Institute of Banking The American Institute of Banking is the educational section of the American Bankers Association and provides a curriculum of banking subjects. It is the largest single adult education group in the United States. The expenses of the Cleveland, Cincinnati, and Pittsburgh chapters are underwritten by the local banks in those cities and by this bank. The major portion of assessments for expenses of the chapters is based on the educational cost of conducting classes in banking subjects for employees of the participating banks and are levied in proportion to the enrollments of employees in the courses. Employees of the banks are urged to take advantage of the educational program by becoming members of the American Institute of Banking through payment of nominal dues. The bank does not pay the employees' dues. In order to encourage employees to take the educational courses, the bank has a plan of tuition refund on satisfactory completion of courses. As extracurricular activities, the chapter sponsors seminar programs for middle management groups and a limited number of social activities for the members. The local chapter holds an annual banquet and the national organization holds an annual convention. This bank sponsors attendance at the local banquets for those employees who by virtue of their activities in key areas of the local chapter organization or by attainment of high grades in the educational courses, have earned the right to attend, and for any of the bank's officers whose schedule permits attendance. Attendance at the annual convention including travel and subsistence is sponsored by the bank for only a few employees who hold key responsibility in the local chapters. Those attending the annual convention participate in the discussions on policies and procedures for both the national and local organization, and attend various departmental conferences in bank management and operations. The bank places a high value on the educational programs and seminars of the American Institute of Banking. The great majority of the employees of the bank 244 THE FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS are members of the organization and many are enrolled in the educational classes. The bank believes its expenditures for this program result in direct benefits both in education and training of employees. ; JUSTIFICATION No. 16 Computer training program Before and after the installation of both the general purpose computer and the high-speed check processors, it was necessary that our personnel be trained to program for and operate them. This training included visits, with resulting travel expenses, to other Fed banks, member banks, and the Board of Governors. The U.S, Government will benefit through the eventual faster return of funds to the treasury Department as checks are processed more economically through the high-speed system. It is also expected that the high-speed equipment will, in time, reduce the amount of float outstanding for the account of member banks. Visits to other Federal Reserve banks were made to obtain and compare information relating to organization for computer systems, to operating problems, and to conversion and programing techniques. At times visits were made to obtain information about a specific application of the computer. Visits to member banks were made to discuss various problems involved in the reporting of data to us by the member bank to improve the flow of such data for smoother computer processing. Visits to the Board of Governors. A 1-week course, offered by the officer in charge of electronic data processing at the Board of Governors, was given to orientate research administrators at the various Reserve banks and to prepare research personnal for use of computer techniques and systems. Attending Fortran programing course. The need for computer programing instructions in "Fortran," a scientifically oriented programing language, to be used to develop programs for applying compound interest formulas, linear correlations, moving averages, etc., could not be met by the computer manufacturer whose course in Fortran was oriented to mathematicians, physicists, and engineers. It was necessary to obtain these instructions at the Board of Governors in Washington where Fortran in terms of language for businesses or statisticians was in use. The programing knowledge gained was put to immediate use in processing jobs such as salary survey information. Visits to plants of manufacturers to familiarize our personnel with operating and programing the hardware. JUSTIFICATION Xo. 17 Travel expense—Examining banks Section 9, paragraphs 7 and 8 of the Federal Reserve Act, place the responsibility of examining State member banks upon the Board of Governors of the Federal Reserve System and provide that expenses of such examinations may in the discretion of. the Board of Governors be assessed against the banks examined. It is apparent that when Congress adopted the provisions of the eighth paragraph of section 9, relating to expenses of examinations, that it considered membership in the Federal Reserve System by State banks would be unattractive if they were subjected to double expenses for examinations. The State banking departments always charge for their examinations. The Board of Governors was given discretion in determining whether the expenses of Federal Reserve examinations should be assessed against the banks or absorbed by the Federal Reserve System. Late in 1935, the Board of Governors authorized the 12 Federal Reserve banks in the discretion of each to waive the charges of examinations of State member banks which were located in their districts. The Board of Directors of the Federal Reserve Bank of Cleveland, at its meeting on March 31, 1938, authorized the waiving of charges for expenses incident to examinations of State member banks in the Fourth Federal Reserve District. Since the middle of 1938, all expenses incurred in examining of State member banks within the Fourth Federal Reserve District have been waived and absorbed by the Federal Reserve Bank of Cleveland. The absorption of travel expenses of examiners for the Federal Reserve Bank of Cleveland is in line with the intent of Congress to further the effectiveness of the Federal Reserve System and to encourage the maintenance of the dual system of banking. THE FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS 245 JUSTIFICATION No. 18 Bank relations and public information department The bank relations and public information department of the three offices of this bank operates under the general objectives and directives provided by the Conference of Presidents of the Federal Reserve banks and this bank's board of directors. The Conference of Presidents, at its meeting in June 1953, adopted the following basic objectives for the bank relations and public information program of the Federal Reserve System: 1. To bring about understanding of the Federal Reserve System's statutory purposes, responsibilities, and operations so as to maximize the effectiveness of the System; and conversely, 2. To keep the Federal Reserve System aware of attitudes toward the Federal Reserve System's policies and regulations and the policies and operations of individual Reserve banks. In following the objectives outlined above, the bank relations and public information department of this bank has developed programs which, among other things, are designed to maintain a close, cordial working relationship with the Fourth District bankers, to aid the operating departments of this bank in the performance of their work, and to inform the public as to the purposes, responsibilities, and operations of this bank and the System. Under the provisions of the Employment Act of 1946, the Federal Reserve System has the duty to regulate the supply, availability, and cost of money with a view to contributing to the maintenance of a high level of employment, stable values, and a raising standard of living. In this light, it is essential to maintain a continuous flow of information to the bank's staff regarding banking developments in the Fourth District and to keep the public informed regarding the responsibilities, operations, and policies of the Federal Reserve System. To this end. our officers and key employees make a practice of visiting bankers in the bankers' own banks. In addition, we provide for tours within the Reserve bank for those who wish to view or study our operations. Our bank also provides speakers, films, etc., for schools, civic, and business groups; and publications in order to foster better understanding by the public of bank and System operations. The above paragraphs indicate our general justification for the expenditures of the bank relations and public information department of this bank. One of the programs is described below: Bank visitation program including bank open house visits These visits provide for an informal discussion with bankers of operating problems relating to the Reserve bank and make it possible for this bank, in fulfilling its statutory obligations, to render better services to the banks. In addition, information obtained on these trips regarding economic and financial conditions within the district is reported to the President of this bank to aid him in discharging his duties as a member of the Federal Open Market Committee. Attendance at bank open houses is considered to be useful in maintaining good working relationships with the commercial banks for the purposes mentioned above. JUSTIFICATION NO. 19 Conference of National Association of Supervisors of State Banks Attendance at the annual conference of the National Association .of Supervisors of State Banks enables the officers in charge of bank supervision to consult and exchange views with supervisors of State banks. This facilitates coordination of policies and practices and helps to reduce areas of misunderstanding and conflict. The Federal Reserve Bank of Cleveland has thus been able to maintain close and harmonious working relations with the banking departments of States lying in whole or in part within the Fourth Federal Reserve District. Each session has a formal program and presents outstanding speakers often drawn from the Congress of the United States, high officials or directors of Federal agencies, nationally recognized bankers, former supervisors of banks, active members of the association and others discussing timely subjects of banking importance. Many times the subjects are quite controversial in nature and 246 ' THE FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS warrant the exchange of ideas by the persons attending since they must be dealt with in the performance of their daily duties. The personal discussions concerning the subjects of the program which are had, both before and after the meetings; are very helpful in determining the treatment to be accorded those areas. Group discussions of this kind, which deal with, general problems are frequently much more helpful in providing understanding of mutual objectives than are discussions with individual supervisors over particular cases where the principles involved are frequently clouded by conflicting interests and pressures. Advantage is taken of the occasion to hold, at the end of the conference, a separate meeting which is attended by all Federal Reserve personnel at the conference. This meeting almost always includes at least 1 representative from each of the 12 Federal Reserve banks and from the Division of Examinations of the Board of Governors. System policies relating to bank supervision and administration of the bank examination function are reviewed at this meeting, in order to provide greater coordination. JUSTIFICATION No. 20 Fellowship program The Federal Reserve Bank of Cleveland sponsors a fellowship program whose stated purpose is to provide financial support for well-qualified graduate students who are completing requirements for the Ph. D. degree in economics or business administration at a university located in the Fourth Federal Reserve District. The program requires each fellow to spend at least two summers at the Federal Reserve Bank. The intent of the program is to give such students an opportunity to become better acquainted with the purposes and functions of the Federal Reserve System, and thereby improve their skills as economists, researchers, and teachers. Monetary theory and policy have become so important in today's affairs that such a program is considered to be highly desirable as a means of providing better opportunities to superior students to study in this field. A copy of the program is attached. As part of this bank's fellowship program, we allowed selected fellows to visit the Federal Reserve Bank of New York. The purpose of the visit was to consult With persons at that bank who are particularly close to, and especially qualified in, the areas of research in which the fellows were conducting research activity. The visitations represented an attempt by this bank to render appropriate assistance to the fellows in carrying out their research projects. RESEARCH FELLOWSHIPS IN ECONOMICS, FINANCE, MONEY AND BANKING, STATISTICS TO B E AWARDED BY THE FEDERAL RESERVE BANK OP CLEVELAND, ACADEMIC YEAR 1963-64 One or two research fellowships are available to graduate students who show excetional intellectual capacity and high levels of competence in written and oral expression. The awards are made for the purpose of promoting graduate study in economics, finance, money and banking, statistics, and related fields as well as to provide students an opportunity to study the problems of central banking at first hand. The awards cover a term of about 15 months and include the following: 1. Initial term of residence (3 months) on a research project at the Federal Reserve Bank of Cleveland—award, $1,200. 2. Graduate study, full time, at a university of the student's choice for 1 academic year—award, $3,000, plus tuition and fees. Additional allowance of $500 will be made for each dependent (wife and children). 3. Second term of residence, continuation of research project at the Federal Reserve Bank of Cleveland until completion, up to 3 months—award, approximately $500 per month. 4. An additional award of $500, payable upon acceptance of a completed report of the assigned research project, if submitted within 1 year of completion of second residence. Upon termination of the fellowship, an applicant may be offered employment by the Federal Reserve bank but there is no obligation on the part of the bank to offer sucti employment, nor on the part of the fellow to accept such offer, if made. Nominations.—Applicants must be nominated by departments of economics or schools of business in universities in the Fourth Federal Reserve District which offer a Ph. D. (or equivalent) in these fields. THE FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS 247 Eligibility requirements.—Applicants must have completed a minimum of 1 full academic year of graduate study, preferably 2 years, in economics (including agricultural economics), statistics, business administration, or finance by the time the fellowship becomes effective; must be citizens of the United States; must be in good health; must be attending or qualified for admission to a university located in this district, and offering a Ph. D. degree or equivalent in economics, statistics, business administration, or finance. Preference will be shown to applicants who, by the end of the period covered by the research award, expect to have completed the requirements for a doctorate. Research projects.—The research assignments will be on problems of significance to the Federal Reserve System and it is expected that they usually will be acceptable in partial fulfillment of doctoral thesis requirements, thereby enabling students to expedite completion of work for their degree. However, it is not necessary that the research project be in a field related to the student's thesis topic. (An illustrative list of projects is available from your department head and from the research department, Federal Reserve Bank of Cleveland. Research assignments are developed in cooperation with the student and his faculty adviser.) Supervision.—During the periods of residence at the Federal Reserve Bank of Cleveland, supervision will be provided by Federal Reserve personnel; during the academic year, by the student's faculty adviser. Application forms should be filed with the university by February 1. University nominations must be received at the Federal Reserve Bank of Cleveland by February 15; awards will be announced by March 31,1963. JUSTIFICATION No. RESEARCH 21 SURVEYS Security loan program This program involved the participation by this bank in a national survey conducted by the Board of Governors at the request of the Securities and Exchange Commission. The purpose of the survey was to obtain additional detailed information on security loans outstanding at selected member banks in the Fourth Federal Reserve District. Collateralized loan survey This involved the participation by this bank in a national survey conducted by the Board of Governors at the request of the Securities and Exchange Commission. The purpose of the survey was to obtain additional detailed information on collateralized loans outstanding at selected member banks in the Fourth Federal Reserve District. JUSTIFICATION NO. 22 Meeting with superintendent of banks of Ohio at Columbus, Ohio, May 6, 1968 This meeting was attended by a majority of directors of a State member bank, the superintendent of banks, first deputy superintendent of banks for the State of Ohio, and the vice president in charge of examinations for the Federal Reserve Bank of Cleveland. The meeting was called by the superintendent of banks and the Federal Reserve Bank of Cleveland. The general condition of the bank was reviewed and discussed. The principal purpose of the meeting was to point out the continuing growth of the bank and consider the resulting circumstances that the bank's capital structure had not kept pace with the bank's expansion of deposits. A memorandum presenting a complete report of the meeting was submitted to the Board of Governors, Washington, D.C. The holding of meetings such as this is required from time to time in the everyday performance of responsibilities assumed jointly by the superintendent of banks and the Federal Reserve Bank of Cleveland in the supervision of State member banks. JUSTIFICATION No. 23 Federation of Management Organization The Federation of Management Organization is an organization to which the Special Libraries Association belongs. It was through FMOA that the Special Libraries Association participated in the International Management Congress. 248 THE FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS As president of Special Libraries, Miss Klahre was a special representative and her attendance at this meeting was necessary because of the upcoming International Management Congress in September 1963. Justification No. 9 outlines the benefits accruing to the bank because of participation in this organization. JUSTIFICATION No. 24 Speeches Officers, economists, and others frequently are invited to speak to trade organizations, service groups, business groups, and high schools and universities on subjects relating to system monetary policy and credit functions, business and agricultural conditions, and service functions of the Federal Reserve banks. This is another service provided by this bank in its attempt to keep the public informed of business conditions and the system's operations and their effect on the general populace. (See Justification No. 18 for overall program.) JUSTIFICATION NO. 25 American Economic Association meetings It is the policy of this bank to send senior members of its research staff to the annual meeting of the Allied Social Sciences Associations, which includes such groups as the American Economic Association, American Finance Association, American Statistical Association, American Farm Economics Association, American Marketing Association, and other organizations involved in economic and associated research and analysis. It is the purpose of these meetings to bring together economists and other social scientists from Government, educational institutions, and private enterprise to discuss economic theory, economic problems, and economic analysis. Attendance at these meetings is of direct benefit to the research staff in improving professional skills and competence. JUSTIFICATION NO. 26 Tours of the bank This bank provides tours within the bank for groups of bankers, students, teachers, and businessmen in order to inform the public of the manner in which the Federal Reserve System meets its statutory duties and responsibilities, and how System operations affect the individual citizen. As a matter of courtesy and convenience, a meal is served to those groups who have traveled from outside the county limits to tour our bank. Cigars and cigarettes, in limited quantities, are made available to those who attend luncheons at our bank as a consideration shown to our guests. Spiritous liquors are not served. At these meals, guests have the opportunity of discussing with the officers and employees of this bank different phases of System and bank operations, thereby increasing public knowledge relative to the nature of our work. (See justification No. 18 for overall program.) JUSTIFICATION No. 27 Meeting with National Association of Armored Car Cos. Mr. Clyde Harrell, while attending the Pennsylvania Bankers Association convention in Atlantic City, also met with Mr. Merritt Kennedy, president of National Association of Armored Car Cos. The outcome was the adoption of policies by the Federal Reserve System concerning Federal Reserve shipments in transit with armored cars in the event of a war emergency. JUSTIFICATION No. 28 Employee educational refunds To encourage employees to take night courses and to improve themselves and their usefulness to the bank, this bank will refund tuition on the satisfactory completion of courses which, in the judgment of the bank's management, wiil accomplish the above improvement, or when the subject course is of direct benefit in the work of the employee. The majority of employees participating in this educational program are enrolled in college night courses. The bank derives benefit from this program in three ways: (1) it makes such employees better qualified for their present jobs, (2) it makes them better prepared for potential advancement, and (3) it aids the recruitment for qualified persons by making bank employment more attractive. THE FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS 249 JUSTIFICATION No. 29 Social and athletic programs for employees This bank's social and athletic programs for employees encompass a calendar of annual events represented by the following, some of which are conducted by an employee organization known as the Federal Reserve Club: Dinner-dance for employees. Federal Reserve Club trustees' dinner. Relocation site employees' dinner (will no longer be held because record sites are no longer staffed permanently). Smorgasbord or picnic for employees. Twenty-five-year employees' dinner. Christmas party for children of employees and their families. Christmas lunch for employees (Cincinnati). Bowling league dinner for employees. Merry Widow bowling for employees. Part of the expenses of participating in the bank's bowling league. Golf tournament for employees. Employees' Softball teams' dinner. Insurance covering Federal Reserve Club liability in connection with an organized fishing trip for bank employees. Table tennis supplies for employees. The bank's policy of sponsoring these events for employees is considered to be desirable and essential because we compete in a labor market in which banks and industries provide somewhat similar programs. There is a shortage of skilled officeworkers in our markets. Our programs are considered to be successful in contributing to good employee morale, and in creating an atmosphere conducive to retention of worker and reduction of turnover, thereby increasing efficiency in the bank. JUSTIFICATION No. 30 Meeting withBell Telephone Co., Ligonier, Pa. Mr. Clyde Harrell, en route to Pennsylvania Bankers Association Convention at Atlantic City, was a guest at dinner following the directors' meeting of the Bell Telephone Co., Ligonier, Pa. The meeting afforded the opportunity to meet the directors of the company and also a select group of leading industrialists in the Pittsburgh area. These contacts are invaluable in obtaining opinions on economic conditions which, when given to the president, aids him in formulating his recommendation for credit policy. Pennsylvania Bell Telephone Co. based in Harrisburg, holds 1 annual meeting in western Pennsylvania at which they invite about 100 leading executives from western Pennsylvania area in for a public relations program. FINK. JUSTIFICATION NO. 32 Sympathy flowers for employees The bank sends a floral piece to the family of an employee in the event of death of an employee or a member of his immediate family, and to an employee who is an operative patient in a hospital. These expressions maintain good relations with employees and contribute to employee morale. JUSTIFICATION NO. 33 Birthday lunches for employees A birthday lunch is furnished each employee in the banks' cafeterias. The small cost of this program is believed more than offset by the establishment of better feelings between employees and the bank. JUSTIFICATION NO. 34 Service pins, retirement receptions and dinners for officers and employees Following an established custom in most banks and industries, this bank recognizes long and faithful service of officers and employees by awarding 15- and 25-year service pins at minimal cost as a gesture of good will. Retirement dinners limited to officers are held upon retirement of officers, and receptions are held upon retirement of all employees. The retiree is presented with an imprinted book containing individual expressions of best wishes from all employees. We believe these events result in improved employee relations and morale. 28-680—64—vol. 1 17 250 THE FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS JUSTIFICATION No. 35 Bank examination reports of national banks The Federal Reserve Act, section 4, paragraph 8, provides that "Each Federal Reserve bank shall keep itself informed of the general character and amount of the loans and investments of its member banks with a view to ascertaining whether undue use is being made of bank credit for the speculative carrying of or trading in securities, real estate, or commodities, or for any other purpose inconsistent with the maintenance of sound credit conditions; and, in determining whether to grant or refuse advances, rediscounts, or other credit accommodations, the Federal Reserve bank shall give consideration to such information." The reports of examination of national banks are required to carry out these responsibilities. The Comptroller of the Currency charges $100 for each copy of a report of examination that he furnishes to this bank. The Federal Reserve Bank of Cleveland has requested that it be furnished with a copy of the report of examination of the first examination of each national bank that is made each year. At this date these are 360 national banks in the Fourth Federal Reserve District. Also, this bank is to be furnished with copies of each examination report of the examination of national banks that are on the chief national bank examiner's problem list. The Board of Governors has authorized that each Federal Reserve bank pay to the Comptroller of the Currency at the rate of $100 for each report of examination that is furnished. JUSTIFICATION No. 36 SERVICES U S E D FOR A P P R A I S A L OF A S S E T S OF M E M B E R BANKS Standard & Poor's Bond Guide (monthly). Stock Guide (monthly). Bond Selector (quarterly). Corporation Records (monthly). In order to be eligible for purchase by State member banks, corporate bonds must be of "investment quality" and prima facie evidence of such eligibility is their inclusion among the top four ratings by the national rating services. As a guide in determining the rating of a particular bond, our bank examiners depend upon Standard & Poor's Bond Guide which also includes valuable price data. Banks are also permitted to purchase unrated bonds if available information indicates that they are, in the opinion of the examiner, of investment quality. The descriptive material supplied by Standard & Poor's Bond Selector, and by the Corporation Records are depended upon for this purpose. Standard & Poor's Stock Guide is used principally in connection with the examinations of trust departments of member banks in order to evaluate the judgment of the trust officers in selecting stocks for investment. Moody's Investors Services Moody's Municipal and Government Manual (annual) (includes loose-leaf services) : Under the provisions of section 5136, U.S.R.S., purchases by State member banks of so-called revenue bonds issued by public authority are restricted to 10 percent of the bank's capital and surplus whereas there is no such restriction governing the purchases of general obligations. It is often difficult to determine from the information on file in the bank whether or not a particular bond is a general obligation or a revenue bond. In such cases it becomes necessary to obtain this information from other sources. Moody's Municipal and Government Manual provides us with complete descriptive material in connection with municipal issues from which we determine the status of such bonds. The Standard Statistics Co., Inc., and Fulton Reid & Co., Inc. In addition to the foregoing, we employ the services of the Standard Statistics Co., Inc., New York, N.Y., in determining current market prices on municipal bonds. The pricing of municipal bonds which constitutes an important segment of the investment account in many member banks has been difficult because of the lack of dependable quotation services. Many of the issues held by the banks are of local origin and of limited distribution and generally there are no quotations published covering them. The Standard Statistics Co., Inc., has sufficient facilities and an efficient organization and we have found that the THE FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS 251 pricing information supplied by them cannot be obtained satisfactorily elsewhere. These services immediately preceding our use of the Standard Statistics Co., Inc., were furnished by Fulton Reid & Co., Inc., Cleveland, Ohio. JUSTIFICATION NO. 37 Films Another phase of the bank relations and public information programs is to make available for showing to bankers, business and service groups, schools, etc, prints of films on the history and operations of the Federal Reserve System and other films of economic interest to the public. These films are designed to provide the public with information not only on the System, but the operations of the U.S. Treasury, Mint, and so forth. Expenditures for films include maintenance, postage, and rental charges and the production of film "leaders" to identify the source of the film and indicate where the film might be obtained. An additional cost was incurred in 1962 in the purchase of a film script designed to replace the outdated public information film "A Day at Federal Reserve Bank of Cleveland." However, when it was determined that the Federal Reserve System would produce a somewhat similar film, production of the local film was discontinued. The script is being retained for consideration at some future date. The aforementioned System film "Money on the Move," was purchased on a pro rata basis of capital and surplus by the 12 Federal Reserve banks. The film is now available for viewing as a service to the general public. (See justification No. 18 for overall program.) JUSTIFICATION No. 38 Refreshments for open house for 1962 The bank held an evening open house for its employees and their families in the spring of 1962, showing new methods that had been inaugurated in bank operations. After touring the bank, the visitors were provided with coffee or fruit punch and pastries and a place to sit down and rest. The bank believes such an event held periodically is a stimulant to good employee morale, and that it contributes to a better understanding of the bank's operations by relatives and friends who are a part of the public. JUSTIFICATION NO. 39 Investigation reports on applicants for employment Before hiring applicants a credit report is requested from the Retail Credit Co., the Credit Bureau, or other similar credit agency. These reports protect the bank against the possibility of hiring employees who would pose a security risk in positions of trust and responsibility. JUSTIFICATION NO. 40 Recreational library subscriptions Provides the employee with reading materials for recreation and self-improvement, and contributes to employee morale. JUSTIFICATION No. 41 Subscriptions for library It is deemed both necessary and desirable to maintain a business library to (1) aid the research staff in carrying out interpretation and analysis of economic affairs, (2) keep officers and emploiyees fully informed as to national business, ecoonmic, and banking developments, so as to interpret more intelligently the changes being experienced in our area, and (3) furnish backgound material for periodic reports to our directors and the president to assist them in recommending appropriate action in the discount rate and open market operations. Subscriptions to newspapers, periodicals, economic indicators, information service, reports, and kindred material are necessary to accomplish these objectives. As part of the library functions, publications are bound into volumes by outside binderies for greater ease in filing and use. 252 THE FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS JUSTIFICATION No. 42 Pro rata share of expenses for study of check handling operations The Stanford Research Institute entered into arrangements to furnish advisory services of the Federal Reserve banks in the development of improved methods of handling checks. The overall purpose of the program was to study the flow of checks through Federal Reserve banks and branches to ascertain how and when further mechanization of these operations might be achieved. The work of the Stanford Research Institute contributed substantially to the development of mechanized handling of checks by Federal Reserve banks. This voucher is for the Federal Reserve Bank of Cleveland's share of the expenses of this study. The System benefited by having the findings and recommendations of a group of independent analysts. JUSTIFICATION No. 43 Luncheon facilities and subsidy for employees The bank provides on its premises concessionaire-operated luncheon facilities with lunches at reasonable cost to employees. The concessionaires' experience in food handling enables them to exercise greater economies and to supply nutritional food at lower cost than would be possible if the bank operated the facilities. The food is served to employees at below actual cost, the net expense of the concessionaires' operations being' borne by the bank. The rate of absorption of expense is within the limit established for the Federal Reserve System by the Board of Governors.T Serving low -cost lunches to employees is considered to be a "fringe benefit" and is the established practice of many employers in the areas of our three offices. JUSTIFICATION No. 44 Newspaper advertising for new employees Maintenance of adequate staffs of qualified personnel requires continuous recruitment. When the need is particularly pressing and applicants are not otherwise available recourse is had to newspaper advertising. This device secures the maximum number of applicants for a minimum cost. JUSTIFICATION NO. 45 Dun d Bradstreet, Inc. The services of Dun & Bradstreet are used to obtain credit reports covering individuals, partnerships, and corporations engaged in commercial and industrial enterprises. Such reports furnish historical and background data on management, information regarding facilities and territories served, financial and paying record data and other information pertinent to the making of a credit decision. Reports of Dun & Bradstreet are one of the tools needed to obtain credit information for the following purposes: (1) As a part of the credit investigations in compiling the information needed as part of the reports which Federal Reserve Bank of Cleveland is required to submit to the armed services under section 302(b) of Executive Order No. 10161 pursuant to section 301(b) of the Defense Production Act of 1950, as amended, in connection with V-loans. Under this act, Federal Reserve banks are designated and authorized to act as fiscal agents of the armed services in the making of contracts of guarantee with respect to private financing for defense contractors. (2) In preparation of credit reports for departments and agencies of the U.S. Government, when the information requested is to be used in the awarding of proposed Government contracts. (3) In ascertaining the credit responsibilities of firms whose uncertified checks our banks may accept in payment of noncash collection items. (4) As an aid in our analysis of the credit standing of the makers of notes that may be offered to us by member banks as collateral to borrowings under section 13 of the Federal Reserve Act. (5) By our building department in the awarding of contracts for substantial building improvements and/or repairs. (6) By our legal department to identify and learn about concerns, that may have a potential claim against the bank or against whom the bank may have a potential claim. THE FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS 253 (7) By our cash and check departments <to ascertain or check on the financial responsibilities of Brinks and other armored car service companies whose services may be up for consideration. (8) Other related purposes. JUSTIFICATION No. 46 Advertising—Treasury refunding The only time the Federal Reserve Bank of Cleveland places advertising for the Treasury Department is when specific instructions are received from the Treasury Department for this bank, as fiscal agent of the United States, to place such advertising. The copy and format for the ads are furnished by the Treasury. The payment in question was authorized January 20, 1963—Supplement No. 2 to confidential letter No. 308 from John Oarlock, Fiscal Assistant Secretary, U.S. Treasury Department. JUSTIFICATION NO. 47 Photographs for biographical books As part of the development and training program, biographical sketches of all employees with potential are kept. Photographs are part of this record and permit easier and faster identification of persons in lower management levels when discussions on promotions occur. JUSTIFICATION No. 49 Service subscriptions for legal department Subscriptions: Federal Bank Service, Labor Law Reports, Installment Credit Guide, and Commerce Clearing House-State Taxes. The aforementioned are Commerce Clearing House and/or Prentice Hall legal publications which are necessary to maintain the law library of the legal department of this bank. They are looseleaf publications and the looseleaf pages are constantly being changed to reflect current changes in the law and regulations so that the legal department may be kept abreast of developments. Federal Bank Service concerns itself wTith banking laws and regulations. Labor Law Reports concerns itself with labor law adminstration and labor management relations (this is of pertinence to us as it relates to overtime, minimum w^age, classification of employees as exempt or nonexempt, etc.). Installment Credit Guide concerns itself with laws relating to corporate and commercial practices, including the new uniform commercial code. Commerce Clearing House-State Taxes concerns itself with the tax lawTs in Ohio and Pennsylvania which it is necessary for us to deal with. JUSTIFICATION NO. 50 PUBLICATIONS BY RESEARCH DEPARTMENT Justification of the cost of these publications is explained below. Monthly Business Review Business Trends Basic Business Neivs Money Market Instruments To disseminate information on regional and national economic developments and trends for purpose of improving economic intelligence and decisionmaking of bankers, educators, businessmen, and public at large. A N N U A L REPORT To keep member banks and public at large informed on current operations, status, and policies of the Federal Reserve Bank of Cleveland and the Federal Reserve System. "CHANGING ECONOMIC PROFILES OF SELECTED u.s. CITIES" This study was published as part of our effort to disseminate information on regional and national economic developments and trends for purpose of improving economic intelligence and decisionmaking of bankers, educators, businessmen, and public at large. 254 THE FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS DISPLAY AT A N N U A L M E E T I N G OF A M E R I C A N ECONOMIC ASSOCIATION Exhibit conducted in conjunction with conference was a means of bringing to the attention of educators and economists who attended the meetings the various publications edited and distributed by the research staffs of the Federal Reserve banks and the Board of Governors. JUSTIFICATION No. 51 Employe publication—Federal Reserve Notes There are two basic reasons for the existence of a house organ such as Federal Reserve Notes: 1. As a morale builder. It provides recognition to employees for jobs well done and keeps employees abreast of personal happenings of fellow workers. 2. As a means of communication. It is an excellent medium of communication between management and employees. Any changes of policy or in departmental organization or in supervisory or management personnel are discussed in the employees magazine. This helps reduce misunderstanding. JUSTIFICATION No. 52 Ohio News Bureau Co.—News clippings (This service benefits the bank by aiding the research staff in carrying out interpretation and anlysis of economic affairs and by enabling the library to provide services to personnel of this bank, member banks, students, and the general public. JUSTIFICATION NO. 53 Photographs for publicity Photography in public information work is not unusual. This bank, being aware of the educational value of photography in the field of public information, uses pictures of operations, group meetings, and individual persons for purposes of publicity, employee relations, and general education. Publicity photographs have been taken of this bank's directors, officers, and employees and have been used frequently by newspapers, television stations, magazines, and other publications. A picture of the conference of Presidents taken at its meeting on December 3, 1962, was arranged for by this bank. This picture was taken not only because it was deemed newsworthy, but because it was also the first picture taken of the conference for 6 years. During that period a number of changes had taken place in the membership of that body. Pictures of the conference were distributed to the other Reserve banks and to the Board of Governors for their use. This bank continues to use pictorial publicity, where possible, as a visual aid in informing the public of the bank's and the System's actions and responsibilities. (See Justification No. 18 for overall program.) JUSTIFICATION NO. 55 Building supplies All three offices own the buildings they occupy. Maintenance includes cleaning force, heating, ventilating and air-conditioning engineers, carpenters, electricians, painters, machine shop. It is less expensive to perform these services with our own employees than to contract for them with outside firms. The purchase of tools and supplies and furnishing work uniforms is a necessary expenditure in the operation of the building service departments. JUSTIFICATION NO. 56 Office supplies and stationery including duplicating service Forms, stationery, office supplies, and duplicating service are necessary to the conduct of operations of a Federal Reserve bank in the discharge of the responsibilities and duties imposed on it by law and by banking and business custom and practices. JUSTIFICATION No. 57 Servicing office equipment It has been determined to be more economical to maintain a small mechanical repair unit to keep typewriters, adding machines, coin and currency machines, THE FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS 255 and other office equipment in top operating condition, than to rely upon the service facilities of the manufacturers or service maintenance companies. Stocks of spare parts are maintained for efficient operation, and work uniforms are supplied to the personnel since the work is greasy and dirty. JUSTIFICATION No. 58 Protection departments The safeguarding of the billions of dollars of cash and securities which this bank holds for the U.S. Treasury, for member banks and for its own account requires the maintenance of an adequately supplied protection force and adequately serviced vaults. The Treasury and the bank benefits from these expenditures because holdups and robberies are discouraged by these precautions. The guard force is supplied with uniforms for identification, and with weapons and ammunition. Vault equipment is inspected and serviced regularly. The Cincinnati branch has an additional arrangement with American District Telegraph for protection alarms when the vaults are closed. JUSTIFICATION No. 61 McClanahan-Heidacher contract Approximately one-half of the building owned and occupied by the bank in Cincinnati is rented. The engagement of a building management firm to operate rental portion relieves the bank management of this responsibility thereby allowing bank personnel to devote full time to bank operations. It also is believed that an experienced management firm, such as McClanahan-Heidacher, Inc., can operate more efficiently than could the bank staff. (Copy of contract attached.) MANAGEMENT AGREEMENT BETWEEN FEDERAL RESERVE BANK OF CLEVELAND AND MCCLANAHAN-HEIDACHER, INC. 1. Federal Reserve Bank of Cleveland, being the owner of the premises situated at the southwest corner of Fourth and Race Streets, Cincinnati, Ohio, and the 15-story office building erected thereon known as the Federal Reserve Bank Building (hereinafter referred to as "owner"), hereby engages McClanahan-Heidacher, Inc., an Ohio corporation with offices in the Enquirer Building, Cincinnati, Ohio (hereinafter referred to as the "manager"), to perform the services hereinafter outlined with respect to the care, maintenance, and management of the aforesaid premises. 2. At the owner's expense, the manager is authorized exclusively to advertise any space available for rental, to secure tenants and to execute on behalf of owner leases with such tenants for a term of not more than 1 year (unless a longer term be specifically approved in each case by the owner) ; to collect rents (otherwise than by suit, distraint, or other legal action) ; to compute bills for electric services furnished all tenants and collect the same; and to deposit all payments collected for rent, and sale of electricity, in a separate property management bank account with the Central Trust Co. of Cincinnati to be held in trust for the owner; such account to bear such title as will indicate that the funds therein are held by the manager as trustee or such other title as will indicate that the funds are not the property of the manager. The manager shall pay from this bank account the charges of the Cincinnati Gas & Electric Co. for furnishing electric service to the premises known as Federal Reserve Bank Building. 3. The manager is further authorized to make or cause to be made any repairs or alterations, and to do or cause to be done any decorating, which the manager considers necessary in connection with the rental or normal maintenance of leased space, provided, that the manager shall not undertake or contract for any such work involving an expenditure of more than $500 for a single project, or involving aggregate expenditures of more than $2,000 for work undertaken or contracted for in any 1 calendar month, except with the prior approval of the owner; to purchase and pay for all supplies and other materials not furnished by the owner which are necessary to the performance of the manager's functions under this agreement; to employ, supervise, discharge, and pay all engineers, janitors, and other building employees, except for those employed by the owner in the care of that part of the premises from time to time occupied by the owner, 256 THE FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS and to perform all other acts reasonably incidental to the proper management of the premises. 4. Manager shall be permitted to enter into contracts with the Cincinnati Nuclear Corp., or other appropriate party, such contracts to be subject to approval of owner, for the supplying of steam for heating purposes to the Woman's Exchange Building. Manager shall perform the duties imposed on the supplier of steam under such contracts. Manager shall collect payments made under such contract for the supplying of steam and shall deposit same in the separate property management bank account referred to in paragraph 2 hereof, which amounts shall be treated in like manner as the other moneys deposited in said bank account pursuant to paragraph 2 hereof. Five percent of such payments received during the time this agreement is in effect shall be included in paragraph 7(b) hereof in computing the amounts due manager. 5. The manager shall render to the owner on or about the 10th day of each month a statement of income and expense for the preceding month, and with such statement shall remit the net amount in the hands of the manager after deduction of the amounts payable to manager hereunder for the preceding month. If at any time funds required for expenditures made or to be made by the manager pursuant to paragraph 3 of this agreement are not available from rent collections in the hands of the manager, the owner shall promptly upon request by the manager, supply the excess funds required. 6. All persons employed by the manager to perform the services which the manager is authorized or required by this agreement to furnish shall be supervised and controlled solely by the manager, and shall be employed by the manager exclusively for work to be done in the performance of this agreement, unless otherwise agreed in any specific case between the manager and the owner. It is understood and agreed that the manager shall employ and pay a resident manager for the premises and such clerical assistant or assistants as may be required by the said resident manager, and shall furnish the said resident manager's office furniture, fixtures, and supplies; that the owner shall furnish office space in the premises for the resident manager and his clerical assistants without charge to the manager, and that the compensation of the resident manager and his clerical assistants, together with the cost of the aforesaid office furniture, fixtures, and suplies shall be considered supervisory expense incurred by the manager for the purposes of paragraph 7 of this agreement. 7. In consideration of its services hereunder, the manager shall receive: (a) The sum of $908.67 per month for that space occupied by the owner in the aforesaid building, to wit: Basement to 7th floor inclusive and the entire 14th floor, excepting boiler and machine room and some building maintenance space in basement, first floor lobby alcove, and approximately 376 square feet used by barber shop on 6th floor. In the event the space occupied by the owner in the building is subsequently reduced, there shall be a proportionate reduction in the sum set forth in this subparagraph (a) ; (&) An amount equal to 5 percent of the gross income received during the time this agreement is in effect as payment for electric service (except payment for electric service by owner) and as rental for space in the aforesaid building not occupied by owner; (c) An amount equal to 3 percent of the fair rental value (as determined from month to month by agreement between the owner and the manager or, in the absence of such agreement, as evidenced by the rental last received from the same space) of any space in the aforesaid building not presently occupied by the owner, but hereafter so occupied; (d) An amount equal to the actual expense incurred by the manager under the provisions of paragraph 3 of this agreement, excluding overhead and supervisory expense; all payable at the time of each monthly accounting made pursuant to paragraph 5 of this agreement. No rental commission is to be paid by the owner for any tenancy created pursuant to this agreement, except that if a tenant is secured by a licensed salesman or broker not employed by the management department of McClanahan-Heidacher, Inc., and if the leasing of space to such tenant is approved in advance by the owner, then the owner shall pay to such licensed salesman or broker a rental commission equal to one-half the fee established by the Cincinnati Real Estate Board. THE FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS 257 8. Manager will carry workmen's compensation on its own employees and will pay the cost of same without charging such cost against owner. Manager shall be added as an additional insured to owner's comprehensive public liability insurance policy with respect to those operations of manager which are performed under this management agreement. The limits of such comprehensive public liability insurance policy (which shall include elevator coverage) shall not be less than the following: Bodily injury $200,00 limit per person. 600,000 limit per accident. Property damage 500,000 per accident. The cost of maintaining the aforesaid insurance shall be paid by owner. Owner shall furnish manager with evidence that such insurance is in effect. Manager will carry steam boiler insurance in an amount satisfactory to owner (or will permit its name to be added to any steam boiler insurance policy carried by owner), and the cost of such insurance shall be charged to owner as a reimbursable expense (or owner, in its discretion, may pay the premium direct). 9. In addition to the duties which the manager specifically in this agreement undertakes to perform, the manager agrees to perform all the functions customarily performed by building managers of commercial properties. The manager agrees to perform all its duties and functions with due and proper care having due regard for the best interest of the owner and in a manner consistent with the highest standards of recognized building managers. 10. The provisions which the owner may be required to place in any management agreement as a result of the owner's leasing at any time any space in the building to the United States of America shall be deemed to be incorporated herein the same as if fully set forth and the manager agrees to comply with such provisions. 11. In performing its duties hereunder, manager shall act as an independent contractor. 12. This agreement represents the entire contract between the parties, and the manager agrees to perform the services provided for herein upon the terms and conditions herein set forth. This agreement shall remain in effect for a period of 3 years from February 1, 1963, unless sooner terminated by notice in writing from either party to the other, which may be given with or without cause at any time and shall be effective at the close of the first calendar month that ends not less than 30 days after the date of such notice. 13. This agreement shall be deemed personal between the parties, and shall not be subject to assignment by either of them. The manager may, however, delegate to any corporation owned and controlled by the manager, its officers or employees, any or all of the duties that the manager is to perform under paragraphs 3, 4, or 9 hereof, accounting for the expenses of such other corporation in the same manner as if they were direct expenses of the manager; and in the event of such delegation, the provisions of paragraph 8 hereof with respect to liability insurance shall apply to the manager and such other corporation, jointly and severally. 14. This agreement shall become effective February 1,1963. In witness whereof, the parties hereto have executed this agreement this 31st day of January 1963. FEDERAL RESERVE BANK OF CLEVELAND (Owner), By FRED O. KIEL, Vice President. MCCLANAHAN-HEIDACHER, INC. (Manager). By JULIUS HEIDACHER JUSTIFICATION No. 64 Dinners with northern Kentucky bankers and Pittsburgh bankers These dinner meetings were arranged with the chief executives of northern Kentucky and Pittsburgh banks in order to introduce to them the new incoming President of the Cleveland bank, Mr. W. B. Hickman. We considered that such meetings at central points would be more economical as to travel, time, and expense than visits to each city or bank in the areas. The new President had been in the Fourth District area less than 3 years prior to his appointment. It was essential, therefore, that he meet as many bankers as 258 THE FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS possible in order to facilitate the discharge of his responsibilities. As President he is expected to be well informed regarding banking, credit and economic developments and problems, and to interpret monetary and credit policy to the district. He must know bankers and others well enough to gain their confidence and to encourage them to discuss with him freely and frankly their programs, plans, policies, and views. These contacts are also helpful in carrying out the reserve bank's responsibilities as fiscal agent of the U.S. Government, particularly in administering U.S. tax and loan accounts carried at banks, sale of U.S. savings bonds, and sale or exchange of U.S. Government securities for member bank account or for the account of their customers. This activity redounds to the benefit of the U.S. Treasury. JUSTIFICATION No. 65 Job evaluation travel expense of branch personnel In order to foster the efficient conduct of the bank's business and to assure fair treatment for the more than 1,500 employees of the three offices of the Federal Reserve Bank of Cleveland (offices at Cleveland, Cincinnati, and Pittsburgh) the personnel department is continually reviewing the job content of positions in the three offices. This review is undertaken for the purpose of providing a proper alinement of grades and remuneration with difficulty of work and levels of responsibility within the three offices of the bank and in comparison with comparable jobs in other concerns in the three communities. To achieve comparability in the assignment of salary grade levels, and to discus personnel administration with a view toward uniformity, meetings of members of personnel departments concerned with the particular functions or problems under consideration are held from time to time. Branch personnel are represented in such meetings held at the bank's main office. Travel and subsistence expenses of these branch personnel are paid by the bank. This program has been effective in providing an equitable means of determining the relative values of jobs and permits a more sound salary administration program thus reducing the tendency of employees to seek employment elsewhere. JUSTIFICATION No. 66 Emergency preparedness program Pursuant to the authority granted by Executive Order 11094, issued by the President of the United States, the Federal Reserve System has embarked upon national security preparedness measures relating to monetary and bank credit programs in the event of a national emergency. One phase of the emergency preparedness program of this bank was to establish cash agent banks through the Fourth Federal Reserve District, where currency would be placed in the vaults of these cash agent banks for use only in the event of a national emergency. Cash agents—Travel expense A substantial amount of currency has been prepositioned in 12 of the 15 cash agent banks in the Fourth District. Periodically, it is necessary for one or more of our officers to go to these cash agent banks to check the alarm systems, make audits, or handle other miscellaneous details in connection with our cash agent program. These trips, which involve travel expense, are made as part of the responsibility of this bank in carrying out the details of our emergency preparedness program under the Executive order issued by the President of the United States. Travel expenses—Record center program For a number of years, in order to strengthen our emergency preparedness program, two people were assigned each week throughout the year to the record center at Athens, Ohio, for training purposes and to become familiar with the operations of the record center in the event it would be necessary to use them during a national emergency. This training program was revised on July 1, 1963, when three records sites were established—one for the main office and one for each of the branches. Records had to be moved from Athens to the other sites. This program should be of immeasurable direct benefit to all of the communities in the Fourth Federal Reserve District in the event of a national emergency, with accompanying practical benefits to the Federal Reserve Bank of Cleveland and the U.S. Government. THE FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS JUSTIFICATION No. 259 67 Balance sheet audit of tranches The board of directors of this bank has authorized and directed the general auditor to make periodic complete audits of the branches. It is less excepsive to have the audit force of the main office travel to branches and conduct the audit on a concentrated basis over a period of a week or two, than to keep a resident audit force at each branch large enough to perform the work. JUSTIFICATION No. 70 Ackenheil & Associates, Inc., engineering fees In April of 1962 we retained the engineering firm of Ackenheil & Associates to make a preliminary survey and a continuing check of the bank building structure to protect the bank building and property from any possible damage due to the imminent construction of the Federal building adjacent to our property. It had been determined that due to the soil conditions and the depth of the foundation for the proposed building, there would be a distinct possibility of damage to the bank property. There was also a possibility that water seeping into the excavation and being removed could cause a lowering of the water table pressure beneath the bank building which could cause settlement and subsequent damage. Also, there was the possibility of damage to the bank building from the vibration caused by pile driving. Ackenheil & Associates surveyed the bank building to determine existing plaster cracks. These existing cracks were then noted and microscopically measured and photographed. Certain check points on the exterior of the building were established and measured. The plaster cracks were inspected and measured weekly for the purpose of detecting any structure movement during the pile driving and excavation. The check points on the exterior were surveyed at varying intervals during the excavation. Weekly reports were submitted to the bank to keep the officers informed at all times. Ackenheil & Associates' final report indicated that there had been only a very minor settlement of the bank building in the order of one thirty-second to one sixteenth of an inch. The preliminary investigation had indicated the possibility of three-sixteenths of an inch of settlement. This very minor settlement caused no structural damage to the bank building. The plaster cracks that had been kept under surveillance also indicated that there had been no structural movement other than the expected vibration from pile driving. The bank benefited by having expert examination at all times in a situation that could have been dangerous and could have resulted in heavy damage and expense. JUSTIFICATION NO. 71 Moving expenses of C. Harrell from Cleveland to Pittsburgh Shortly after the death of the vice president previously in charge of the Pittsburgh branch, the Federal Reserve Bank of Cleveland transferred Mr. Harrell from Cleveland to Pittsburgh, to assume responsibility, as vice president, for management of the branch, and requested him to move his domicile from Cleveland to Pittsburgh. In line with common practice of industry and government, his necessary moving expenses were paid. JUSTIFICATION NO. 72 Outside cost of tabulating Periodically it is necessary to process certain punch cards, including cards used in fiscal agency bond inscription operations, so that the data punched into the cards is interpreted or printed on the cards. As the volume of this operation does not warrant the installation and rental of an Alphabetical Interpreter, the prepunched cards are taken to a service institution for processing. The annual cost for this service is less than 1 month's rental would be if such an "Interpreter" were installed in our tabulating department. JUSTIFICATION NO. 73 Work uniforms for cash department personnel Since the work of counting and wrapping coin is dirty and messy, the bank furnishes work clothes for the people working in the unit. 260 THE FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS The furnishing of the clothes enables the bank to maintain more effectively standards of cleanliness and sanitation considered to be desirable and necessary. The employees engaged in the work in this unit are in the lower pay grades and requiring them to supply and launder their own work clothes would impose a severe and unconscionable financial burden on them. The cost to the bank of furnishing and laundering the uniforms is estimated to be less than would be the compensation necessary to reimburse the employees for doing it individually. JUSTIFICATION No. 74 Savings bond drive luncheons The branch sponsored a luncheon on March 7, 1962, for bankers and industrialists in Erie County, Pa., to promote the sale of savings bonds through the Payroll deduction plan. At that time the Savings Bonds Division of the U.S. Treasury Department was commencing a drive to encourage greater participation in the bond program in Erie County. The branch also sponsored a dinner-meeting on March 29, 1962, using the branch's cafeteria facilities. It was attended by Pittsburgh area volunteer workers interested in the savings bond program; its purpose was to help increase the sale of savings bonds. These meetings helped to encourage greater interest in the savings bond program, and were sponsored at the request of the Treasury Department. The Board of Governors approved the Treasury Department request and authorized Federal Reserve banks to assist in the Treasury's program to stimulate sales of savings bonds by paying the cost of a luncheon or a dinner. JUSTIFICATION NO. 75 Christmas gifts to employees in armed services A token gift of $10 which displays continuing interest in having an experienced employee return to the bank following military service. JUSTIFICATION No. 76 Dinner for convention of Allied Social Science Association 1 Pittsburgh was host city to over 3,800 delegates representing 12 large research, educational, and scientific associations attending the Allied Social Science Associations meeting held December 26-29, 1962. In connection with the Science Associations meetings, the branch management felt it would be a fine opportunity for the representatives attending the Science Associations meetings from the various Reserve banks and Board of Governors' office to get together to discuss problems of mutual interest in the research and economic field. Accordingly, the branch sponsored a dinner-meeting which was held at the branch, using its cafeteria facilities. The branch facilities were decided upon because it was more economical than holding the dinner at a local hotel. The meeting at the branch was of benefit as it presented the opportunity to the members of the research staffs from the various Reserve banks and Board of Governors' office to meet informally with those in the same line of endeavor, share their experiences, and exchange information on research and economic policies. JUSTIFICATION No. 77 Employees1 handbook The employees' handbook contains policies, rules, and regulations of the bank affecting the employee during the normal course of business. This booklet is furnished by the bank to all employees. It fosters an improved understanding of personnel policies and encourages employees to observe established rules. In so doing, it has eliminated those grievances and complaints that usually arise through misunderstanding or lack of knowledge of the bank's rules. Mr. H I C K M A N . I'd like to make this comment about our fellowship program, which you mentioned. We have a program here which I think is probably saving the Federal Reserve Bank of Cleveland, and the Treasury indirectly, more money than any other program. 1 The Allied Social Science Associations refer to meeting in Pittsburgh as meetings— not conventions. THE FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS 261 The CHAIRMAN. W h a t is that? Mr. H I C K M A N . This is our fellowship program—this is the payment of the money to the University of Kentucky, to Ohio State University, to Carnegie Institute of Technology, and so forth. Roughly, what we do is select two promising young graduate students each year to wTork on subjects of interest to our bank. And I would like to indicate some of the topics that these young people are working on. One man is working on the impact of monetary policy on the investment portfolio decisions of country member banks. Another is working on term lending among large member banks in the Fourth Federal Reserve District. Another one is working on the principal determinants of the demand for money by consumers and households, and so on. The CHAIRMAN. Mr. Hickman, whose permission did you have outside of your own directors to make these expenditures ? The Federal Reserve Board didn't give you that power, did they ? Mr. H I C K M A N . Oh, yes. These are moneys that are needed to be spent to understand the workings of the monetary system. The CHAIRMAN. Who did you make a report to on these actual expenditures ? Mr. H I C K M A N . We make a functional report quarterly to the Board of Governors. And then we have an annual budget The CHAIRMAN. I was told that you did not. We will have to look into that. Mr. H I C K M A N . That is correct. We give them a quarterly The CHAIRMAN. Including these items right here that I mentioned ? Of course the items that we have here, they are just a small number of the items. You say they are included in totals and not details? Mr. H I C K M A N . There is a listing The CHAIRMAN. I n detail ? Mr. H I C K M A N . I think that there is, sir. No, I beg your pardon. I have to take that back. There is not. The CHAIRMAN. YOU are wrong about that, because you made no report to anyone. Mr. H I C K M A N . I am sorry. The CHAIRMAN. We looked into that carefully. So the banks are spending all this money for anything they want to spend. Some of it is justified5 some of it is not justified. But you are spending money here as though it was your money. I t is not your money. I t is the Government's money, it is the taxpayers' money. If you didn't spend it for these purposes, it would go into the Treasury, reduce the tax bill of every person in the United States. So this is a serious matter. And I think you people are going just too far, taking onto yourselves the decision as to how you will spend money. There doesn't seem to be much of a limit on what you spend it for or how much. Mr. H I C K M A N . We are spending $6,000 for a study, per man, for 18 months' work, on a subject of interest and value to the Federal Reserve Bank of Cleveland. I t is very difficult to get professional economists to work for you 18 months full time for that kind of money. The CHAIRMAN. I know. But most of your work is check clearing. 262 T H E FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS Mr. H I C K M A N . NO, as I started off by saying, Mr. Chairman, the main responsibility, most of our work, most of my time is spent on trying to formulate the correct decisions, the correct information, to give to the Board of Governors, in assisting them to formulate monetary policy. The CHAIRMAN. YOU could not prove or disprove anything along that line. There is no way to arrive at any definite conclusions. Mr. H I C K M A N . I t is a very nebulous thing, as you know. Millions and millions of dollars are spent for similar purposes. The CHAIRMAN. Any other questions, gentlemen ? Mr. WIDNALL. Mr. Chairman, I think he made a statement earlier about 33 percent of the time was spent on check clearing—32 percent. The CHAIRMAN. And 16 percent for what ? Mr. H I C K M A N . For general services—let me get this breakdown, please. The CHAIRMAN. Of course, the Federal Eeserve Act contemplated that the bankers would pay for clearing these checks. That is something else that the Federal Reserve banks took on, without any authority at all, and it is costing the Government about $150 million a year. The lowest estimate has been $125 million a year. Mr. H I C K M A N . Well, as I understand, the total cost of this to the Federal Reserve Bank of Cleveland for the check collection function in 1963 was $3,700,000. The total cost for the system was $41 million. The CHAIRMAN. The taxpayers paid that. They shouldn't have paid it. But you are making them pay it. Mr. H I C K M A N . The taxpayers are paying for the roads and the harbors and the public works, to take care of promotion of commerce and industry. A fundamental part of the Federal Reserve Act was to encourage the use of checks as a means of payment. The CHAIRMAN. S O the banks are not helping the Federal Reserve—capital about $500 million, so-called capital—it is not used, it is idle, unused. You pay them 6 percent on it. Mr. H I C K M A N . I t is not idle. Our capital is used. The CHAIRMAN. W h a t do you use it for ? Mr. H I C K M A N . I t is invested in Government bonds and all the other assets we have. The CHAIRMAN. Where are the Government bonds it is invested in ? Mr. H I C K M A N . I t is prorated over all the assets. The CHAIRMAN. The bonds you said that you held were not owned by you. I t is owned by others. You answered that question for me. Mr. H I C K M A N . These bonds are owned by us, a proportionate share of these bonds. The CHAIRMAN. H O W much in bonds do you have ? Mr. H I C K M A N . I just gave you the balance sheet of the bank here. We have somewhere in the neighborhood of two and a half billion dollars worth of Government bonds. U.S. Government securities, $2,783 million The CHAIRMAN. Wait a minute. I s that your p a r t of the portfolio ? Mr. H I C K M A N . That is what we own. The CHAIRMAN. YOU own yourself in Cleveland ? Mr. H I C K M A N . T h a t is correct. We own it. The CHAIRMAN. And that is not part of the open market portfolio ? Mr. H I C K M A N . T h a t is p a r t of it. THE FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS 263 The CHAIRMAN. How did you buy those bonds ? Mr. H I C K M A N . By setting up liabilities—claims on us in the form of member bank reserves. The CHAIRMAN. W h a t did you pay for them % Mr. H I C K M A N . Checks on the Federal Reserve Bank. The CHAIRMAN. Didn't pay any money for them ? Mr. H I C K M A N . We paid deposits for them. The CHAIRMAN. Paid deposits for them. That is just by a flick of the pen. Mr. H I C K M A N . That is just what banking is. That is the way it is done. The CHAIRMAN. That is what I say. You paid nothing for these bonds. Mr. H I C K M A N . T h a t is the whole banking process. The CHAIRMAN. All right. Of course, we have 11 other Presidents to interrogate. And I have some other questions. I think I will wait and ask one of the others. Mr. BOLTON. Mr. Chairman—as a point of clarification—with specific reference to the study being made by the various economists, is it your point that these would be better controlled if they went through the appropriation process? The CHAIRMAN. Yes, sir; it is. And we get rid of that back-door spending. Mr. BOLTON. I understand the gentleman's point. But I think, therefore, if these research projects which are approved by the Congress, and appropriations through ARA, such as discovering where the umbilicus of a whale is and the mating habits of seals in Alaska are better controlled and the taxpayers' money is better controlled than it is under the policy directed along policy lines for a distinct purpose by the bank. The CHAIRMAN. Without the approving the projects the gentleman has stated, I think that all Government expenditures should be made under Government supervision some way, and somebody independent should be reviewing and evaluating the operations of the Fed to see whether or not the money is properly spent. T h a t is my point. Mr. BOLTON. And you don't believe that any breadth of judgment The CHAIRMAN. Sure, you have to have discretion. But you don't have to have where they can spend thousands of dollars to join the American Bankers Association, and things like that. That is just clearly out of line. There is no point in them joining the American Bankers Association. W h y should members of Congress join and charge it up to the Government, and make the Government pay it? That would be terrible. Mr. BOLTON. Does the gentleman know whether the Government pays the membership in the American Medical Association for any members of the Department of Health, Education, and Welfare ? The CHAIRMAN. I don't know. But it would not surprise me if they paid for specific professional people. But that is quite a long way from what they are doing here. Here is where a whole bank is joining the American Bankers Association, spending thousands of dollars for it. Mr. WIDNALL. Mr. Chairman, do I understand you to be saying that if they are to use any economists in that bank, it should go through 264 THE FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS the appropriation process and be screened, as to the number they hire, who they hire? The CHAIRMAN. Well, we have a way of handling that. The agencies ask for something and say, "This is approximate—we might use some of these other funds for that, and we have to have some flexibility." You have to have that. Mr. BOLTON. If that is the gentleman's point, we are a lot closer together than some of the past statements would indicate. The CHAIRMAN. I would not label every penny—of course not. You have to have some flexibility. But somebody has to look that over. I t is just like the fellow, his son's going to town to shop, back in the old days, to buy food and cattle feed, everything else. And he just throws the boy his purse and tells him to go to town, buy a wagonload, and then give the purse back, and he never looks at it. They got along all right that way. But it is not a good way to do business. And that is what we are doing right here. We are throwing the Federal Reserve a billion dollars a year. After they spend all they want for any purpose, it is never approved by Congress, never approved by anybody, before or after. And then they send the balance back to the Treasury. I t is kind of a loose way of doing business. And it is far from what you said as to how your operations were better than any Government agency's operations. I cannot agree with you on that. Mr. WIDNALL. Mr. Chairman, I would like to compliment them on what they have done with respect to research. I think the funds in my own way of thinking have been wisely spent and in the interest of the taxpayer. There is no more frustrating experience than to see what happened last year, when Congresss did not act on the defense education scholarship funds, and thousands of our young people could not go to college this past fall because of the failure of Congress to act, and they could have acted a year ago this January. They need help. I t seems to me they are using the expeditious way to get competent help. And it is in the interest of all the people. Mr. BROCK. Mr. Chairman—if I may add a comment. I can think of no more judicious use of the tax dollar than to provide an educational opportunity for Government employees or anybody. And I think it is commendable that these employees of yours are being given this opportunity to advance themselves technically so that they are of greater benefit to the Federal Eeserve bank, to the people of the United States. I think perhaps if we wanted to be brutally honest about this thing, if we are going to put this list into the record of educational opportunities being offered, and membership in organizations, which I also agree with because we have to have communications between the two to be able to assess the economy—I think it would be entirely germane, then, for a list to be compiled of the subsidization of Members of Congress, in the form of shampoo, hair oils, massage parlors, and steam baths. This to me is just talking about the other side of the coin and being fair about it. The CHAIRMAN. Well, I am not using any of the services the gentleman mentioned. But I would not object to any reasonable regulation against any Member of Congress. I don't get any free hair- THE FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS 265 cuts either. I have been here 35 years and I have never gotten a free haircut. Mr. BROCK. I t is subsidized, as is the cafeteria. I think the point that I would like to raise is what method of investigation raised these figures, and where did the facts come from ? The CHAIRMAN. Personal visits to the banks by two investigators from the committee. If you gentlemen will remember, one of the first things they discovered, and it was brought before the committee, was the note in the minutes of the Federal Reserve Bank of New York, when they were up there, about this $7,500,000 loss in Government bonds in San Francisco. And we brought that before the whole committee, appointed a committee to go out to San Francisco and look into it. And I thought their books were rather loosely handled out there. I n fact, this goes to prove that the Government's money is being handled in a rather careless way, the way it looks to me. Mr. BOLTON. Mr. Chairman, in light of this whole proposition—if the Fed were to turn those Federal bonds back to the Treasury, would you suggest that all other Government agencies do the same thing ? The CHAIRMAN. This is not a comparable situation at all. The other Government agencies pay actual money for their bonds—like the trust fund—they pay actual money. Only the Federal Reserve and the commercial banks can create money. Nobody else can get bonds unless they pay for them, except the Federal Reserve and the commercial banks. They can create money on the books of the banks. Mr. BROCK. What would the Chairman suggest as an alternative to these bonds, for the creation of money ? The CHAIRMAN. F o r the creation of money? You mean Federal Reserve ? Mr. BROCK. Yes, The CHAIRMAN. sir. The banks should pay part of it, clearing checks and other services that are just purely for the banks' benefit. The banks should pay that part. Then any public service the Government should pay, by appropriation from Congress. Mr. BROCK. Are not these bonds used, Mr. Hickman, in the process of generating capital for the U.S. economy ? Mr. H I C K M A N . Yes, sir. Mr. BROCK. What alternative would the Chairman suggest for this purpose? The CHAIRMAN. Well, they could still go ahead and do that. You see, these reserves are given to commercial banks. When a commercial bank sells a million dollar bond, a bond maybe that you have yourself, that you want to sell through that bank, the Federal Reserve gives them credit in their reserves for it. Now, you see? that is not their money—that is really your money, but they are using it, and they give you a million dollars, and then the banking system can expand on that $9 million more. That is under the fractional reserve system—free of charge. So the banking system may get interest on $10 million for the use of that million dollars that doesn't even belong to them. Mr. BROCK. May I ask, Mr. Hickman, what would happen to the capital structure of the country if we withdrew from the Fed this $33 billion? 28-680—64—vol. 1 18 266 T H E FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS Mr. H I C K M A N . If the bonds were canceled and the reserves of the banking system wiped out? Mr. BROCK. Yes, sir. Mr. HICKMAN. I should think all the commercial banks would be insolvent. The CHAIRMAN. Nobody is advocating that. We can get to the alternative later on. We are just talking about now the existing facts. Mr. BROCK. That is the point—we could not operate. The CHAIRMAN. We could operate. Mr. BOLTON. Mr. Chairman, I hate to make a point of it, but there is the recognition on the floor today The CHAIRMAN. We will adjourn until 2:30, and we will resume with the gentleman from Boston. (Whereupon, at 12:20 p.m., the committee recessed to reconvene at 2:30 p.m., the same day.) AFTERNOON SESSION 2 130 P. M. Present: Representatives Patman (presiding), Reuss, Vanik, Minish, Hanna, Wilson, Harvey, Bolton, and Brock. The CHAIRMAN. The committee will please come to order. We have as our witnesses this afternoon, Mr. Ellis, President of the Federal Reserve Bank of Boston, who was here this morning but did not testify, and Mr. Shuford, President of the Federal Reserve Bank of St. Louis, and Mr. Wayne, President of the Federal Reserve Bank of Richmond. Well, gentlemen, do you have prepared statements ? Mr. ELLIS. Sir, I came with a prepared statement; yes. Mr. SHUFORD. Yes, sir; I have a short one. Mr. W A Y N E . I do not have a prepared statement. The CHAIRMAN. That is all right. Just make a brief statement then. Even if it is prepared, we will put it all in the record. You may make a brief statement, and we will take all three of you at once rather than have two of you come back tomorrow, and we can interrogate you at the same time. Mr. Ellis, you may proceed first but, before you start, Mr. Brock asked a question and made a statement this morning which, I am afraid, was misunderstood. Something was said about if interest was not paid on the Federal Reserve bonds that are held by the Open Market Committee that that would, in other words, invalidate the reserves. I just wanted to state that if interest was not paid, and they were carried as non-interest-bearing obligations, it would not affect the reserves, as I understand it. Mr. BROCK. That is correct, and I did not imply that I was talking about the removal of the bonds themselves. Mr. CHAIRMAN. Oh, I see. Well, I misunderstood you then. Thank you, sir. All right, Mr. Ellis, you may proceed. THE FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS 267 STATEMENT OF GEORGE H. ELLIS, PRESIDENT, FEDERAL RESERVE RANK OF BOSTON Mr. E L L I S . With your permission, I would like to review the salient features of the opening statement which, I understand, will be in the record. I would like to start by simply advising you of the background that I bring to this discussion. I joined the Federal Reserve Bank of Boston as a research economist in June 1951. Prior to that I had obtained a Ph. D. in economics at Harvard University and was an assistant professor of economics and business administration at the University of Maine. With the passage of time I became successively manager of the bank's research department, director of research, vice president, and in January 1961, president. I t is my understanding that the principal purpose of this hearing is to consider what is the best central banking system for the people of the United States. I n such a reconsideration it would seem essential to start with a restatement of some basic, widely agreed objectives to be obtained by our central banking system. To my way of thinking there are two: 1. The Nation's individual commercial banks must be welded together into an effective system that will serve individuals, businesses, small and large, and governments, large and small. 2. The Nation's money-creating powers must be continuously exercised for the national interest. Let me consider these two objectives in sequence. The problem starts, I think, with the simple fact that we have in our country some 14,000 privately owned, highly competitive, independently operated commercial banks. The mechanics of effectively tying together the activities of all these banks through a pooling of reserves and provision of cash, check, credit, and other services needed in an integrated financial system is a major administrative task faced by no other country. A t some point Congress had to decide whether these functions were going to (a) be left entirely to private banking, (6) become strictly governmental activities, or (c) be some combination of the two alternative approaches. Behind this choice, and behind much of the questioning that I have heard here this morning, lay the question of how far a democratic government can go in guidance and control of economic affairs without severely limiting the effectiveness of the private economy. When it passed the Federal Reserve Act in 1913, Congress made its initial choice. I t decided to create by statute 12 semipublic corporate agencies of the Federal Government—the Federal Reserve banks—to perform certain banking functions in the public interest subject to governmental supervision through the Board of Governors of the Federal Reserve System, itself a Government establishment holding powers in trusteeship from Congress. As the Federal Reserve has evolved new administrative arrangements and new policy techniques, it has continued to reflect, in general, the political, economic, and social traditions characteristic of the 268 T H E FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS United States. The size, diversity, and democratic character of the Nation are implicit in these arrangements—specifically, that regional interests make up the national whole and that primary economic changes in most regions have become increasingly dependent upon what happens in others. The public, in general, specific economic groups in the community, and differing sections of the Nation are represented in the policymaking bodies of the Eeserve System. The distribution of System powers between the regional banks and the Board of Governors, and the organization of the policymaking bodies provide means of bringing increased knowledge and improved judgment to bear on final decisions in the public interest. A t the same time, this organizational framework insulates monetary decisions from both the perssures of private interests and from partisan politics. I n the meetings of the Federal Open Market Committee, as in other. System bodies, lines of thought converge from two directions into the formation of national policy; one flows from banking, business, and the general public in the various regions through the Presidents of the Eeserve banks, the other from the Board of Governors of the Federal Eeserve System at the national level. Eegional representatives of the System not only participate in policy formulation but interpret these actions and objectives in their own communities, thus encouraging wider public understanding and support of national decisions and improved effectiveness of general policy. Policy determined, at least in part, by locally oriented means becomes more broadly based and less vulnerable than an entirely centralized determination and administration of policy with only a rudimentary role of gathering regional intelligence assigned to a network of field offices. The flow of regional economic materials produced by the research activities of the Eeserve banks contributes directly to the development of the geographical areas which they serve. One of the implications of the Employment Act of 1946 is that the Government must engage in constant analysis of business conditions in the interest of greater stablity and economic growth. Since its inception the Eeserve System has collected statistics and conducted economic studies toward this end. The banks' variety of regional statistics, their continuing improvement and development as new data become available, not only increase the understanding of the economic characteristics of the various individual regions of the Nation, but provide a better perspective for analysis of economic conditions as a whole. Thus, the Employment Act reaffirmed and broadened the general objectives concerning economic growth and stability implicit in the Federal Eeserve Act. Within this general framework a Federal Eeserve bank President has dual responsibilities for administration and for policy formulation. On the one hand he is responsible for administration of a bank that provides coin and currency for a wide geographical area, clears checks between banks, acts as fiscal agent of the United States in such duties as issuing, retiring, and transfering Federal securities, and many related service functions. His administration takes place in a business environment where the objective is efficient service at lowest possible costs; where a board of directors exercises general supervision and policy guidance; where operations conform to an approved budget within the framework of general directives issued by the Board of THE FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS 269 Governors; and where he is subject to continuous audit control and examination. Each Reserve bank's internal auditor reports to and is directly responsible to the board of directors and independent of the bank's operating management. Each year, in addition, an examination of the bank is made by the Board of Governors' examiners who report directly to the Board. I t can be demonstrated that under these arrangements Federal Reserve banking operations, all of which serve the public interest in one way or another, compare favorably in result with the best in comparable Government operations and private enterprise. Having made such a self-directed complimentary observation, let me hasten to recognize that the System is made up of human beings, no one of them being infallible. W e always have a host of problems and there is always a constant struggle for improvement. P a r t of my job is to see that the struggle has a successful outcome. By act of Congress I am sworn to service every third year as a member of the Federal Open Market Committee. To Committee deliberations a Reserve bank President must bring familiarity with banking and credit conditions in his district and wTith the requirements of banks for reserves with which to meet the credit needs of their customers. He must also be fully familiar with the overall credit policies of the System and actions that may contribute to national economic stability and growth. In fulfilling my regional operational and national policy responsibilities, I find the services of our board of directors extremely helpful. Their wide-ranging public concern and their business and banking experience are valuable in planning and conducting the bank's affairs. Their contact with the economic life of the region provides current evaluation of economic conditions that is valuable in policy determinations. I n my 3 years of service as a Reserve bank President I have been fortunate to have as Chairman first, Dr. Nils Wessell, president of Tufts University, and currently, Mr. Erwin D. Canham, editor of the Christian Science Monitor. My experience with these and other directors, and that of my predecessor, suggests that they are willing to serve because they feel they are elected or appointed on the basis of reputation and ability to serve in the public interest. Furthermore, their standing in the region provides support for the Reserve System and widens public understanding and appreciation of monetary matters. I would count it as a serious liability were the System so to be changed that we could not continue to secure highly experienced directors willing to serve the public in this way. I t should be clear to all that the quality of Reserve bank directors and their devotion to public welfare insures that Reserve bank Presidents are not banker dominated. Mr. Chairman, I should like to conclude this opening statement with a general observation about the subject matter of H.R. 3783, H.R. 9631, and the related proposals for altering the structure of the Federal Reserve System. Taken as a group, these proposals amount to a nationalization of the country's central bank. I n countries with parliamentary form of government it might be argued that since the cabinet hold their office at the will of the parliament the ultimate control of the monetary system remains with the people's elected represent 270 THE FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS atives. In our country, however, such a change as making the Secretary of the Treasury Chairman of the Federal Reserve Board would amount to congressional abrogation to the executive of the fundamental powers of control of the Nation's monetary system. For an excellent discussion of this issue I refer you to a letter from Mr. Allen Sproul to Mr. Patman at the time of the 1952 hearings. I t appears on page 983 of the March 1952 hearings on the economic report. I n its 1960 response to the Commission on Money and Credit, the Treasury expressed my view so well that I should like simply to quote their conclusions: If the executive were to possess the power over the creation of money (which is the prerogative of Congress and has been delegated to the Federal Reserve), while at the same time bearing the responsibility to borrow to meet the Government's fiscal requirements as cheaply as possible, there might be considerable danger of reliance on unsound monetary policies to minimize (in the short run) Government borrowing costs, at the expense of encouraging inflationary pressures. This is no idle academic theory; it has happened in this and other countries. I have long maintained that one principal advantage of the Federal Reserve System is that it has shown flexibility in adapting to the changing needs of our economy. At the same time, one of its greatest assets has been an independent stability that has won the confidence of the world's financial community. I n fact, willingness of foreign central banks to continue holding dollars as part of their monetary reserves is heavily dependent on their confidence in the U.S. monetary system. The substantial alteration in the structure of the Federal Reserve System as proposed in the bills under discussion might raise the serious prospect of loss of confidence in the dollar and lead to a rapid gold outflow. Mr. Chairman, any fair appraisal of how the Federal Reserve System has evolved over the past 50 years would suggest that further modification might result in continued improvement and it is always appropriate to direct inquiries in that direction. With respect to the particular proposals contained in the bills here under discussion, however, I am disposed to adhere to the judgment reached by your own Subcommittee on General Credit Control and Debt Management in 1952, when it concluded: The independence of the Federal Reserve System is desirable, not as an end in itself, but as a means of contributing to the formulation of the best overall economic policy. In our judgment, the present degree of independence of the System is about that best suited for this purpose under present conditions. I still think that was a fine conclusion. Thank you, sir. The CHAIRMAN. Thank you, sir. All right, Mr. Wayne, you may proceed. You have an impromptu statement, I believe you said, that you would like to make. STATEMENT OF EDWARD A. WAYNE, PRESIDENT, FEDERAL RESERVE BANK OF RICHMOND Mr. W A Y N E . There are a few comments that I would like to make, if I may, Mr. Chairman. The CHAIRMAN*. All right. Mr. WAYNE. I brought no prepared statement. T H E FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS 271 Mr. HARVEY. Could I interrupt to ask Mr. Wayne if he is the same "Mr. Wayne" whom we saw in the movie of the Eichmond bank? Mr. W A Y N E . I am afraid so. Mr. HARVEY. I am sure we would all like to compliment you and say we thought that was a very fine movie. You did very well. Mr. W A Y N E . Thank you very much, Mr. Harvey. Well, I would like simply to make a few observations, if I may, in connection with the matters being here considered. I n the first place, it seems to me that the central bank is, after all, a banking operation by the very "nature of the beast," and that the business that it carries out is banking in nature and is expected to be and to materially alter the central bank so that it might, in the public mind and in the mind of our friends at home and abroad, lose this particular image, would seem to me dangerous in terms of our reliance upon it. As I have looked at the experience and as I have read economic history, it seems to me that one of the things which is true of all of the nations of the Western World, even under a parliamentary system of government where the central bank is clearly subject in the ultimate sense to the control of a member of the Cabinet, that either by tradition, as in the case of the British, or by statute or by internal party discipline or by whatever move it may be, the central bank is always once removed from the daily pressures of parliamentary life, and this, it seems to me, is a lesson of history which cannot be overlooked ; That the very nature of the central bank and that which it is expected to do in the public interest not only requires that it occupy this position, where it can exercise a detached view, and not only must it be free to do so, but it must of necessity be required to do so, because by the very nature of its purposes it will pursue unpopular courses. I t will frequently pursue courses which will for the moment arouse hostile reactions in the public mind and in the Congress and in the administrative arm, the executive arm at times, and this it seems to me is an inevitable position which the central bank must occupy. As I look at rather recent economic history and examine, for instance, the Republic of Germany in the early 1920's and I see what happened when the central bank was completely subservient to the executive and to the treasury, it seems incredible that one would run such a risk. If one doesn't want to go back that far, one can look at the experience of France prior to 1958 and see exactly the same thing. Or if one prefers a current example, one can look south to Brazil. So it seems to me that it is absolutely essential that, by whatever system, the central bank must be kept in this once-removed position. Now, with respect to the services of the clearing of checks and of providing money, currency of coin, to the Nation's needs I find myself a little startled, Mr. Chairman, to run into some of your comments and expressed views on this particular subject because it has seemed to me that one of the prime purposes for which this was established was to preserve, as Mr. Ellis has intimated, a vast system of locally oriented banks. So far as I know, no other great nation in the world has as many as a hundred banks. Most of them have only 20 or less. 272 THE FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS For instance, it is not necessary for the Bank of Canada to collect checks because there are about 10 banks that blanket Canada and they clear checks on themselves. The true beneficiary of the check collection system of the Federal Reserve is the public at large. I would like to recall a comment which was made by Mr. Glass, when he was in the House of Representatives, in a speech which he made, the last speech he made, in connection with the Federal Reserve Act on the day before it was enacted into law, in which he said with respect to the provision for the establishment of the check collection function that— The provision, as it stands, will result in an immense saving to the tradespeople of the United States. It will eliminate the amazing wastefulness incident to many independent collection organizations by substituting one compact collection system. And so it has happened and it has seemed to me that the real beneficiaries of this particular transaction have been the tradespeople and that somehow this service has to be performed in such a way that will permit the smaller, locally oriented banks to enjoy complete acceptance of their checks. I t is true that in other nations of the world it is the banknote which is circulated rather than the check, but this is a unique development of this country, and it seems to me that it is not likely to continue to exist unless there is some unifying system such as the Federal Reserve has provided. With respect to the currency and coin operation, surely some arm of government must and will provide the needed currency and coin for the service of the public. I wish to heavens there was more coin to provide, for it is one of our continuing and very complex problems, and if such a situation were to exist with regard to the real medium, and that is the check, this whole thing would come to a stop. But the real beneficiaries of the currency and coin operation have always been the general public. More particularly, regarding the banks outside of the Reserve cities, there has been a continuing effort of the Reserve System to provide currency and coin to the country banks by means which will preserve as nearly as possible an equal advantage with the city banks, which would accrue to them because they are located in proximity to the central bank. Finally, I recognize, as you and I have discussed before, Mr. Chairman, on previous occasions, of your visits, and I have heard the discussions here, that the matter of expenditures is a matter on which there are differences of opinion. And I concur in the feeling that it is highly desirable for the central bank, in any one of its positions, to have a disinterested party looking over its shoulder. I urge that it be ex post facto or else how can we look at this from a separate and independent position, if you want to use that term, although I do not think that is a very good term. I t is an unfortunate term. I t is not "independent." I t is a once removed position. The CHAIRMAN. Thank you, sir. THE FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS Statement of condition of the Federal Reserve Bank of ousiness Dec. 31,1963 of Richmond 273 at the close [In thousands of dollars] Assets: Gold certificate account Redemption fund for F e d e r a l Reserve notes T o t a l gold certificate reserves F e d e r a l Reserve notes of other b a n k s Other cash Discounts a n d a d v a n c e s : Secured by U.S. Government securities Other Acceptances: Bought outright Held u n d e r repurchase agreement U.S. Government s e c u r i t i e s : Bought outright Held u n d e r r e p u r c h a s e agreement Total loans a n d securities Cash items in process of collection B a n k premises Other a s s e t s : Denominated in foreign currencies All other Total assets Liabilities: F e d e r a l Reserve notes 845, 296 117, 530 962, 826 38, 672 9, 013 1, 350 1,504 2, 350, 949 2, 353, 803 588, 827 5,107 7,173 17,098 3,982, 519 2, 703, 310 Deposits: Member b a n k reserves U.S. T r e a s u r y — G e n e r a l account Foreign Other 706, 663 79,381 7,520 8, 074 Total deposits Deferred availability cash items Other liabilities 801, 638 398, 382 5, 480 T o t a l liabilities Capital a c c o u n t s : Capital p a i d in Surplus Other capital accounts Total liabilities a n d capital accounts R a t i o of gold certificate reserves to deposit a n d F e d e r a l Reserve note liabilities combined (percent) Contingent liability on acceptances purchased for foreign correspondents 3, 908, 810 24, 570 49,139 3, 982, 519 27. 5 4,319 274 THE FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS Federal Reserve note statement—Federal Reserve Bank of Richmond at the close of business Dec. 31, 1963 [In thousands of dollars] Federal Reserve notes: Issued to Federal Reserve Bank by Federal Reserve agent and outstanding 2, 786,928 Less held by issuing bank, and forwarded for redemption 83, 618 Federal Reserve .notes, net 1 Collateral held by Federal Reserve agent for notes issued to bank: Gold certificate account Eligible paper U.S. Government securities Total collateral 2,703,310 625, 000 1, 350 2,275,000 2, 901, 350 1 Includes Federal Reserve notes held by U.S. Treasury and by Federal Reserve banks other than the issuing bank. W 0 5 0 ( N O i O O O O H CO CO t ^ H 00 <N 00 iO O t ^ 00 00 (M T-i ^ O 00 CO ^ ^ ^ ^ . ^ ^ ^ ^ ^ CD CM CM CM CM CM CM CM 0 5 H I Tfi 00 l > CO CO 00 ^ ^ ^ CO i-i I-H i-< i iO 00 © CO i-4 t > CO i-i 00 iO 00 CO iO O CO O rtt KMrHCOrH^ rH CM CO - ^ CO CM lO T^ U0 l > i r-t CO >0 b - CO !>• ^ *C iO OS CM CO O i 00 00 CO ICOCMCM w t ^ 00 00 CO iO CD ^ CO rt< CM CM "«* l^rHT-KCMT-4 i—i05T-i"<fr-i00i0i0C000t>TtiiOC0iOcMT^O €«-CMOI>»Ot^OOb-cOrttT-i|>cOOOiOOOCMCO CMCMCO^^ CM CO CO CD iO CM rH rH lOSCOWlONCOOlO^r-lC5t>.COOii-HTjH iC0 05 0 0 0 0 l > a i 0 5 T ^ c D » O c O r H C O t > - O O 5 C 0 l€fc HC^^i rHi-^CM-tf^H T^COCO H O Q r - l l l l l l l l l l i l l l l l €/3t I . i t I I l I i l I l I I I i 1 i c M c O O i i i i i i i i i i i t i i i l C M l O T t < ! l l l l l l l l l t l l l i€©i i i i i i i i i i i i i i O ^ H O i i O W O CM CO CM t - t>- O CO CO 00 C i b - OS €©• ^ ^ CM rt< CO THE FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS ? <3 •8 A3 ^ i i i i i i i CM "tf iO CD CM CM i T-I i H H i i i i H CM i i i f O O i C C 5 0 0 i - t c O O C M i O r H c D O O ^ O i l > c 0 05 HrHHOSOCNCONCjOOCNNOJ^CONCSCX) COCMrt<CO'-HO5rHiOCDO5l>CO00O5iO001>a5 LQ TficDI>0005Oi-tCMC0^iOC0l>00CiOi-iCM rH^rHr-HrHCMCMCMCMCMCMCMCMCMCMCOCOCO OS Oi OS Os Oi OS 0* Os OS Os Os Os Os Os O) OS 0> Os 275 Miscellaneous Total earnings Net service charges received Deficient reserve penalties Municipal warrants U.S. securities Purchased bills Discounted bills T}H CO i—i O t ^ rH 00 0 3 ^ 0 W 0 5 0 C ^ C O ( M H 0 5 N ( N O C D C N N O C i GO (M CD O CO i O i O rtn CO CO O 0 I-H H CM CM CM TH CM CM CM co~-* icf a d a T c T o i cT r^~co~ T-H O H C 0 O ' 0 N 0 0 0 C C 0 O » 0 » 0 O ( M H ( M N H O CO 00 CO CO CM r t CM CM CM r-i T-H T-H CM CM T-H T-H ^ l O r H r I i H r 1 i H H 1 i r-H l i l l 1 1 1 1 I l 1 I l l 1 1 ' i ! i ! i i i i i i i i i i i i i ! i i ! i i ! i ! ! i ! i 1 i 1 i r-lCM rHCM i 1 1 1 i 1 1 1 I 1 1 1 0 1 > t ^ i 0 iCOOiOCO i€&- i I 1 1 1 l l l l l l l 1 1 1 1 1 1 I 1 I 1 1 1 1 t > CO r - i CO CM CM T ^ t ^ . O r-t Oi l O r H T H CM CO CO | > iT-HCOr-HCMGOCOtCTJi^CM l € ^ C M CM t - i i S e - r H CM T-H r-H i ^ O l N X i O C N O i O O S N ^ C N H H H €£• O *C CO i-i l O CO CM CM H 00 CM «0 CO 1> lO CM CO Th GO CO CM CO C i I— CO " ^ i O 00 GO l > " ^ 00 O GO r-i r h CM CM OGCOONON03HCNH00550HQO^OCDGO T-H THE FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS « 03 o C M lO €/=r i i CJ0COCOCMC5diOCMT-HrHi>Tt<CirfrliO H l O T-i l O CO CO lO rH rH <& « i cococorocorocoTti^T*^Ti<T^Tt<T*<Tt<<H^uoio W * i O ( O N C C Q O H ( M C O ^ i C H O N O O a i O H i Total earnings All other U.S. securities Acceptances purchased Commitments to make industrial loans Industrial loans Purchased bills Discounted bills Discounts and advances THE O CD j - > CO P-J bC a • as O10 g 02 lOcDiOHCDOiCiOO^OO COOOOOCDCOQOOIOT^QO cT r f lO* rt^ io" l>T t C cO~ oT oT |>T OCOCOTlH|>TtT^aicDC<lTtH oT co* iS co rjT <xftC T*T<xT c T N T OOHOOMr-IC0005COCO OH(NcD05 0 0 0 c O H O f O O CD O o3 T3 O bD S FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS a o E £ cu ra o a o3 _g .2 ii ^ ggI to °3 > Q c3 (MCO^iOONOOOiOHlM 277 to Federal Reserve Bank of Richmond—Profit and loss account, 1914-25 3 1914-15 1916 1917 1918 1919 $177, 304 $191, 085 $569, 073 $2, 445, 259 $3, 912, 817 1920 W H C u r r e n t n e t earnings __ _ _ __ _ 25, 531 _ Deductions from current n e t earnings: B a n k premises—depreciation _ _ __ __ ____ F u r n i t u r e a n d equipment _ _ _ _ _ _ _ _ Reserve for probable losses _ _ Reserve for self-insurance _ _ _ _ _ ___ Reserve for Federal Reserve Board expenses __ _ Reserve for depreciation, U.S. bondsAll other T o t a l deductions __ N e t deductions from current n e t earnings N e t earnings- __ Distribution of n e t earnings: Dividends paid _ Transferred t o surplus account Franchise t a x paid U.S. Government Balance to profit a n d loss __ »=_ © Additions to current n e t earnings: W i t h d r a w n from reserve for— Federal Reserve Board expenses. Depreciation on U.S. bonds _ All other _ _ ___ __ Total additions $5, 489, 694 __ 58, 606 940 6, 486 59, 546 32, 017 20, 000 49, 420 170, 000 103, 126 > f W fc_ t_ % 2,349 4,514 28, 435 28, 414 28, 245 91, 786 W H W 25, 531 50, 000 13, 198 146 5, 865 4, 214 2,349 4,514 106, 849 133, 229 95, 097 283, 205 2,349 4,514 106, 849 133, 229 35, 551 251, 188 174, 955 186, 571 462, 224 2, 312, 030 3, 877, 266 5, 238, 506 151, 940 197, 922 240, 944 116,472 116,472 -11,664 232, 432 2, 079, 598 252, 872 3, 624, 394 392 052 4, 740 869 204, 585 •4 H __ __ _ _ _ 23, 015 -11,315 > GO 1921 1922 1923 $4, 799, 834 $1, 201, 588 $1, 327, 740 1924 1925 H C u r r e n t net e a r n i n g s . Additions t o current net earnings: W i t h d r a w n from reserve for— Federal Reserve Board expenses. Depreciation on U.S. bonds All other Total a d d i t i o n s . Deductions from current net earnings: B a n k premises—depreciation Furniture and equipment Reserve for probable losses Reserve for self-insurance Reserve for Federal Reserve Board expenses. Reserve for depreciation, U.S. bonds All other $672, 406 $730, 846 O W > 6,827 4,202 3,618 8,831 2,006 712 11,029 12, 449 2,006 712 671 216 000 000 82, 114 52, 819 100,000 50, 000 81,671 18, 357 54, 197, 100, 50, 178, 64, 50, 50, 069 329 000 000 358 710 000 000 89, 43, 50, 50, 50, 000 15, 838 3,521 3,898 9,688 5,420 Total deductions. 417, 236 346, 589 236, 785 294, 621 155, 448 Net deductions from current net e a r n i n g s . 406, 207 334, 140 234, 897 292, 615 154, 736 4, 393, 627 867, 448 1, 092, 843 379, 791 576, 110 333, 321 32, 954 501, 173 342, 295 384, 404 366, 144 351,251 28, 540 358, 162 217, 948 Net earnings Distribution of net earnings: Dividends paid Transferred t o surplus account Franchise t a x paid U.S. G o v e r n m e n t . Balance t o profit a n d loss 322, 203 693, 792 3, 377, 632 1 1 1 After charging surplus a n d crediting franchise t a x with $20,459 paid as an additional franchise t a x for 1921. t o surplus a n d paid as a franchise t a x out of earnings for 1922 were $53,413 a n d $480,714, respectively. W Amounts transferred W CO < CO CO 5 *1 H ^ CD Federal Reserve Bank of Richmond—Profit-and-loss account, 1926-35 • _ 1927 1926 C u r r e n t net earnings _ _ $964, 189 ____ __ _ _ _ _ _ _ _ _ _ $1, 558, 942 - $ 8 4 , 576 _ _ _ _ _ __ 561 1,884 1,057 625 59, 218 2, 598 561 1,884 1,057 625 61, 816 182, 092 50, 000 ___ Net deductions from current n e t earnings N e t earnings _ _ _ _ _ _ ___ Dividends paid _ _ Franchise t a x paid U.S. Government__ Paid U.S. Treasurer (sec. 13b)__ _ Transferred t o surplus (sec. 13b)__ _ Transferred t o surplus (sec. 7)__ $1, 261, 508 1930 w H *i ft > w w Ul H < Deductions from current n e t earnings: Special depreciation allowances on b a n k premises Reserve for losses _ _ _ _ _ _ _ _ Reserve for self-insurance _ _ _ _ _ _ Building for Board of G o v e r n o r s . _ All other deductions _ _ _ _ _____ ____ Total deductions. 1929 t- Additions to current n e t earnings: Profit on U.S. G o v e r n m e n t securities sold Other additions _ _ _ Total additions $552, 776 1928 ___ _ 72, 378 50, 000 50, 000 50, 000 100, 000 Ui 5,013 6,949 43, 605 44, 964 6,037 237, 105 56, 949 143, 605 217, 342 6,037 236, 544 727, 645 55, 065 497, 711 142, 548 1, 118,960 216, 717 1, 342, 225 + 5 5 , 779 -28,797 363, 957 84, 472 372, 230 370, 683 673, 449 368, 601 876, 262 353, 472 279, 216 125, 481 74, 828 97, 362 1 - 3 8 2 , 269 _o H t_ > H H W M H H > 00 00 1 1931 OS 00 1932 1933 1934 1935 3 *l fel O fel f1 H -$231,275 $346, 375 $31, 635 $229, 186 $260, 413 r- Additions to current net earnings: r Profit on U.S. Government securities sold Other additions 82, 148 2,165 82, 101 1,186 30, 735 17, 300 327, 207 25, 259 257, 648 17, 122 ® 84, 313 83, 287 48, 035 352, 466 274, 770 T Current net earnings , Total additions $ w fel W Deductions from current net earnings: Special depreciation allowances on bank premises Reserve for losses. _ __ Reserve for self-insurance Building for Board of Governors All other deductions _ fel W 107, 145 391, 805 259, 188 101, 147 9,684 8,027 16, 605 9,117 37, 141 8,567 9,684 115, 172 408, 410 268, 305 146, 855 + 74,629 31, 885 360, 375 + 84,161 + 127,915 -156,646 314, 490 - 3 2 8 , 740 313, 347 388, 328 340, 360 314, 490 308, 388 (2) 299, 050 293, 644 __ ^__ Total deductions Net deductions from current net earnings Net earnings Dividends paid _ Franchise tax paid U.S. Government Paid U.S. Treasurer (sec. 13b) Transferred to surplus (sec. 13b) Transferred to surplus (sec. 7) 1 Deficit in earnings after payment of dividends, charged to surplus account i -497,006 2 1 - 6 3 7 , 128 -298 14, 595 < fel GO H GO H fel % fel W *i M 66, 714 27, 970 Banking Act of 1933 eliminated the provision in the Federal Reserve Act requiring the payment of a franchise tax. % CO oo to Federal Reserve Bank of Richmond—Profit and loss account, 1936-45 1937 1936 1938 1939 1940 M Current net earnings Additions to current net earnings: Profits on sales of U.S. Government securities __ Recoveries of, and withdrawals from allowances for, losses on industrial advances (net) All other __ $310, 956 $520, 212 $226, 737 $355, 454 $483, 129 296, 982 127, 633 437, 837 229, 376 608, 518 W 3,296 56, 577 33, 882 21, 096 72, 575 W 300, 278 184, 210 471, 719 250, 472 681, 093 *1 > GO Total additions Deductions from current net earnings: Reserve for contingencies __ Losses and reserves for losses on industrial advances (net) Special reserves and chargeoffs on bank premises Chargeoffs and special depreciation on bank premises Prior service contributions to retirement system Retirement system (interest base adjustment) Retirement system (interest base and increased benefits adjustments) Assessment for building for Board of Governors All other Total deductions Net additions or deductions(—) Net earnings __ _ H fel 406, 982 113,543 161, 248 157, 044 157, 044 314, 088 88, 123 21, 537 60, 953 849 22, 245 12, 245 261, 174 673, 686 -332,389 - 4 9 7 , 581 82, 799 291, 674 -373,408 - 1 4 8 , 179 -25,862 167, 673 389, 419 -62,452 372, 033 200, 875 523, 127 872, 548 2 70, 554 30, 500 CD a H fed W > Paid U.S. Treasury (sec. 13b). . . Dividends paid Transferred to surplus (sec. 13b) _ Transferred to surplus (sec. 7 ) — Surplus (sec. 7) Jan. 1 Additions, as above Transferred to reserves for contingencies Transferred from reserves for contingencies _ Surplus (sec. 7) Dec. 31 280, 136 - 2 6 , 247 -316, 341 291, 235 - 1 3 , 420 94, 218 297, 732 -115,893 19, 036 305, 414 - 4 6 , 834 264, 547 317, 760 -1,721 556, 509 5, 185, 759 -316,341 4, 869, 418 94, 218 4, 963, 636 19, 036 4, 982, 672 264, 547 5, 247, 219 556, 509 -556,509 4, 869, 418 4, 963, 636 4, 982, 672 5, 247, 219 5, 247, 219 •3 W H IO H W > W GO H < GO H CQ Federal Reserve Bank of Richmond—Profit and loss account, 1936-45—Continued 1941 $278, 400 Current net earnings Additions to current net earnings: Profits on sales of U.S. Government securities Recoveries of, and withdrawals from allowances for, losses on industrial advances (net) __ All other Total additions Deductions from current net earnings: Reserves for contingencies -_ Losses and reserves for losses on industrial advances (net)_ Special reserves and chargeoffs on bank premises Chargeoffs and special depreciation on bank premises Prior service contributions to retirement system Retirement system (interest base adjustment) Retirement system (interest base and increased benefits adjustments) Assessment for building for Board of Governors All other Total deductions... Net additions or deductions (—) Net earnings - 1942 $599, 198 1943 $1, 313, 974 fe5 oo 1 1944 $2, 774, 030 1945 $5, 538, 717 H *j 69, 594 178, 234 1, 974, 305 191, 113 207, 653 8,261 14, 609 50, 624 264, 540 106 5,207 44, 373 2, 717 77, 855 192, 843 2, 289, 469 196, 426 254, 743 O H W > W £0 W 15, 735 1 627, 298 17, 422 < CO 243, 691 CO 528, 506 > 259, 717 7,784 29, 117 5,386 9,752 2, 624 23, 519 271. 412 777, 583 9,752 629, 922 54, 336 - 7 8 , 569 1,511,886 186, 674 — 375, 179 332, 736 520, 629 2,825,860 2, 960, 704 5, 163, 538 H M W > CO Paid U.S. Treasury (sec. 13b). _. Dividends paid Transferred to surplus (sec. 13b). Transferred to surplus (sec. 7) Surplus (sec. 7) Jan. 1 Additions, as above Transferred to reserves for contingencies 113, 229 24, 307 359, 650 45, 557 2, 396, 346 2,559 380, 712 5° 2, 577, 375 4,154 409, 879 35, 858 4, 713, 647 5, 235, 966 113, 229 -113,229 5, 235, 966 2, 396, 346 -2,396,346 5, 235, 966 2, 577, 375 7, 813, 341 4, 713, 647 13, 808 330, 180 58, 959 348, 441 -11,252 5, 247, 219 -11,252 fe) 3, 066, 084 Transferred from reserves for contingenciesSurplus (sec. 7) Dec. 1 1 Net recoveries. W 5, 235, 966 5, 235, 966 7, 813, 341 15, 593, 072 > W fel H w < fei CD H CO H fel £ Federal Reserve Bank of Richmond—Profit and loss account, 1946-55—ContinuedL 1946 , $5, 601, 937 Current net earnings Additions to current net earnings: 1947 1948 1949 1950 $5, 706, 891 $14, 769, 404 $14, 873, 882 $12, 124, 196 114, 920 167, 375 396, 690 1, 995, 190 2, 364, 501 699 3, 153 24, 210 1,738 358 768 7, 363 118, 772 193, 323 397, 048 1, 995, 958 2, 371, 864 35, 848 120, 162 38, 602 24, 260 8,065 4,587 5, 128 2,029 180, 270 46, 667 4,587 168, 558 46, 847 -61,498 146, 656 392, 461 1, 827, 400 2, 325, 017 5, 540, 439 5, 853, 547 15, 161, 865 16, 701, 282 14, 449, 213 Transferred to reserves for contingencies Paid to U.S. Treasury (sec. 13b) _ __ Paid U.S. Treasury (interest on Federal Reserve notes) _ Net earnings after reserves and payments to U.S. Treasury._ 2, 592, 033 2, 537, 242 5, 450, 439 1,992 4, 808, 290 1, 043, 265 10, 855, 278 1, 714, 554 12, 261, 570 1, 902, 470 12, 487, 998 1, 961, 215 Dividends paid _ Transferred to surplus (sec. 13b) Transferred to surplus (sec. 7) 457, 887 -427 5, 082, 979 485, 085 23,881 534, 299 508, 237 539, 948 573, 601 1, 206, 317 1, 362, 522 1, 387, 614 15, 593, 072 20, 676, 051 20, 676, 051 21, 210, 350 21, 210, 350 22. 416. 667 22, 416, 667 23, 779, 189 23, 779, 189 25, 166, 803 Profits on sales of U.S. Government securities (net) Recoveries of, and withdrawals from allowances for, losses on industrial loans (net) _ All other Total additions _ Net earnings before payments to U.S. Treasury. _ Surplus (sec. 7) Jan. 1 Surplus (sec. 7) Dec. 31 _ __ - _ _ _ __ 44, 818 1 1 W S3 163, 430 _ Total deductions _ _ _ •3 W W Deductions from current net earnings: Reserves for contingencies Retirement system (salary computation adjustment) Retirement system (adjustment for revised benefits) Losses on U.S. Government securities sold (net) All other Net additions or deductions (—)__ 00 C5 00 9 1951 Additions to current net earnings: Profits on sales of U.S. Government securities (net) Recoveries of, and withdrawals from allowances for, losses on industrial loans (net) All other , Total additions Deductions from current net earnings: Reserves for contingencies __ _ __ Retirement system (salary computation adjustment) _ _ Retirement system (adjustment for revised benefits) Losses on U.S. Government securities sold (net) All Other _ > -_ Total deductions Net additions or deductions (—) _ Net earnings before payments to U.S. Treasury Transferred to reserves for contingencies Paid to U.S. Treasury (sec. 13b) Paid U.S. Treasury (interest on Federal Reserve notes) __ Net earnings after reserves and payments to U.S. Treasury. _ Surplus (sec. 7) Jan. 1_ Surplus (sec. 7) Dec. 31 1953 1954 $19, 354, 463 $22, 797, 676 $25, 794, 145 $18, 047, 581 Current net earnings__ Dividends paid _ Transferred to surplus (sec. 13b) _ Transferred to surplus (sec. 7) 1952 -_ __ _ 1,255 130, 497 129, 573 31, 735 1,693 33 9,213 1955 $16, 170, 668 w 482 1,255 132, 190 129, 606 40, 948 482 54, 664 55, 181 64, 579 52, 509 51, 955 167, 576 O W W H GO 101, 555 10, 488 2,225 2, 124 637 55 995 < 166, 707 57, 406 234, 279 53, 146 53, 005 w - 1 6 5 , 452 74, 784 - 1 0 4 , 672 - 1 2 , 198 -52,523 H 19, 189,011 22, 872, 460 25, 689, 473 18, 035, 383 16, 118, 145 16, 720, 823 20, 006, 070 22, 511, 392 15, 573, 733 13, 786, 647 2, 468, 188 2, 866, 390 3, 178, 081 2, 461, 650 2, 331, 498 610, 304 643, 141 676, 502 731, 160 799, 651 1, 857, 884 2, 223, 249 2, 501, 579 1, 730, 490 1, 531, 847 25, 166, 803 27, 024, 687 27, 024, 687 29, 247, 936 29, 247, 936 31, 749, 515 31, 749, 515 33, 480, 005 33, 480, 005 35, 011, 852 H > CO fcO oo 00 00 Federal Reserve Bank of Richmond—Profit and loss account, 1956-63—Continued 1959 1956 1957 1958 $26, 716, 974 $37, 840, 469 $37, 805, 386 $45, 915, 067 16, 960 10, 406 116, 135 9, 795 11, 746 ft) W W Current net earnings Additions t o current net earnings: Profits on sales of U.S. Government securities (net)__ R e i m b u r s e m e n t for fiscal agencv expenses incurred in prior y e a r s . _ Transferred from reserves for contingencies (net) All other _ T o t a l additions T o t a l deductions . Net earnings before p a y m e n t s t o U.S. Treasury Paid U.S. T r e a s u r y (interest on Federal Reserve notes) Dividends paid Transferred t o surplus (sec. 7) Surplus (sec. 7) J a n . 1 Transferred from surplus (sec. 13b) Surplus (sec. 7) Dec. 31 -_ __ - 1,886 1,719 20, 999 128, 427 11,513 6, 512, 123 52, 928 42, 636 1,426 53, 038 571, 926 533 2,080 1,385 54, 354 625, 497 44, 716 1,385 -33,355 -497,070 - 3 3 , 203 6, 510, 738 26, 683, 619 37, 343, 399 37, 772, 183 52, 425, 805 23, 237, 535 864, 154 32, 783, 688 917,082 33, 129, 772 961, 325 61, 688, 735 1, 016, 950 2, 581, 930 35,011,853 3, 642, 628 37, 593, 783 3, 681, 086 41,236,411 -71,517 - 1 0 , 2 7 9 , 880 44, 845, 980 44, 845, 980 34, 566, 100 > CO < Deductions from current net earnings: Reserves for contingencies R e t i r e m e n t s y s t e m (adjustment for revised benefits) All other Net additions or deductions (—) 4,039 6, 500, 112 266 H *3 H O 1 37, 593, 783 41,236,411 W H w W > w 1960 Current net earnings Additions to current net earnings: Profits on sales of U.S. Government securities (net) Reimbursement for fiscal agency expenses incurred in prior years Transferred from reserves for contingencies (net) _ All other __ _ Total additions Deductions from current net earnings: Reserves for contingencies Retirement system (adjustment for revised benefits) All other. . Net additions or deductions (—) __ __ _„ Paid U.S. Treasury (interest on Federal Reserve notes) Dividends paid __ Transferred to surplus (sec. 7) Surplus (sec. 7), Jan. 1 _ _ Transferred from surplus (sec. 13b) Surplus (sec. 7), Dec. 31 i 1961 1962 1963 $58, 466, 303 $47, 862, 298 $55, 359, 683 $62, 786, 323 153, 387 219, 354 130, 618 20, 749 O 1, 178, 351 278 515 32, 588 36, 891 1, 332, 016 219, 869 163, 206 57, 639 3,502 3,595 66, 024 1,459 3,502 3,595 66, 024 1,459 1, 328, 514 216, 274 97, 181 56, 181 59, 794, 817 48, 078, 572 55, 456, 865 62, 842, 503 55, 718, 988 1, 083, 429 44, 327, 343 1, 168, 329 50, 222, 987 1, 272, 977 56, 413, 810 1, 391, 693 2, 992, 400 34, 566, 100 2, 582, 900 37, 558, 500 3, 960, 900 40, 141, 400 5, 037, 000 44, 102, 300 37, 558, 500 40, 141, 400 44, 102, 300 49, 139, 300 W W W < Total deductions __ Net earnings before payments to U.S. Treasury 1 __ __ H CD Kj H > 290 The THE FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS CHAIRMAN. We will now hear from Mr. Shuford. STATEMENT OP HARRY A. SHUFORD, PRESIDENT, FEDERAL RESERVE BANK OP ST. LOUIS Mr. SHUFORD. Mr. Chairman and members of the committee, I certainly appreciate The CHAIRMAN. Would you wait just a moment ? Mr. SHUFORD. Excuse me. Mr. BOLTON. I S it your intent to have each witness testify before he is questioned ? The CHAIRMAN. That is right. Mr. BOLTON. Fine. The CHAIRMAN. G O ahead. Mr. SHUFORD. I was simply saying that I certainly appreciate the opportunity to appear before the committee and to comment on some phases of the Federal Reserve System which are under consideration. I shall not undertake to cover all the specific provisions of the bills before the committee, but would like to refer to several points. We all recognize this, but just to get myself oriented, I would like to review^ that the power over money is, of course, vested with the Congress of the United States. Under our system, money includes not only currency and coin but bank reserves and deposits. Due to the heavy responsibilities of the Congress and to the technical and complicated nature of monetary administration, Congress has found it desirable to delegate the responsibility for formulating and implementing monetary policy to others in order that the many factors and considerations involved may be followed closely w^eek by week and day by day. I n making the delegation Congress has been wise to create and develop the Federal Reserve System, which is a governmental institution with responsibility to exercise judgment regarding monetary matters. I regard it, as I think most of the others do, that it is constructive for institutions to be reviewed from time to time and for changes to be made when found to be necessary. The Federal Reserve System was created 50 years ago, and during the years since has properly been under repeated review by Congress, private organizations, and the System itself. Many constructive changes have been made. I regard this, just as Mr. Wayne has just indicated, to be proper. Through it all, the principle of independence of judgment for determining an appropriate amount of money in the economy has been adhered to and, at times, strengthened. I regard as sound the policy of delegating monetary responsibilities to an instrumentality which is accountable only to Congress and separated from the Treasury. The Reserve banks, as instruments of the Federal Government, operate under the authority of Congress with their powers, duties, and responsibilities provided for by law. While member banks are required to pay in capital to the Reserve banks, they do not own stock in the usual sense of the word as it applies to private corporations. The member banks do not control the Reserve banks or set their policies. They do not share in the earnings above the statutory limitation and they have no claim on the assets. THE FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS 291 Member banks do, through the method prescribed by law, elect six directors of a Reserve bank, three of whom are bankers. The other three directors are appointed by the Board of Governors; one of these is named chairman and another deputy chairman, each for a 1-year term. I n my experience, the directors are able and competent men of high character. They come from varied walks of life and bring to the banks valuable experience and informed judgment. They make important contributions, not only in the formulation of audit, budget, personnel, and operating policies, but also in the presentation of grassroots information with respect to economic and financial conditions in various sections of the country. I n carrying out their responsibilities as directors, I have found that these men act in the general interest and without regard to the manner by which they are elected or who elected them. While the Reserve banks are expected to exercise judgment and initiative in carrying out their responsibilities, they are subject to general supervision. The Board of Governors must approve the appointment of the President and First Vice President and the salaries of all officers of the banks. I n addition, it supervises and coordinates the activities of the banks and examines each of them annually. The Board also approves, and is required to approve and does examine and approve, the budget of each of the banks. They issue uniform instructions and policy letters with respect to our operations. Again, we are left with the privilege, with the board of directors, in carrying these out; and to take the initiative and basic responsibility, but we do have to operate within the framework of this close supervision by the Board of Governors, which is again, a desirable structure. The supervision and coordination includes the issuance of uniform operating instructions and letters of interpretation of regulations. The examinations of the Federal Reserve banks cover all phases of operations and are made by a staff which answers only to the Board. I will not read what I have here because you are all familiar with it, but these examinations are detailed. They are made by people that we only see, unless it is a rare occasion, once a year, and we welcome them. I think all of us who have anything to do with these securities and money welcome them. We know it is there, in our institutions, and we are anxious to have these examiners as well as our own audits check these securities and moneys as often as is reasonably possible, and I must say again that we all welcome these checks, these true audits of our securities and valuables. You know, too, of our own audit procedure, and I shall not repeat it other than to emphasize again, as I am sure each President will do, that insofar as the general auditor of the bank is concerned he does not answer to me. H e answers directly to the audit review committee, the chairman of our board and, through them, to the board of directors. I am furnished a copy of the examination report which he directs to the board of directors and sends a copy to the Board of Governors in Washington. Now, with respect to the Federal Open Market Committee, I think that the composition of the Federal Open Market Committee is an important matter in view of the vital functions which the Committee 292 T H E FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS performs. I believe the present arrangement for five of the Federal Reserve bank presidents to serve as members of the Committee is a desirable one. I n serving on the Committee, the Presidents—I know 1 can speak for myself and I think I can speak for the other Presidents—fully recognize that they are public servants performing a governmental function. Their commitment is supported by the usual public oath. I think it is the same one that I took when I went into the Navy. A t least it is to support the Constitution, the work of the Government. They, with their research staffs, study the economic and financial conditions in their particular districts as well as in the Nation. As members of the Committee they formulate their independent views and conclusions. This arrangement has permitted determination of monetary policy upon a basis of views centered in Washington but, in an important measure, coming from various sections of the country. This has facilitated close contact with current and developing grassroot trends. The present structure and composition of the Open Market Committee, while we have in the judgment of some and I guess we all in some degree agree that we have made errors, but nevertheless, generally speaking, it seems to me that since the Open Market Committee was established it has worked especially well and I think particularly so since we have had the arrangement of all the Presidents sitting in on the meetings of the Open Market Committee, not only when they are voting members, but also when they are alternates and participants. I would favor this continuation. Thank you very much, Mr. Chairman. (The complete statement of Mr. Shuford follows:) STATEMENT OF HARRY A. SHTJFORD, PRESIDENT, FEDERAL RESERVE B A N K OF S T . LOUIS Mr. Chairman and members of the committee, I appreciate this opportunity to appear before the committee and to comment on some phases of the Federal Reserve System which are under consideration. I shall not undertake to cover all the specific provisions of the bills before the committee, but would like to refer to several points. The power over money is, of course, vested with the Congress of the United States. Under our system, money; includes not only currency and coin but bank reserves and deposits. Due to the heavy responsibilities of the Congress and to the technical and complicated nature of monetary administration, Congress has found it desirable to delegate the responsibility for formulating and implementing monetary policy to others in order that the many factors and considerations involved may be followed closely week by week and day by day. I n making the delegation Congress has created and developed the Federal Eeserve System, which is a governmental institution with responsibility to exercise judgment regarding monetary matters. I t is constructive for institutions to be reviewed from time to time and for changes to be made when found to be necessary. The Federal THE FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS 293 Reserve System was created 50 years ago, and during the years since has properly been under repeated review by Congress, private organizations, and the System itself. Many constructive changes have been made. Through it all, the principle of independence of judgment for determining an appropriate amount of money in the economy has been adhered to and, at times, strengthened. I regard as sound the policy of delegating monetary responsibilities to an instrumentality which is accountable only to Congress and separated from the Treasury. The Reserve banks, as instruments of the Federal Government, operate under the authority of Congress with their powers, duties, and responsibilities provided for by law. While member banks are required to pay in capital to the Reserve banks, they do not own stock in the usual sense of the word as it applies to private corporations. The member banks do not control the Reserve banks or set their policies. They do not share in the earnings above the statutory limitation and they have no claim on the assets. Member banks do, through the method prescribed by law, elect six directors of a Reserve bank, three of whom are bankers. The other three directors are appointed by the Board of Governors; one of these is named chairman and another vice chairman, each for k 1-year term. I n my experience, the directors are able and competent men of high character. They come from varied walks of life and bring to the banks valuable experience and informed judgment. They make important contributions, not only in the formulation of audit, budget, personnel, and operating policies, but in the presentation of grassroot information with respect to economic and financial conditions in various sections of the country. I n carrying out their responsibilities as directors, I have found that these men act in the general interest and without regard to who elected them. While the Reserve banks are expected to exercise judgment and initiative in carrying out their responsibilities, they are subject to general supervision. The Board of Governors must approve the appointment of the President and First Vice President and the salaries of all officers of the banks. I n addition, it coordinates the activities of the banks and examines each of them annually. The supervision and coordination includes the issuance of uniform operating instructions and letters of interpretation of regulations. The Board must also approve each bank's budget. The examinations of the Federal Reserve banks cover all phases of operations and are made by a staff which answers only to the Board. I n addition to these examinations, the resident auditor at each Federal Reserve bank and a staff under his supervision conduct continuing audits of operations. I n performing his functions and duties the auditor answers only to the directors of the bank through an Audit Review Committee and the Chairman of the Board. I think that the present structure and control of Federal Reserve banks provide a desirable and effective blending of the national and regional. There is strong control by the Board in Washington. There is benefit from the knowledge and judgment of the local boards of directors. 294 THE FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS The composition of the Federal Open Market Committee is an important matter in view of the vital functions which the Committee performs. I believe the present arrangement for five of the Federal Reserve bank Presidents to serve as members of the Committee is a desirable one. In serving on the Committee, the Presidents fully recognize that they are public servants performing a governmental function. Their commitment is supported by the usual public oath. They, with their research staffs, study the economic and financial conditions in their particular districts as well as in the Nation. As members of the Committee they formulate their independent views and conclusions. This arrangement has permitted determination of monetary policy upon a basis of views centered in Washington but, in an important measure, coming from various sections of the country. This has facilitated close contact with current and developing grass root trends. The present structure and composition of the Open Market Committee has worked especially well since the procedure was changed to enable all the Presidents of the banks to participate in the meetings of the Committee. I would favor a continuation of the present open market arrangement. *-4 ^3 o (T) 0005t^l>.0000C0i0>O00iOrH(MOrt<Tti00CS ^(Nl>COOOHHTt<NCiO«OC<Ja)(NNHC> (NNO»00505H©01CONO»00*^0500 H » 0 » C O 0 0 ^ W N « N H H M H N ^ HCOH ^coooooooc^os^osT-ioooocooooorHost^ U5^kOHHOOCCOcOrHCC»OH(MOCOOOO) €/3CO CN OS CO t ^ CO G5 rH 00 <N 00 05 i O CO CO Tt< 050i-HC<l P THE FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS oa 05 r-. W) QJ *H .°> bf<r/>D 73o>> o» ou at -t-3 J? ° S pj CD <D .2 £'-£ a GO rt .2 fe^ <JH P r^3 Xi CO •a 2 CO CD TJ OS .£3 PH 0) +-> XJ fl m 3 o o Xi P ^COt^00050'-H(MCOTt(iO<lDI>00 295 urc 296 I-HT-H rH <M C O ^ f c O l > 00 CO 1> lG~i-i OiN^OlNOONOINfN^O^MCONWON NiCNHHHHlM(MM(NCOiOOGO(MH(M «9- 1 1 1 I 1 1 1 1 1 1 1 1 1 O I H C O H 1 CO T-H 0 0 ( N CO CO CO ^ I C 0 ( N H H lCO*OOCOCi i € ^ ( N (MT-H T-H I I i I I I I I I I I 1 1 t 1 i 1 1 1 1 i I 1 1 1 i I 1 1 1 i I 1 1 1 1 i 1 I I 1 I 1 1 1 I 1 i 1 1 1 I 1 1 1 1 lQ0I>rH I I 1 1 1 lr-4 I CO I I I I I I © O i T C i H O ^ ! ! ! C ^ C O C O < N I H H H I M •€£• ! r H i O CO <M ( M r - i ( N i O <M 0 0 « * T*< I I I I r H l > - O C O ^ I I I I W l O H r - 1 r-H ^ €£- CO CO COrH i I I | COrt<iOCOI>.00050T-((MCOT^iLOc01>-OOaiOrH COCOCOCOCOCOCO^TtH'HH^'HHTH^^rti^iOiO Oi OS 05 Oi OS Gi 05 Gi OS OS OS Oi Oi Ot> C5 05 Oi G5 C5 I I I I I I I I I I I I I I I I I I I I I I 1 i i I i l €# 1 1 1 H H H H H H H H H M C O ^ O N O O C O C O I O O €/3H H H C ^ C^(^C5TtlCOC5iOtQcOOOcOC^^HiOOOCOCOCOC^ N^C^OiOWOOOCOHCOCOCOrHNlMN^Oi COt>NOONiOiOOOO>iCH»O^HOCOOOOOi €/^ j-lr-ir-lT-ir-ly-lr-lr-ir-iC^ O i T H T-4 CO CO rt< O i - i CO < N r-* l O CO G5 <M tO < N ! > • * 0 <M < N l O CO O CO r-4 O* CO * C 0 0 0 0 OS i - i H ^ 0 3 O CM CO 0 0 0 0 0 0 0 0 i O CO O i O » 0 H CO * 0 CO CO * 0 O H < N THE FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS $ O 5* o 1 All other Total earnings United States securities CommitAcceptments ances to make industrial purchased loans Purchased Industrial loans bills Discounted bills Discounts and advances -20 OOOC^HN^OOOiOMW 1 TjH lO 00 J>- TH O 0~ lO Th b- H <M <M H i-l <M CO CO CO Tt< CO ^ €/3- &$i-i H H i—1 H T H I—1 N05^cooHOi>oaicoo • * O O O ^ O I O H O C O ( N O €/=>• CO~TJH oo~co co c T © r^ co i>- TH N t ^ H ^ O i O N N C O H H co T*< »o co r- oo a* © I-H cq 05©©Oi©Oi050^05G50i <M o w H O O a bJO THE FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS 28-680—64—vol. 1 - 297 $119 Total current earnings All other Foreign currencies U.S. Government securities Acceptances Commitments to make industrial loans Industrial loans Discounts and advances to CO Federal Reserve Bank of St. Louis—Profit and loss account, 1914-25 1914-15 Current net earnings __ -$97,169 00 1916 1917 1918 1919 $144, 372 $509, 884 $2, 052, 838 $2, 783, 483 1920 Additions to current net earnings: Withdrawn from reserve for— Federal Reserve Board expenses Depreciation on U.S. bonds All other $5, 431, 763 19, 520 H 19, 520 _ 3,355 7,728 102, 031 172, 997 335, 000 73, 798 19, 520 350, 000 176, 102 11 3,355 7,728 275, 028 428, 329 575, 717 Net deductions from current net earnings 3,355 7,728 275, 028 428, 329 556, 197 141,017 502, 156 1, 777, 810 2, 355, 154 4, 875, 566 31, 100 284, 566 404, 838 1, 603, 310 234, 660 2, 120, 494 253, 711 4, 621, 855 109, 917 217, 590 -230,338 Distribution of net earnings: Dividends paid Transferred to surplus account Franchise tax paid to U.S. Government Balance to profit and loss - 9 7 , 169 - 9 7 , 169 CO CO H 34, 615 15, 000 Total deductions Net earnings w w Total additions Deductions from current net earnings: Bank premises—depreciation Furniture and equipment Reserve for probable losses Reserve for Federal Reserve Board expenses Reserve for depreciation, U.S. bonds All other 3 K > w CO 1921 Current net earnings $3, 259, 147 Additions to current net earnings: Withdrawn from reserve for— Federal Reserve Board expenses Depreciation on U.S. bonds All other Total additions Deductions from current net earnings: Bank premises—depreciation Furniture and equipment_ Reserve for probable losses Reserve for Federal Reserve Board expenses Reserve for depreciation, U.S. bonds All other _ 1922 $833, 225 1925 1924 1923 $665, 538 $247, 607 $1, 280, 760 « > 13, 241 3,883 2,257 80, 294 564 15, 452 59, 748 13, 241 6, 140 80, 858 15, 452 59, 748 XJi 112,224 54, 082 152, 000 2,000 44, 755 125, 000 2,200 29, 971 123, 687 4,400 25, 927 489, 462 257, 373 GO W GO 2, 156 20, 038 23, 597 28, 795 Total deductions _ _ « _ 320, 462 191, 793 179, 455 59, 122 818, 826 Net deductions from current net earnings 307, 221 185, 653 98, 597 43, 670 759, 078 2, 951, 926 647, 572 1, 182, 163 203, 937 — 93, 540 270, 253 1, 042, 564 1, 639, 109 283, 166 276, 450 87, 956 296, 810 407, 070 478, 283 Distribution of net earnings: Dividends paid. Transferred to surplus account Franchise tax paid to U.S. Government Balance to profit and loss W H 5,256 66, 735 Net earnings W 1 304, 976 -101,039 1 306, 753 -400,293 • w GO Deficit in earnings after payment of dividends, charged to surplus account. CO co Federal Reserve Bank of St. Louis—Profit and loss account, 1926-35—Continued H3 1926 $909, 790 Current net earnings __ - $664, 002 1928 1929 $1, 346, 790 $1, 544, 597 W 1930 $152 569 Total additions 15, 852 152, 434 90, 022 16, 815 57, 523 6 695 15, 852 152, 434 90, 022 16, 815 64, 218 250, 000 23, 276 155, 000 250, 000 214, 875 -11,950 253, 500 40, 000 755 401, 653 247, 252 798 Total deductions 242, 620 40, 755 651, 653 675, 528 215, 673 Net deductions 226, 768 + 111,679 561, 631 658, 713 151, 455 Net earnings 683, 022 775, 681 785, 159 885, 884 1 114 314, 420 317, 727 321, 855 40, 293 319, 231 509, 988 315 839 368, 602 457, 954 423, 011 56, 665 w Ui < 1 1,070 Dividends paid _ __ _ _ Franchise tax paid U.S. GovernmentPaid U.S. Treasurer (sec. 13b) __Transferred to surplus (sec. 13b) Transferred to surplus (sec. 7) O w > Additions to current net earnings: Profit on U.S. Government securities sold Other additions Deductions from current net earnings: Special depreciation allowances on bank premises Reserve for losses Reserve for self-insurance_ Building for Board of Governors.. All other deductions 1927 2 —314 725 w *} > 1931 C u r r e n t net earnings __ Additions t o current n e t earnings: Profit on U . S . Government securities sold. Other additions T o t a l additions 1 $164, 908 $87, 907 153, 306 164, 289 115, 524 71, 759 39, 059 17, 836 308, 050 32, 550 244, 755 13, 820 317, 595 187, 283 56, 895 340, 600 258, 575 w O 86, 832 321, 831 42, 857 79, 337 __ _ __ __ _ __ _ __ . ... . ... __ Due to salvage receipts. Banking Act of 1933 eliminated the provision in the Federal Reserve Act requiring the payment of a franchise tax. 1935 -$47,408 Net earnings 3 1934 $59, 906 __ N e t deductions Dividends paid _ Franchise t a x paid U.S. Government P a i d U.S. Treasurer (sec. 13b) Transferred t o surplus (sec. 13b)_ Transferred t o surplus (sec. 7) 1933 - $ 3 6 6 , 121 __ Deductions from current net earnings: Special depreciation allowances on bank premises Reserve for losses. ._ Reserve for self-insurance Building for Board of G o v e r n o r s . All other deductions T o t a l deductions 1932 2 12, 737 3,704 13, 421 824 30, 485 1,372 12, 737 3,704 100, 253 365, 512 111, 194 + 304,858 + 183,579 43, 358 24, 912 + 147,381 > -61,263 243, 485 -90,766 139, 996 235, 288 H CO 289, 409 268, 505 246, 643 (3) 241, 009 236, 187 -47 2-100,966 -899 -350,672 2 -25,020 i 2 -337,409 2 Deficit in earnings after payment of dividends, charged surplus account. w to CO o CO Federal Reserve Bank of St. Louis—Profit and loss account 1936-45—Continued 1936 1937 1938 1939 o 1940 Current net earnings Additions to current net earnings: Profits on sales of U.S. Government securities _ Recoveries of and withdrawals from allowances for losses on industrial advances (net) All other $412, 532 $431, 641 $149, 011 $251, 951 $547, 571 308, 766 116, 946 385, 083 201, 044 528, 208 13, 878 1,802 10, 532 8,519 60, 998 Total additions __ Deductions from current net earnings: Reserves for contingencies Losses and reserves for losses on industrial advances (net) Chargeoffs and special depreciation on bank premises Assessment for building for Board of Governors Prior service contributions to retirement system Retirement system (interest base adjustment) Retirement system (interest base and increased benefits adjustments) __ _ All other _ 322, 644 118,748 395, 615 209, 563 589, 206 Total deductions Net additions or deductions ( —) __ __ Net earnings _ Paid U.S. Treasury (sec. 13b) Dividends paid Transferred to surplus (sec. 13b) Transferred to surplus (sec. 7) _ . _ Surplus (sec. 7) Jan. 1 Additions, as above Transferred to reserves for contingencies Transferred from reserves for contingencies Surplus (sec. 7) Dec. 31 - _ o > w H 301,355 59, 653 144, 902 W GO 39 42, 080 144, 900 150, 000 289, 800 H W 9 GO H 4, 101 452 219 4,045 205 510,011 187, 432 290, 019 4,084 150, 205 - 1 8 7 , 367 -68,684 105, 596 205, 479 439, 001 225, 165 362, 957 254, 607 457, 430 986, 572 4,152 229, 420 1,796 234, 488 129, 385 18, 323 239, 369 -6,664 224, 725 248, 242 -5,675 744, 005 4, 654, 737 4, 654, 737 129, 385 -116,947 4, 667, 175 18, 323 4, 685, 498 224, 725 -201,044 4, 709, 179 744, 005 - 528, 208 4, 654, 737 4, 667, 175 4, 685, 498 4, 709, 179 4, 924, 976 225, 724 -559 1942 1941 Current net earnings . Additions to current net earnings: Profits on sales of U.S. Government securities Recoveries of and withdrawals from allowances for losses on industrial advances (net) All other Total additions Deductions from current net earnings: Reserves for contingencies Losses and reserves for losses on industrial advances (net) Chargeoffs and special depreciation on bank premises __ Assessment for building for Board of Governors Prior service contributions to retirement system Retirement system (interest base adjustment). Retirement system (interest base and increased benefits adjustments) All other _ _ Total deductions-. Net additions or deductions (—) Net earnings Paid U.S. Treasury (sec. 13b) . __ Dividends paid Transferred to surplus (sec. 13b) Transferred to surplus (sec. 7) _ Surplus (sec. 7) Jan. 1 Additions, as above Transferred to reserves for contingencies Transferred from reserves for contingencies Surplus (sec. 7) Dec. 31 ___ -_ 1943 1944 1945 $356, 525 $494, 056 $1, 005, 230 $2, 165, 269 $3, 931, 591 60, 214 153, 088 1, 658, 200 148, 719 156, 071 313 1,539 1,249 -7,000 6,697 4, 136 60, 527 154, 627 1, 659, 449 148, 416 160, 207 623, 745 120, 468 1,777 I 248, 913 309 136 521, 905 110 120, 777 250, 826 522, 015 4,791 649, 163 -60,250 - 9 6 , 199 1, 137, 434 143, 625 — 488,956 296, 275 397, 857 2, 142, 664 2, 308, 894 3, 442, 635 258, 762 -3,832 41, 345 269, 312 616 127, 929 1, 115 277, 796 -25 1, 863, 778 293, 577 -2,714 2, 018, 031 326, 314 -241 3, 116, 562 4, 924, 976 41, 345 4, 966, 321 127, 929 -127,929 4, 966, 322 6, 330, 100 1, 863, 778 2, 018, 031 -500,000 - 1 , 3 0 0 , 0 0 0 7, 048, 131 3, 116, 562 7, 048, 131 12, 938, 821 4, 966, 321 4, 966, 321 6, 330, 100 4,791 25, 418 K 00 2, 774, 128 CO o 00 Federal Reserve Bank of St. Louis—Profit and loss account, 19^6-55—Continued 1946 Current net earnings _ ____ $4, 054, 763 ___ Additions to current net earnings: Profits on sales of U.S. Government securities (net) Recoveries of, and withdrawals from allowances for, losses on industrial loans (net) _ All other _____ Total additions ___ _ __ __ Deductions from current net earnings: Reserves for contingencies _ _ _ _ ____ Chargeoffs on bank premises._ _ __ Retirement system (salary computation adjustment) Retirement system (adjustment for revised benefits) Losses on U.S. Government securities sold (net)__ All other __ _ _ _ 86, 925 1 1947 00 1949 1948 1950 $4,353,362 $12, 216, 272 $12, 469, 979 130, 373 322, 194 1, 646, 280 $10, 332, 945 1, 973, 676 4, 045 137 126 174 67, 322 134, 418 322, 331 1, 646, 406 1, 973, 850 16, 805 17, 008 143, 553 17, 999 153, 522 1,096 83, 918 135, 966 160, 643 185 154, 618 101,917 -68,644 - 2 6 , 225 322, 146 1, 491, 788 1, 871, 933 3, 986, 119 4, 327, 137 12, 538, 418 13, 961, 767 12, 204, 878 Transferred to reserves for contingencies_ __ Paid to U.S. Treasury (sec. 13b) Paid to U.S. Treasury (interest on Federal Reserve notes) Net earnings after reserves and payments to U.S. Treasury 2, 129, 843 2, 116, 055 3,986, 119 401 3, 553, 033 773, 703 ! 9, 014, 434 1, 394, 141 10, 294, 486 1, 551, 226 10, 595, 592 1, 609, 286 Dividends paid. _ Transferred to surplus (sec. 13b) Transferred to surplus (sec. 7) 353, 160 - 5 , 297 3, 638, 256 378, 794 392, 300 407, 193 431, 812 394, 909 1,001,841 ! 1, 144, 033 1, 177, 474 12, 938, 821 16, 577, 077 16, 577, 077 16, 971, 986 17, 973, 827 19, 117, 860 19, 117, 860 20, 295, 334 __ Net earnings before payments to U.S. Treasury Surplus (sec. 7) Jan. 1 Surplus (sec. 7) Dec. 31 _ _ _ __ _ _ 1 t. ui t_ w < ft »-_ 185 Net additions or deductions (—) w GO 82 _ t_ CO 2,212 Total deductions t_ > 22, 897 3,294 116, 949 W 16, 971, 986 17, 973, 827 ft > h_ ft ft > 1951 1953 1954 $15, 503, 151 $18, 825, 427 $18, 979, 784 $12, 099, 517 Current net earnings Additions to current net earnings: Profits on sales of U.S. Government securities (net) Recoveries of, and withdrawals from allowances for, losses on industrial loans (net)__ All other Total additions Deductions from current net earnings: Reserves for contingencies Chargeoffs on bank premises Retirement system (salary computation adjustment) Retirement system (adjustment for revised benefits) Losses on U.S. Government securities sold (net) All other 1952 1955 $10, 947, 221 108, 609 105, 011 25, 452 6,244 7,490 2,226 5, 050 636 6,244 116, 099 107, 237 30, 502 636 22, 607 -_ _ 24, 873 32, 098 21, 655 18, 662 2,050 5,524 73 6, 998 109, 896 27, 793 179, 744 27, 179 25, 733 -103,652 88, 306 -72,507 3,323 — 25, 097 15, 399, 499 18, 913, 733 18, 907, 277 12, 102, 840 10 922 124 Transferred to reserves for contingencies Paid to U.S. Treasury (sec. 13b) .__ _____ 13,435,403 Paid to U.S. Treasury (interest on Federal Reserve notes) 1, 964, 096 Net earnings after reserves and payments to U.S. Treasury 16, 560, 583 2, 353, 150 16, 533, 509 2, 373, 768 10, 380, 897 1, 721, 943 9, 274, 574 1, 647, 550 471, 210 513, 060 536, 709 568, 325 617, 044 1, 492, 886 1, 840, 090 1, 837, 059 I, 153, 618 1, 030, 506 20, 295, 334 21, 788, 220 21, 788, 220 23, 628, 310 23, 628, 310 25, 465, 369 25, 465, 369 26, 618, 987 26, 618, 987 27, 649, 493 Net additions or deductions (—) Net earnings before payments to U.S. Treasury. Dividends paid Transferred to surplus (sec. 13b) Transferred to surplus (sec. 7) Surplus (sec. 7) Jan. 1 Surplus (sec. 7) Dec. 31 Net loss. w 145, 596 2,920 Total deductions w $ ui 86, 872 417 _ *1 fel O GO H s __ __ o Ox CO O Federal Reserve Bank of St. Louis—Profit and loss account, 1956-63—Continued 1956 1957 1958 $17, 470, 813 $23, 614, 288 $22, 450, 644 $27, 472, 066 12, 665 7,489 83, 015 6,933 7, 864 W 4,541 1,438 139, 600 5, 691, 670 3,044 w 17, 206 91, 943 146, 533 5, 702, 578 17, 370 18, 436 2,812 14, 259 455, 325 3,204 671 989 20, 182 472, 789 19, 107 989 - 2 , 976 - 3 8 0 , 846 127, 425 5, 701, 588 17, 467, 836 23, 233, 442 22, 578, 070 33, 173, 654 15, 135, 639 650, 481 20, 296, 234 682, 073 19, 675, 908 715, 956 40, 296, 779 760, 610 3 1,681,716 27, 649, 493 2, 255, 135 29,331,210 2, 186, 206 31, 586, 344 -26,515 — 7, 883, 735 33, 746, 035 3 29, 331, 210 31, 586, 344 33, 746, 035 25, 862, 300 1959 H3 w Current net earnings _ _ _ __ _ _ Additions t o current net earnings: Profits on sales of U.S. Government securities (net) R e i m b u r s e m e n t for fiscal agency expenses incurred in prior years_ Transferred from reserves for contingencies (net) _ All other O 00 T o t a l additions Deductions from current net earnings: Reserves for contingencies R e t i r e m e n t s y s t e m (adjustment for revised benefits) All other _ T o t a l deductions _ _ __ __ Net additions or deductions (—) Net earnings before p a y m e n t s t o U.S. Treasury Paid U.S. T r e a s u r y (interest on Federal Reserve notes) Dividends paid _ Transferred t o surplus (sec. 7) Surplus (sec. 7) J a n . 1 Transferred from surplus (sec. 13b) _ Surplus (sec. 7) Dec. 31 __ _ __ GO H CO M M Current net earnings Additions to current net earnings: Profits on sales of U.S. Government securities (net) Reimbursement for fiscal agency expenses incurred in prior years Transferred from reserves for contingencies (net) __ All other Total additions 1963 1960 1961 1962 $35, 839, 322 $29, 339, 372 $32, 565, 491 $35, 904, 587 98, 618 139, 634 79, 230 12, 768 470, 496 759 1,026 16, 637 17, 535 569, 873 140, 659 95, 867 30, 303 2,679 3,283 86, 140 1,996 2,679 3,283 86, 140 1,996 567, 194 137, 376 9,727 28, 307 36, 406, 516 29, 476, 748 32, 575, 218 35, 932, 894 Paid U.S. Treasury (interest on Federal Reserve notes). Dividends paid 33, 936, 191 801, 826 25, 741, 888 862, 261 30, 331, 971 940, 346 32, 405, 995 985, 699 Transferred to surplus (sec. 7)__ Surplus (sec. 7) Jan. 1 _ Transferred from surplus (sec. 13b) 1, 668, 500 25, 862, 300 2, 872, 600 27, 530, 800 1, 302, 900 30, 403, 400 2, 541, 200 31, 706, 300 27, 530, 800 30, 403, 400 31, 706, 300 34, 247, 500 _ Net additions or deductions (—) Net earnings before payments to U.S. Treasury._ Surplus (sec. 7) Dec. 31 . w H H W < a Deductions from current net earnings: Reserves for contingencies Retirement system (adjustment for revised benefits). All other Total deductions a _ ___ __ _. S a 308 THE FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS The CHAIRMAN. Thank you very much, Mr. Shuf ord. Now, without objection, we will ask each one of you gentlemen to insert, in connection with your remarks, the last statement issued by your banks showing the bank's condition. You need not insert everything that is in your statement, but just show everything in it regarding the condition of your bank. Mr. W A Y N E . YOU mean on the last daily statement or The CHAIRMAN. The last annual statement will be all right. Mr. SHUFORD. At the close of the year ? The CHAIRMAN. At the close of the year. Mr. E L L I S . F o r which year? The CHAIRMAN. YOU are on a calendar year, are you not ? Mr. E L L I S . Yes, sir. The CHAIRMAN. December 31,1963. Mr. W A Y N E . We will insert it. I do not have it with me. The CHAIRMAN. Well, that is all right, you can furnish it, and make it just the statement of the condition. (The statement follows:) Statement of condition of the Federal Reserve Banh of St. Louis, at the close of business, Dec. 81,1963. [In thousands of dollars] Assets'. Gold certificate account Redemption fund for Federal Reserve notes Total gold certificate reserves Federal Reserve notes of other banks Other cash Discounts and advances: Secured by U.S. Government securities Other Acceptances: Bought outright Held under repurchase agreement U.S. Government securities: Bought outright Held under repurchase agreement Total loans and securities Cash items in process of collection Bank premises Other assets: Denominated in foreign currencies All other Total assets $633,169 60,338 693,507 21,923 13,417 2, 000 1,088 1, 325, 049 1,328,137 298,295 6,171 5,189 10,260 2,376,899 THE FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS 309 Statement of conditions of the Federal Reserve Bank of St. Louis, at the close of business, Dec. 31, 1963—Continued [In thousands of dollars] Liabilities: Federal Reserve notes $1,340,343 Deposits: Member bank reserves U.S. Treasurer—General account Foreign Other Total deposits Deferred availability cash items Other liabilities 651, 848 82, 828 5,440 3,267 — Total liabilities Capital Accounts: Capital paid in Surplus Other capital accounts 743,383 238, 588 3,213 2, 325,527 17,124 34,248 Total liabilities and capital accounts Ratio of gold certificates reserves to deposit and Federal Reserve note liabilities combined percent Contingent liability on acceptances purchased for foreign correspondents 2,376, 899 33.3 $3,125 Federal Reserve note statement of Federal Reserve Bank of St. Louis, at the close of business, Dec. 31,1963 [In thousands of dollars] Federal Reserve notes: Issued to Federal Reserve bank by Federal Reserve agent and outstanding $1,402,417 Less held by issuing bank and forwarded for redemption 62, 074 Federal Reserve notes, net* 1,340, 343 Collateral held by Federal Reserve agent for notes issued to bank: Gold certificate account 250, 000 Eligible paper 2,000 U.S. Government securities 1, 210, 000 Total collateral 1, 462,000 1 Includes Federal Reserve notes held by U.S. Treasury and by Federal Reserve banks other than the issuing bank. The CHAIRMAN. I would like to insert in the record statements prepared from information furnished by the Federal Eeserve about the discounts and advances and number of banks accommodated which would include the number of banks in the district and the number of banks accommodated for each of the years 1960 to 1963, inclusive, and also the discounts and advances by years for 1960 to 1963, inclusive. 310 T H E FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS (The documents follow:) FEDERAL RESERVE Discounts SYSTEM and advances—Number of member banks accommodated window of the regional banks) Number of banks, 1963 Boston New York Buffalo Philadelphia Cleveland Cincinnati Pittsburgh Richmond Baltimore Charlotte Atlanta Birmingham Jacksonville Nashville New Orleans Chicago Detroit St. Louis Little Rock Louisville Memphis Minneapolis Helena K a n s a s City Denver Oklahoma City_ Omaha Dallas E l Paso Houston San Antonio San Francisco Los Angeles Portland Salt Lake C i t y . . Seattle Total 251 426 443 513 413 "467" 1,010 """475" """485" """796" "~~656~ '""I72" 6, 107 1960 1961 (at the 1962 discount 1963 178 230 42 208 71 39 42 104 31 23 86 146 180 32 158 44 26 27 73 27 12 46 132 145 28 117 29 19 24 67 15 11 42 127 139 33 120 38 26 26 64 17 16 49 27 220 55 54 8 11 8 97 34 64 32 45 76 45 11 16 22 8 9 7 6 11 22 151 37 17 1 8 5 52 24 45 17 29 49 16 4 4 9 4 5 6 4 5 18 133 41 21 3 6 4 34 19 45 17 27 62 21 3 5 7 3 5 5 4 5 19 146 46 20 5 8 3 69 22 41 22 37 64 24 5 12 9 4 6 5 6 4 1,920 1,285 1, 117 1,232 THE FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS 311 Discounts and advances 1960 Number Boston N e w York 1 Buffalo Philadelphia Cleveland _ C incinnati Pittsburgh Richmond Baltimore Charlotte Atlanta .._ Birmingham Jacksonville Nashville New Orleans Chicago Detroit _ St. Louis Little Rock Louisville _ Memphis Minneapolis _ Helena Kansas City_ Denver Oklahoma C i t y Omaha Dallas, El Paso _ Houston _ San Antonio San Francisco Los Angeles Portland _ _ Salt Lake City Seattle. Subtotal Foreign loans on gold1 Bank earnings Amount Allocated earnings 1 District earnings 1,634 $1, 449, 287, 158 1,436 7, 375, 454, 000 252 343, 705, 000 1,821 2, 712, 358, 000 532 2, 388, 350, 000 341 764, 245, 000 301 518, 685, 000 1,277 2, 006, 871, 000 301 557, 438, 000 254 629, 623, 000 1,028 3, 255, 948, 000 $540, 1, 612, 71, 832, 461, 153, 131, 530, 124, 154, 1, 136, 445 $11,445 $551, 754 922 65, 754 1, 750, 097 421 228 13, 617 845, 845 635 21, 678 769, 086 841 932 163 10, 407 819, 821 297 954 889 11,981 1, 980, 105 793 2, 616, 184, 500 2,433 10, 714, 867, 797 412 1, 844, 024, 000 1, 220, 637, 000 431 61 76, 875, 000 225 678, 436, 000 228 1,272,887,000 808 3, 600, 367, 500 276 189, 935, 000 754 1, 075, 379, 000 295 1, 361, 155, 000 781 3, 591, 289, 000 654 582, 807, 000 468 1, 763, 149, 514 111 106, 785, 000 144 420, 989, 642 166 351, 739, 000 129 1, 850, 144, 000 119 1, 563, 130, 000 70 433, 440, 000 105 253, 850, 000 153 333* 650, 000 831, 3, 514, 551, 337, 19, 113, 208, 1, 073, 55, 333, 302, 833, 348, 830, 73, 164, 129, 391, 301, 75, 52, 111, 235 282 31, 891 580 983 7,633 351 250 179 349 5,313 424 106 9 , 4 6 3 604 186 236 005 13, 386 173 294 737 890 28, 389 774 160 759 657 4, 097, 753 686, 396 1, 134, 086 1, 826, 595 1, 210, 595 961, 629 18, 793 57, 903, 685, 111 16, 402, 941 230, 821 16, 633, 762 _ Total 2 2 1 8 , 815 58, 057, 685, 111 1 6 , 633, 762 See footnotes at end of table, p. 314. 230, 821 154, 000, 000 22 2 312 T H E FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS Discounts and advances—Continued 1961 Number Boston New York 1 Buffalo ___ Philadelphia Cleveland Cincinnati Pittsburgh Richmond Baltimore Charlotte Atlanta. _ Birmingham Jacksonville Nashville. New Orleans Chicago Detroit St. Louis Little Rock Louisville Memphis Minneapolis Helena K a n s a s City Denver Oklahoma City Omaha Dallas El Paso _ Houston San Antonio _ i San Francisco Los Angeles Portland. Salt Lake City Seattle Subtotal Foreign loans on g o l d 1 ___. Bank earnings Amount 746 827 166 909 198 86 161 495 169 82 212 $475, 3, 952, 101, 564, 685, 125, 334, 381, 175, 150, 320, 082, 971, 270, 176, 266, 720, 510, 305, 730, 644, 324, 000 000 000 125 000 000 000 500 000 000 500 $113, 487, 17, 148, 98, 39, 17, 87, 35, 24, 63, 227 948 156 66 3 37 177 175 166 328 84 127 330 64 18 19 44 23 14 62 36 20 332, 127, 000 3, 041, 332, 513 531, 870, 000 91, 605, 000 1, 500, 000 41, 435, 000 678, 950, 000 78, 030, 000 118, 945, 000 477, 076, 000 229, 115, 000 139, 342, 000 461, 967, 000 261, 484, 006 5, 005, 000 3, 119, 860 59, 332, 000 132, 050, 000 307, 600, 000 83, 611, 000 104, 600, 000 84, 450, 000 111, 528, 62, 24, 7, 175 14, 531, 545, 504 . 27 3 126, 000, 000 284 $6, 265 937 35, 822 405 084 7,415 280 11, 896 741 408 121 5,877 686 019 327 6,772 731 088 18, 014 461 025 4 , 3 4 3 411 6,017 76, 138 26, 809 2 , 9 4 1 22, 162 88, 090 5,498 31, 614 27, 846 106, 629 41, 119 7 , 4 1 5 2,733 2, 065 9,427 14, 865 15, 598 30, 699 8,068 11, 392 9, 374 District earnings $119, 549 541, 164 155, 499 167, 325 152, 703 181, 830 608, 563 110, 934 51, 912 259, 677 62, 759 89, 996 2, 374, 055 127, 856 2 , 5 0 1 , 9 1 1 127, 856 7, 202 U4,657,545,504 1 » 2, 501, 911 Total See footnotes at end of table, p. 314. Allocated earnings 1 THE FEDERAL EESEKVE SYSTEM AFTER FIFTY YEARS 313 Discounts and advances—Continued 1962 Number Boston New York 1 _ Buffalo Philadelphia Cleveland_ CincinattiPittsburgh. Richmond _ Baltimore Charlotte. _ Atlanta _ _ _ B i r m i n g h a m . __ _ Jacksonville . Nashville.. New Orleans Chicago Detroit St. L o u i s . . . Little Rock Louisville Memphis Minneapolis _ Helena Kansas City Denver Oklahoma City Omaha Dallas.. ... El Paso. Houston San Antonio S a n Francisco Los Angeles Portland _ Salt Lake City Seattle Subtotal Foreign loans on gold1Total 720 754 156 590 153 71 90 629 101 115 338 $702, 173, 000 5, 040, 618, 000 312, 410, 000 484, 789, 400 601, 735, 000 65, 360, 000 232, 145, 000 607, 627, 000 146, 405, 000 479, 360, 000 811,700,000 152 893 186 79 9 41 93 137 58 249 115 188 422 132 22 16 67 57 34 68 14 27 228, 200, 3, 606, 161, 1, 058, 910, 263, 690, 6, 900, 41, 250, 569, 070, 87, 768, 31, 025, 383, 530, 726, 870, 405, 018, 261, 893, 639, 314, 11, 600, 40, 000, 44, 640, 782, 000, 460, 000, 116, 388, 24, 500, 254, 950, 000 537 000 000 000 000 000 000 000 000 000 000 000 759 000 000 000 000 000 000 000 000 54, 974 603, 095 136, 110 33, 848 2,967 4,977 69, 606 23, 866 7, 145 81, 865 85, 048 58, 823 99, 525 181, 995 5,751 16, 628 10, 285 80, 813 54, 049 11, 591 3,325 25, 993 3 6, 794 19, 685, 050, 696 28-680—64—vol. 1 21 District earnings 924 $211, 180 759 1, 059, 944 673 844 155, 057 215, 615 975 238, 006 783 235, 404 135, 828 875, 033 33, 221 144, 619 22, 474 53, 485 41, 039 366, 300 54, 719 269, 378 131,911 307, 682 3, 154, 553 977, 150 4, 131, 703 157, 050, 000 18 3 Allocated earnings 1 $165, 256 $45, 747, 670 267, 44, 515 98, 384 56, 65, 319 91, 11,318 47, 134 103, 730 43, 23, 228 67, 073 128, 647 51, 6,776 19, 528, 000, 696 See footnotes at end of table, p. 314, Bank earnings Amount 977, 150 3 4, 131, 703 314 THE FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS Discounts and advances—Continued 1963 Number Boston New York Buffalo Philadelphia, Cleveland. __ Cincinnati _ Pittsburgh __ RichmondBaltimore Charlotte Atlanta Birmingham Jacksonville Nashville _ New Orleans Chicago Detroit St. Louis Little Rock Louisville Memphis, Minneapolis Helena K a n s a s City Denver Oklahoma City Omaha _ Dallas El Paso Houston SanAntonio San Francisco Los Angeles _ Portland Salt Lake Ciry Seattle _ J _ J _ _ _ Subtotal. _ _ Foreign loans on gold1 Total. Bank earnings Amount 748 $1, 206, 233, 000 1, 111 13, 800, 395, 000 746, 545, 000 258 1, 192, 468, 000 716 289 2, 074, 941, 000 100 377, 315, 000 132 596, 985, 000 1, 342, 022, 000 727 211, 040, 000 111 271 1, 745, 925, 000 548 2, 007, 970, 000 $235, 2, 206, 128, 244, 324, 53, 106, 220, 32, 280, 443, 176 1,086 267 85 24 96 44 263 96 300 170 428 428 161 42 60 97 57 81 87 87 47 105, 23o! 1, 188, 597l 396, 688| 139, 306 8, 102 35, 267 41, 528 139, 316 15, 193 240, 899 134, 126 257, 607 161, 237 420, 774 18, 153 76, 179 32, 947 131, 822 203, 280 59, 457 37, 303 82, 242 441, 690, 000 5, 188, 183, 742 1, 528, 155, 000 794, 116, 200 31, 065, 000 263, 600, 000 338, 050, 000 551, 494, 000 60, 740, 000 1, 211, 645, 000 1, 087, 716, 000 1, 419, 150, 000 440, 821, 000 1, 765, 630, 346 22, 200, 000 255, 125, 000 126, 800, 000 875, 500, 000 1, 491, 500, 000 440, 200, 000 324, 000, 000 732, 950, 000 9, 193 44, 692, 170, 288 3 9, 218 3 44. 894. 170. 288 1 ' ' 128 $31, 478 178, 862 235 38, 982 61, 169 634 085 31, 215 412 372 36, District earnings 919 $267, 047 895 2, 514, 235 571 848 282, 806 546, 633 253 563, 965 573 585, 180 93, 764 1, 679, 049 22, 611 246, 814 15, 295 169, 804 27, 931 821, 800 37, 904 585, 957 88, 450 602, 554 8, 200, 830 665, 014 8 , 8 6 5 , 8 4 4 202, 000, 000 25 Allocated earnings1 665, 014 3 8, 865, 844 ' Foreign loans on gold are granted by the Federal Reserve Bank of New York on behalf of all banks. Earnings were allocated to the banks as indicated in col. 4. 2 Per tables Nos. 6 and 10 of Board's annual report. 3 Per tables Nos. 7 and 10 of Board's annual report. T H E FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS 315 STAFF MEMORANDUM JANUARY 5,1964. Chairman, Committee on Banking and Currency, House of Representatives : The Federal Eeserve System and the 12 Federal Eeserve banks, with their branches, are an entity of the U.S. Government. Misguided or uninformed individuals may believe that the 12 regional banks are owned by the member banks of the System, but the Board of Governors of the Federal Eeserve System properly recognizes the ownership of the Federal Government. The Board stated in January 1945 "* * * the residual interest in the banks is in the Federal Government, which, therefore, may be regarded in effect as the owner of all of the common stock." The enabling legislation granted considerable operating latitude to the Board of Governors and the directors of the several banks in the System. There have been indications that some of the banks have tended to make questionable expenditures and have been reminded gently, but pointedly that "The Board is confident that the Eeserve banks will exercise their discretion with respect to expenditures * * * in full recognition of their responsibilities as stewards of public funds" and "Federal Eeserve banks * * * were set up by Congress to perform functions prescribed by Congress for public purposes. * * *" Some of the Eeserve banks have taken their responsibility as "stewards of public funds" less seriously than others and the Board has questioned "* * * the appropriateness of expenditures for professional entertainment, tickets for the theater and similar outlays." Even charitable contributions have been questioned by the Board on several occasions. Specifically a letter from the Board, in 1945, addressed to the chairmen and all of the presidents of the Federal Eeserve banks advised that, "The Board * * * cannot authorize expenditures of Federal Eeserve bank funds by way of donations to further purposes, no matter how worthy, which are not directly related to the conduct of the affairs of the Banks" [Emphasis added.] The principle that expenditures of Federal Eeserve funds should be directly related to and for the benefit of the Federal Eeserve System and the Federal Government has been enunciated many times by the Board. I n 1956 the Chairman of the Board of Governors wrote to the chairman of all of the Eeserve banks that, "Eeserve bank expenditures for memberships should be limited to those organizations whose purposes are directly related to the work of the Eeserve bank. * * * This principle applies regardless of whether the membership is in the name of the bank or an individual." Again in 1958 the Chairman of the Board of the Federal Eeserve System advised that, " I t is recognized that certain expenditures might be very appropriate in a purely private business but would be inappropriate in the case of a Federal Eeserve bank, in view of the public nature of its funds and operations." Still again in 1958 the Chairman of the Board of Governors pointed 316 THE FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS out that "* * * the Board believes that due consideration should be given to the public interest aspect of the Federal Reserve System when use of Federal Reserve funds for nonofficial entertainment of persons not in the employ of the Federal Reserve bank is contemplated, and that expenditures of this nature should be limited to those which can be justified by the benefits received by the Reserve bank and the Reserve System." Since the Federal Reserve System carries out governmental functions and handles Government funds without annual congressional review and approval it may tend to use Government funds for inappropriate purposes. The official position of the Board of Governors is that, "The absence of other governmental controls and supervision under existing law places upon the Board and the Federal Reserve banks a peculiar responsibility to be certain that any expenditures are clearly authorized by law and to be able to justify fully any items which may be questioned." The Board of Governors has further suggested in effect that criteria set up for expenditures by U.S. Government agencies be used by the Federal Reserve banks. F o r example in May 1946 the Board stated that "* * * the policy to be followed in these matters that the limitations on local governmental offices should be borne in mind," and in 1952 "The residual interest of the Government is the assets of the Reserve banks and the disposition which is now being made of their earnings, raises further doubt as to the propriety of contributions by the Reserve banks which are not made by Government agencies." Directors of the Federal Reserve banks are the responsible controlling individuals for the operations of the Federal Reserve System within the limitations of the Federal Reserve Act, as amended, and related statutes. The entire System has 108 directors, 9 at each Federal Reserve bank. At each bank there are three class A, three class B, and 3 class C directors. Class A and class B directors are elected by the member banks in each district. Class A directors are usually member bank officers, while class B directors cannot be actively associated with banking, but are actively engaged in commerce, agriculture, or industry within the bank's district. The class C directors are appointed by the Federal Reserve Board of Governors from the bank's district and may not have any financial interest in banking. One class C director is designated by the Board of Governors as Chairman and Federal Reserve Agent; a second as Deputy Chairman and the thirds acts as Chairman in the absence of the other two. Federal Reserve bank directors are charged with many important responsibilities, the primary one being the economical and efficient operation of the Federal Reserve banks. This responsibility is carried out through prescription of the bylaws of the banks; selection of the President, First Vice President, and other officers of the banks subject to the approval of the Board of Governors; review and approval of semiannual budgets, and by maintaining and supervising all interna] auditing systems. The operating function of the banks which requires the greatest number of employees is the check collection or clearing activity. During 1962 the average number of persons employed in check collection was 6,441. Other major operating functions include currency and coin (1,965 average employees), accounting (1,020 average employees), research, public information, and bank relations (757 average THE FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS 317 employees), fiscal agency (2,072 average employees), provision of space (1,429 average employees), personnel, including cafeteria employees (833 average employees), and general service (2,723 average employees). Provision of facilities for borrowing from the Federal Reserve banks by member commercial banks was a main objective of Reserve banking as established in this country. This function, referred to in the Federal Reserve System as discounts and advances, is no longer a major function of the System. During 1962 an average of less than 100 employees were engaged in this activity. Statistics of the number and amount of discounts and advances in recent years have been reported as follows. An analysis of the distribution of the employees of the Federal Reserve System shows that the greater part of these employees are engaged in serving the banking community on a nonreimbursable or free basis. Since these services are free it is difficult to understand the necessity for the Reserve banks to engage in so-called public relations or sales activities. Are the free services so unattractive that the banks must sell them? The board of directors of the 12 Reserve banks elect 5 presidents of the Reserve banks to the Federal Open Market Committee and each board of directors elects 1 member to the Federal Advisory Council. The directors are further charged with administering the general policies of the Board of Governors and the Federal Open Market Committee; meeting the currency needs of the country and regulating the extension of credit so that the objective of "* * * helping to stabilize the economy at the highest sustainable level of production and employment * * * through the exercise of monetary and credit influence" will be attained. Director's fees, limited to $75 per day plus expenses, are the only remuneration attached to the position of director. Directors are usually men prominent in their community and ofttimes financially well off. The comparatively modest fees, in view of the responsibilities attached to the position, suggest that other considerations might include access to important information not generally available, but of considerable significance to the banking and general business community may be involved. Undoubtedly many of the directors are mainly motivated by an urge to serve their country. A confidential report of expenses of the Federal Reserve banks and branches for the year 1962 revealed that substantial sums of Government money amounting to about $2 million annually were being expended for what we considered questionable purposes. We tested our belief by selecting thousands of items listed by the Federal Reserve banks and their branches from four expense categories. These categories were "Fees," "Printing and supplies," "Traveling expenses," and "All other." The banks and branches have been requested to provide descriptive material and justification for the items selected. Complete responses to the requests have not been received at this time. However, in an effort to accelerate the receipt of the information requested, and to conduct a firsthand survey of how the subject material might be expeditiously processed and forwarded, we visited the Federal Reserve Banks of New York, Cleveland, and Chicago. We were courteously received and given all reasonable cooperation by bank personnel in accomplishing our work. 318 THE FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS A t each location we scanned vouchers that supported the amounts selected from the lists supplied by the banks. This scanning enabled us to greatly reduce the overall number of vouchers to be explained and justified by the three banks that were visited. Many vouchers were eliminated from the list because they represented normal transactions which might be found in any Government agency, while other vouchers were repetitions of types of questionable transactions for which many similar type vouchers had been selected. The survey was specifically directed toward obtaining examples of expenditures by the Federal Eeserve banks not normally found in a U.S. Government agency, where receipts are substantial and destined for deposit in the U.S. Treasury. The U.S. post office is such an agency. A substantial type of expenditure found in the banks, but not in the post office, is a cafeteria subsidy that cost the banks about $2.75 million during the 18 months ended June 30,1963. I n connection with cafeteria operations that are so costly, one of the banks retained a firm of food service consultants who advised the bank in part t h a t : (1) With very few exceptions the cafeteria equipment * * * is antiquated and obsolete. (2) At least 75 percent of the equipment is not constructed and installed in accordance with standards of the National Sanitation Foundation and of State and local health departments. (3) The efficiency of the food service operation is severely handicapped * * *. (4) * * * even casual inspection reveals the bad condition of most equipment. (5) * * * the location of this operation (the scraping of soiled dishes) in the main dining area exposed to the view of all occupants is deplorable. (6) * * * the layout of the existing food service facilities is poorly conceived. (7) * * * (the handling of finished products) comprises four operations, and three of these operations could be eliminated if the preparation and serving areas were on the same floor. (8) * * * the size of the main dining room is more than adequate to provide seating capacity for the present load as well as any increase in load that might be anticipated in the future * * *. The second or auxiliary dining room appears to serve no real purpose. * * * there is actually no apparent need for this second dining room. (9) With very few exceptions, the existing equipment should be scrapped and new equipment provided * * *. (10) The menus offered in the cafeteria are diversified and extensive. * * * However, we believe the selectivity could be reduced * * *. The greater the selectivity of the menu, the more equipment and labor is needed to prepare and serve it. This tends to pyramid * * * costs to an extent where they are not proportionate to the prices which can be charged * * *. I n addition to the cafeteria subsidy there are many other types of expenditures which we would not expect to find in the accounts of a postmaster. Such expenditures fall into several groupings. Examples of such expenditures found by us in the selected and limited THE FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS 319 review of vouchers for 1962 and the first half of 1963 for the New York, Cleveland, and Chicago Federal Reserve Banks will be listed below. The Board of Governors has specifically questioned the appropriateness of expenditures for theater tickets, hence we were mildly surprised to learn that about $4,000 had been spent for theater parties by one of the banks during the period reviewed. The listing below of the plays attended includes the cost of food and beverages before or after the performance. Number of tickets N a m e of play Mary, Mary N o Strings A M a n for Ail Seasons H o w T o Succeed I n Business W i t h o u t (Play not specified) A F u n n y Thing H a p p e n e d on t h e W a y Bolshoi Ballet H o w T o Succeed I n Business W i t h o u t Do Purlie Victorious Ukranian Dancers Shot in t h e D a r k Carnival I Can Get I t For You Wholesale T h e Night of t h e I g u a n a T h e Affair C am elot Calculated Risk A M a n for All Seasons Bolshoi Ballet Carnival Do (Play not specified) Cam elot A M a n for All Seasons (A night club with a floor show) Sound of Music T h e Night of t h e Iguana A M a n for All Seasons N o Strings Milk and Honey N o Strings A Shot in T h e D a r k Carnival I Can Get It For You Wholesale Milk and Honey N o Strings A M a n for All Seasons Opera H o w T o Succeed I n Business W i t h o u t Total Really Trying to the Forum Really Trying. . Really Trying. 3 5 4 12 4 4 6 4 4 4 2 3 4 4 4 3 3 3 4 3 4 4 4 6 2 4 4 6 3 2 8 3 2 4 9 5 4 4 2 4 167 The several Federal Eeserve banks spend substantial sums on luncheons and dinners for bankers and industrialists. F o r example, the New York bank gave a luncheon at the Waldorf-Astoria Hotel at a 320 THE FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS cost of $5,320.10 which averaged about $8 per person. Most of the guests were bankers but several represented securities brokerage and underwriting companies. The New York and Philadelphia banks sponsored jointly a luncheon at the Haddon Hall Hotel in Atlantic Citv, N. J., at a cost of about $5.40 per person. The most fruitful of the four expense categories tested, for examples of questionable expenditures, was the "All other" category. During 1962 and the first half of 1963 the system total for this category was more than $4.5 million. Within this classification were several kinds of expenses. The CHAIRMAN. And I would like to insert an elaboration of the statement put in this morning about the Federal Reserve Bank of Cleveland, preceding the statement of expenses and so forth. Without objection, that will be done. The CHAIRMAN. NOW, the questions I would like to ask are these: Now, all of you gentlemen feel your expenses are justified. Would you be willing for every agency of the Government to use the same discretion in its affairs, through debts or financing or otherwise and do exactly what you gentlemen are doing under the same circumstances ? W h a t about you, Mr. Ellis ? Mr. ELLIS. Mr. Patman, I have listened carefully to the subjects of our activities that you question. I have been delighted to find that your questions have been directed to a minuscule portion of our total; that you have no question about the major operations that wre are responsible for, the efficiency wdth which we The CHAIRMAN. You are not responding to my question. Now, we will not get through here this afternoon and we will have to have another session tomorrow morning if you Mr. E L L I S . My answer directly is because I feel we are doing an efficient job I would be very happy to have the Government agencies do the same thing. The CHAIRMAN. YOU would be ? Mr. E L L I S . I would be very pleased to have them obtain the same efficiency. Mr. W A Y N E . I do not feel competent to answer as to what another Government agency should do, but I have no apologies for ours. Mr. SHUFORD. I think I am in substantial agreement with Mr. Wayne, which is to the effect that I do not feel competent to pass on the other agencies. I do think there is a distinction between the structure of the Federal Reserve and the other agencies, and I think that the Federal Reserve, as I have indicated in my statement, should be continued in this independent character with which we speak, and I shall not try to define that, Mr. Chairman, because I know that you know what I mean when I say that. THE FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS 321 The CHAIRMAN. Yes, sir; I know what you mean. I do not think it is the same as I mean, however. Mr. SHUFORD. That is entirely possible. The CHAIRMAN. Yes, sir. However, your statement, I thought, was pretty good along the line that you have indicated there. Mr. SHUFORD. Thank you, sir. The CHAIRMAN-. I want to ask you gentlemen this question: Who is the senior? Mr. Wayne, are you the senior of the three gentlemen? I am sure you are. Mr. SHUFORD. Yes, sir. The CHAIRMAN. Are Presidents of Federal Keserve banks allowed to have other business interests ? Mr. W A Y N E . N O , sir. The CHAIRMAN. Y O U Mr. W A Y N E . No, sir. The CHAIRMAN. YOU do not own stocks in any industrial concern ? do not have the privilege of making money in any other way, by lectures or speeches or interest in commercial banks or savings and loans or anything else ? Mr. W A Y N E . None whatever. The CHAIRMAN. D O you gentlemen agree with that ? Mr. E L U S . I agree. Mr. SHUFORD. N O , sir; I do not. I do own The CHAIRMAN. D O you have a statement that you have to sign each year or at a certain period of time about your personal affairs ? Mr. W A Y N E . Yes, sir. The CHAIRMAN. H O W often Mr. W A Y N E . Well, I file a do you have to do that? statement once a year, as of J u l y 1, in which I have to certify to the chairman of our board any indebtedness which I may have and have to certify whether I have any outside interest or any investment of any kind or any obligation of any kind, and I am under obligation, if there is any change in the statement, to immediately notify the chairman of the board. Mr. SHUFORD. I will have to modify that to the extent that there is no prohibition that I am aware of The CHAIRMAN. T h a t is what I am getting at. I was talking about prohibitions. Mr. SHUFORD. I say, there is none that I know of that would prevent me from owning stock, and I do own stock in corporations. I do not own any bank stock, and I do file the statement similar to the one that that Mr. Wayne stated, but I do own stock in private corporations. Otherwise, my statement is in accord with his. The CHAIRMAN. There is no particular statement that each one of you have to sign, as Presidents of banks, and there is no regulation against outside business. Is that right ? 322 Mr. THE FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS SHUFORD. N O , there is a regulation with respect to outside The CHAIRMAN. That, I would like to see. Do you have a copy of that ? Could you furnish it ? Mr. W A Y N E . There is a statement of principles from the Board of Governors which specifies particularly that the officers of Eeserve banks shall devote their full and entire interest to the affairs of the Reserve banks and shall not be engaged in any outside business of any kind. I am sure a copy of this is readily obtainable. I do not have it with me. The CHAIRMAN. Of course, the theory is that Presidents of banks are paid a pretty good salary. They are not supposed to have outside interests. I t has always been my contention that Members of Congress should be paid a salary which would justify them devoting their whole time and attention to their duties and not having any outside conflicting businesses. Now, that has not been done for the Members of the Congress. I t should have been done, in my view. But, in the case of you gentlemen, as Presidents of banks, you may earn up to $75,000—not one of you here but the New York Bank is the biggest bank and, of course, the President of the New York Bank gets the biggest salary; but the others get satisfactory salaries and I am glad they do. Now, without objection, I will place in the record the salaries of the 50 highest paid in each of the 12 Federal Eeserve Mr. ELLIS. Twenty-five, I believe. The CHAIRMAN. Twenty-five, yes, of the Federal Eeserve banks and the Board. That will get them all. Mr. ELLIS. Mr. Chairman, could I volunteer that this same certification is applied to all of our employees in critical positions in the institution, and the same statement is supplied. The CHAIRMAN. YOU mean the statement about outside interests ? Mr. E L L I S . Yes, sir. Mr. W A Y N E . Yes, sir; there are approximately 700 of our staff that file similar statements. The CHAIRMAN. I think that is very fine, and I will ask the staff to get a statement from the Federal Eeserve Board to the effect that they are required to be filed by these Presidents and have them put in the record at this point. THE FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS 323 (The documents follow^:) BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM, Washington, March 2^ 19J/S. : Recently, in connection with a review of the policies in effect with respect to outside business affiliations and teaching activities of members of the Board's staff and officers and employees of the Federal Reserve banks, the Board expressed the view that, under established policies, such connections should be made by those occupying responsible positions only with the approval of the Board whenever a member of its own staff was involved and only with the approval of the appropriate committee or officers of a Federal Reserve bank whenever an officer or employee of the bank was involved. This letter is for the purpose of incorporating the above suggestion in existing policies and consolidating the Board's letters on this matter into a single communication. Accordingly, this letter supersedes the Board's letters of May 7, 1924 (X-4048, F R L S No. 9054), June 25, 1937 (S-8, F R L S No. 9055), July 26, 1937 (S-19a, F R L S No. 9056), and J u n e 25,1945 (S-855, F R L S No. 9054.1). For many years the Board has taken the position that the good conduct and repute of the Federal Reserve System require that officers and employees occupying responsible positions in the Federal Reserve banks shall give their entire time and attention to the affairs of the hanks and not be identified with any outside business interests. Stated as a general principle, it is important that officers and employees of a Federal Reserve bank refrain from being placed in any position which might embarrass the Federal Reserve bank in the conduct of any of its operations or result in any questions being raised as to the independence of their judgment or their disinterestedness in the discharge of their official responsibilities or their ability to perform satisfactorily all of the duties of their positions. Question as to the applicability of this policy to teaching commitments has been raised and it has been urged that there is a definite distinction between the outside business connections contemplated by the above statement of policy and purely educational work, and that there should be no objection to an officer or a member of the research staff of a Federal Reserve bank having a teaching connection with a university which is also helpful in enabling him to keep in touch with current developments in his field and in establishing and maintaining relations between the bank and the university which would be of advantage to the bank. The Board is in agreement that such instances, DEAR S I R 324 THE FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS as well as other teaching connections which are closely related to the work of the Federal Reserve banks, such as A I B classes, should not be regarded as coming within the scope of the policy stated above provided; (a) the teaching engagement is clearly secondary and in keeping wtih employment by the Reserve bank, and (5) the teaching engagement does not interfere with the work of the Reserve bank. I n the review of this policy, other questions have arisen about outside activities of members of the research staffs. Some time ago the Board had occasion to consider the question of the propriety of a member of the research staff receiving substantial pay for preparing for a semipublic agency a study peculiarly in the field of Federal Reserve interests. The Board expressed the view that an important principle was involved; namely, that a full-time employee or officer of a Reserve bank should not receive pay from another source for work being, or which should be, done by the Reserve bank as part of its public service, and that, in the case in question, if the study were one that the bank, as such, should make, it should be done by the bank without charge to the other agency, except possibly for out-ofpocket expenses. I t may be added that frequently the person involved would not be called upon to render the outside service if he were not in position to utilize information and material accumulated in the conduct of the affairs of the bank. The policy with respect t o outside engagements applies only to officers and to full-time regular employees. I t may not necessarily apply to individuals engaged as consultants on a fee basis, to those engaged as part-time employees, or to those employed for temporary periods, such as during vacations or for work on specific projects. Such cases should be considered individually by the Reserve banks in the light of the general principle involved. I n this connection, it may be observed that a consultant for special services on a parttime basis should not be an officer of the bank nor should he be considered as a representative of the bank, except to such extent as he may be authorized for the specific purpose for which he is engaged. I t is expected that reports now being made to the boards of directors of the Federal Reserve banks regarding indebtedness and outside business activities of officers and employees occupying responsible positions will be continued. The Board's examiners have been instructed, in connection with each examination of a Federal Reserve bank, to review these reports and advise the Board of any situations which should be brought to its attention. I n no event should an officer or an employee occupying a responsible position undertake any outside business activity or teaching engagement without first obtaining the approval of the appropriate committee or officer of the bank. THE FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS 325 The Board also feels that, in accordance with the principle stated in this letter, officers of the Federal Reserve banks and employees occupying responsible positions should not purchase stock in a member bank or an affiliate thereof (except possibly in the case of affiliates where the actual relationship to the member bank is remote) and that they should dispose of any such stock which they may now have, or may hereafter acquire, as soon as practicable without undue hardship. I t is requested, therefore, that the annual reports of officers and employees to the board of directors regarding indebtedness and outside business activities also include information regarding the ownership of bank stock and stock of affiliates of banks. Very truly yours, S. K-. CARPENTER, Secretary. To the Presidents of oil Federal Reserve banks. To the chairmen of all Federal Reserve banks. Board of Governors of the Federal Reserve Name Annual salary $20 20, 20, 20, 20, 20, 20, 27, 26, 26, 26, 25, 25, 24, 24, 24, 24, 23, 23, 23, 22, 22, 22, 22, 21, 21, 21, 21, 20, 20, 20, 20, 500 000 000 000 000 000 000 500 000 000 000 000 000 500 500 000 000 500 500 000 500 000 000 000 500 500 000 000 000 000 000 000 Title CO System to Principal assignment W __ Chairman of t h e Board Vice Chairman of the Board Member of the Board _ do do do do R a l p h A. Young Adviser t o the Board do Guy E . Noyes Secretary of t h e Board Merritt S h e r m a n . General Counsel H o w a r d H . Hackley Dire ctor Daniel H . Brill _ do Frederic Solomon Associate Director Robert C. Holland do Albert R. Koch ___ Adviser J. Herbert F u r t h . Dire ctor J o h n R. Farrell Assistant t o the Board Charles Molony Adviser 1 J. Charles Partee Assistant General Counsel D a v i d B. Hexter Legislative counsel Robert L. Cardon __ Adviser F r a n k R. Garfield do A. B. Hersey _ _ ________ do Robert L. Sammons Assistant General Counsel. T h o m a s J. O'Connell Director Edwin J. Johnson Adviser K e n n e t h B. Williams __ Coordinator._ Innis D . Harris _ _ Associate adviser Lewis N . D e m b i t z _ __ do Robert Solomon. Samuel I. K a t z do Brenton C. Leavitt Assistant Director William M c C . M a r t i n , Jr_ C. C a n b y Balderston __ J. Dewey Daane Abbot L. Mills, Jr George W. Mitchell J. L. Robertson __ Board members. Do. Secretary. Legal. Research a n d statistics. Examinations. Research a n d statistics. Do. International finance. B a n k operations. Board members. Research a n d statistics. Legal. Board members. Research a n d statistics. __ International finance. Do. Legal. Personnel. Research a n d statistics. __ Defense planning. Research a n d statistics. Do. International finance. Examinations. H __ GO W > H W •3. H_ *! a > CO 20, 000 I Maurice H. Schwartz.. 19, 500 Kenneth A. Kenyon 19, 500 Jerome W. Shay 19,500 Glenn M. Goodman 19, 500 Joseph E. Kelleher 19,000 Ralph C. Wood 19,000 Robert C. Masters 19,000 J . J . Connell 18,755 Clayton Gehman 18, 750 Gerald M. Conkling.... 18,500 Arthur L. Broida 18,500 Henry Benner 18,500 James C. Smith 18,500 Mortimer B. Daniels. _ 18,250 H. F. Sprecher, Jr 18,240 Mona E. Dingle 18,240 James B. Eckert 18, 240 Harlow D. C. Osborne. Director * ~_^_ Assistant Secretary of the Board. _. Assistant General Counsel Assistant Director Dire ctor Associate adviser Associate Director Controller Chief, Business Conditions Section. Assistant Director Assistant Secretary of the Board. _. Assistant Director do do do Senior economist Chief, Banking Section Chief, Consumer Credit and Finance Section. Data processing. Secretary. Legal. Examinations. Administrative services. International finance. Examinations. Controller. Research and statistics. Bank operations. Secretary. Examinations. Do. Bank operations. Personnel. Research and statistics. Do. Do. H3 w © W 5 w W 00 CO Federal Reserve Bank of Boston Annual salary$35, 000 27, 500 22, 000 22, 000 19,000 19, 000 19,000 18, 000 18,000 17,500 17,500 17, 000 16, 500 16, 500 16,000 16, 000 15, 000 14,500 14, 000 14, 000 14,000 13, 340 13,000 13, 000 13,000 Name George H. Ellis E. O. Latham D. Harry Angney Oscar A. Schlaikjer Ansgar R. Berge Charles E. Turner G. Gordon Watts Luther M. Hoyle, Jr John E. Lowe Wallace Dickson Parker B. Willis Robert W. Eisenmenger_ Jarvis M. Thayer, Jr Louis A. Zehner Stanley B. Lacks Laurence H. Stone Loring C. Nye Lee J. Aubrey Daniel A. Acquilino Charles H. Brady Richard A. Walker H. Wendell Chittim Paul S. Anderson Ripley M. Keating Harry R. Mitiguy Title President 1st vice president Vice president Vice president and general counselVice president do do do Special adviser Assistant vice president Vice president and economic adviser Director of research Cashier Assistant vice president General auditor Secretary and associate general counselAssistant vice president do Assistant cashier Assistant vice president. do Examiner Financial economist. _. Assistant cashier Bank relations officer. Principal assignment Administrative. Do. Personnel. Legal. Loans and credits. Check collection. Fiscal agency, currency. Examinations. Special assignments. Public information. Research. Do. Accounting. Bank relations. Auditing. Legal. Loans and credits. Examinations. Planning. Currency. Personnel. Examinations. Research. Building. Bank relations. 1 w GQ H W 3 GQ El GO Federal Reserve Bank of New York f w M i $70, 000 S 40, 000 M 37, 500 1 35, 000 Alfred Hayes William F. Treiber Robert G. Rouse_ _ _ Harold A. Bilby 8 Marcus A. Harris Charles A. Coombs Howard D. Crosse John J. Clarke Insley B. Smith Robert W. Stone Horace L. Sanford Walter H. Rozell, Jr Angus A. Maclnnes, Jr_ Edward G. Guy Felix T. Davis Thomas O. Waage George Garvy Alan R. Holmes. _ Herman G. Sandvoss Robert G. Link Spencer S. Marsh, Jr John P. Jensen Fred W. Piderit, Jr William H. Braun, Jr Norman P. Davis 32, 500 31, 500 29, 000 28, 500 28, 000 27, 500 27, 500 26, 000 25, 500 25, 000 24, 250 24, 000 23, 000 23, 000 23, 000 22, 000 21, 500 21, 500 21, 000 21, 000 21, 000 Principal assignments Title Name gg Annual 9 salary Administrative. Do. Special assignments. Government bond, accounting, loans, and credits. Cash and collections. Foreign. Examinations. Legal. Administrative (branch). Open market operations. Foreign. Personnel. Check collection. Legal. Fiscal agency. Public information. Research. Do. Medical. Research. Open market operations. Auditing. Bank examinations. Accounting, planning, loans, and credits. Accounting, planning. President 1st vice president Vice president and senior adviser Vice president do do do Vice president and general counsel Vice president do __ do do Assistant vice president Assistant general counsel. Assistant vice president Vice president Economic adviser Vice president Medical director Adviser Assistant vice president General auditor Assistant vice president do do 1 1 © H W W H W xn w H H W 3 > GO to CO 00 Federal Reserve Bank of Philadelphia Annual salary $40, 27, 25, 21, 19, 19, 19, 19, 18, 18, 18, 18, 18, 17, 17, 15, 15, 15, 15, 15, 14, 14, 14, 14, 13, Name 000 Karl R. Bopp 500 Robert N. Hilkert 000 J. V. Vergari 500 David P. Eastburn 500 Hugh Barrie 500 John R. Bunting 500 Joseph R. Campbell. __ 500 Harry W. Roeder 500 Murdoch K. Goodwin, 500 Richard G. Wilgus 500 G. William Metz 000 Norman G. Dash 000 Clay J. Anderson 500 Evan B. Alderfer 000 Joseph M. Case 500 E. A. Aff 500 H. J. Nelson 500 Fred A. Murray 000 R. E. Haas 000 Leonard Markford 000 Warren R. Moll 000 Kenneth M. Snader 000 Lawrence C. Murdoch, J r . 000 James P. Giacobello 500 Jack P. Besse Title President 1st vice president. Vice president and cashierVice president .do -do. _do_ _do_ Vice president, general counsel and assistant secretary. Vice president and secretary General auditor Vice president Economic adviser do Assistant vice president.do. .doDirector of plant Assistant vice president. Examining officer Assistant vice president. do Business economist Chief examining officerAssistant cashier o Principal assignments Administrative. Do. Check collection. Research. Planning. Bank relations. Examinations. Accounting. Legal. Building. Auditing. Fiscal agency. Research. Do. Examinations. Bank relations. Fiscal agency. Building. Check collection. Examinations. Check collection. Research. Do. Examinations. Data processing. w o W H CO H GO Federal Reserve Bank of Cleveland Name Title W. Braddock Hickman_ Donald S. Thompson.,_ Clyde E. Harrell Fred O. Kiel Martin Morrison Paul C. Stetzelberger... Roger R. Clouse Edward A. Fink Maurice Mann Addison T. Cutler Elmer F. Fricek Fred S. Kelly Elfer B. Miller John A. Schmidt P h i l J . Geers Paul Brei den bach Clifford G. Miller George T. Quast George E. Booth, Jr Phillip B. Didham Robert G. Hoover Charles E. Houpt President 1st vice president. Vice president do .do. .do. Vice president and secretary _ Vice president .do. Special economist Vice president Vice president and cashier . General auditor Cashier do Counsel Vice president Chief examiner Assistant counsel Assistant vice president. do Assistant cashier John J. Hoy Harry W. Huning Walter H. MacDonald. Assistant vice president _ do Assistant cashier Principal assignments Administrative. Do. Administrative (branch). Do. Fiscal agency. Examinations. Bank relations, public information. Accounting, budget. Research. Do. Personnel. Cash. Auditing. Administrative (branch). Do. Legal. Check collection. Examinations. Legal. Operating and circular letters. Fiscal agency. Check collection, building operations (branch). Accounting. Examinations. Fiscal agency (branch). 3 H CO W < CO H 8 3 Federal Reserve Bank of Richmond Name Annual salary $40, 000 27, 500 25 000 22, 000 22, 000 22, 000 19, 000 19, 000 19, 000 18, 500 18, 500 17, 500 17, 500 16, 000 16, 000 16, 000 15, 000 15, 000 14, 500 14, 000 13, 500 13, 500 13, 500 13, 000 13, 000 Edward A. Wayne Aubrey N. Heflin Benjamin U. RatchfordD. F. Hagner Upton S. Martin J. M. Nowlan Robert P. Black W. S. Farmer E. F. MacDonald John L. Nosker G. Harold Snead S. A. Ligon A. A. Stewart, Jr J. G. Dickerson, Jr H. E. Ford R. E. Sanders, Jr John G. Deitrick James Parthemos John C. Horigan V. E. Pregeant III E. L. Bennett R. Henry Smart Joseph F. Viverette Stuart P. Fishburne W. B. Harrison III Title President 1st vice president Vice president and senior adviser. _ Vice president do Vice president and cashier. _ Vice president Vice president and general counsel Vice president do General auditor Cashier do Vice president- _ Assistant vice president__ Vice president Assistant vice president do Chief examiner Assistant vice president and secretary. Examining officer do Assistant vice president do do__ Principal assignment Administrative. Do. Research. Administrative (branch). Fiscal agency, check collection. _ Cash, accounting. Research, bank and public relations. Legal. Administrative (branch). Examinations. Auditing. _ Administrative (branch). Do. Planning. Cash, building. Personnel. Fiscal agency. Research. Examinations. Special assignments. _ Examinations. Do. Data processing. Planning. Accounting. _ a a a I a a a GO a GO Federal Reserve Bank of Atlanta ••3 Annual salary $40,000 27, 500 21,000 20, 000 20,000 19, 500 19, 500 18,000 17, 600 16,750 16, 750 16, 200 15,750 15, 750 15, 400 15, 250 15, 000 14, 500 14, 500 14, 250 14, 000 13, 500 13,500 13,500 13,500 Name Title Principal assignment w H Malcolm Bryan Harold T. Patterson.. J. E. McCorvey R. E. Moody, Jr M.L.Shaw T. A. Lanford Brown R. Rawlings_.. E. C. Rainey J. E. Denmark L. B. Raisty Charles T. Taylor . . . Harry Brandt DeWitt Adams R. M. Stephenson W. H. Sewell Richard A. Sanders... George W. Sheffer, Jr. W. M. Davis Theodore Walter Beyrl E. Howard Dowdell Brown, Jr_._. L. Y. Chapman T. C. Clark John T.Harris Arthur Kantner President 1st vice president and general counselVice president and cashjer Vice president ...-do .do. -do. _do. .do. -doVice president and director of researchAssistant vice president General auditor Assistant vice president ,_. .do. Associate general auditor, Chief examiner Assistant cashier Assistant vice president— ....do ....do ....do ....do. .-__do__ ___. Assistant cashier. Administrative. Do. Fiscal, loans, building. Administrative (branch). Do. Do. Check collections, personnel. Administrative (branch). Examinations. Currency, accounting. Research. Do. Auditing. Examinations. Administrative (branch;. Auditing. Examinations. Research. Administrative (branch). General services. Fiscal agency, check collections (branch). Check collection (branch). Acounting, cash (branch). Fiscal agency. Research. W GO GO co H « 4 > W GO CO 00 Federal Reserve Bank of Chicago Name Annual salary $55, 000 27, 500 24, 000 24, 000 23, 000 23, 000 23, 000 21, 000 21, 000 20, 000 20, 000 19, 500 19, 000 18, 500 17, 500 16, 500 16, 500 16, 500 16, 250 16, 000 16, 000 16, 000 16, 000 15, 500 15, 500 C. J. Scanlon Hugh J. Helmer Paul C. Hodge Title President _ _ 1st.vice president Vice president, general counsel, and secretary. Vice president __ R. A. Swaney Ernest T. Baughman Vice president __ John J. Endres General auditor L. H. Jones __ Vice president and cashier__ _ _ __ Vice president ___ _ _ C. T. Laibly Leland M. Ross _ _ _ _ _ Vice president ___ ___ A. M. Gustavson __ _ Vice president ___ __ ___ H. J. Newman Vice president _ Harry S. Schultz Vice president __ _ Bruce L. Smyth_ __ _ Assistant vice president Vice president ___ Richard A. Moffatt R. W. Bloomfield __ Assistant vice president- _ _ _ Assistant general auditor _ _ _ _ Fred A. Dons Assistant vice president _ Elbert O. Fults_ Ward J. Larson Assistant counsel and assistant secretary G. W. Lamphere Assistant general counsel __ Carl E. Bierbauer _ __ Assistant vice president Assistant vice president and assistant E. A. Heath secretary. Chief examiner __ James R. Morrison _ Assistant chief examiner Carl W. Weiskpof -__ __ _ George W. Cloos __ _ _ _ _ _ _ _ Senior economist Joseph Srp, Jr _ _ _ * _ _ Assistant vice president Principal assignments Administrative. Administrative. Legal. Administrative (branch). Research. Auditing. Accounting. Fiscal agency. Examinations. Cash. Personnel. Check collection. Planning. Credit, discount. Accounting (branch). Auditing. Examinations. Legal. Legal (branch). Check collection. Publications. Examinations. Examinations. Research. Building operations. 3 U H > w __ fc_ xn __ > G- Federal Reserve Bank of St. Louis Name Annual salary$35, 000 27, 500 23, 000 22, 500 22, 000 21, 500 21,000 20, 000 20, 000 19,500 18, 500 18, 500 17, 000 17, 000 17,000 16, 500 16, 500 16, 000 15, 000 15, 000 15,000 14, 500 14, 000 14,000 14, 000 Harry A. Shuford Darryl R. Francis Howard H. Weigel Joseph C. Wotawa Dale M. Lewis Donald L. Henry Homer Jones E. Francis DeVos Orville O. Wyrick Fred Burton Marvin L. Bennett George W. Hirshman__ Gerald T. Dunne Wilbur H. Isbell Stephen Koptis Earl R. Billen Norman N. Bowsher__ Willis L. Johns Woodrow W. Gilmore. John W. Menges Paul Salzman Earl H. Chapin John F. Breen James M. Geiger Clifton B. Luttrell Title President 1st vice president Vice president and secretary. Vice president do Vice president and manager Vice president Vice president and manager Vice president Vice president and manager Vice president General auditor General counsel and assistant secretary. Chief examiner Assistant vice president do do do Planning officer Cashier Assistant vice president Assistant chief examiner Cashier Assistant vice president Manager, senior economist- Principal assignments Administrative. Do. Building, Personnel. Check collection. Cash, credit, discount. Administrative (branch). Research. Administrative (branch). Examinations. Administrative (branch). Fiscal agency. Auditing. Legal. Examinations. Credit discount. Check collection. Research. Personnel. Planning. Accounting, building (branch). Operations, research. Examinations. Accounting, cash (branch). Building services. Research. H > w tel W GO Federal Reserve Bank of Minneapolis Name Annual salary $40, 000 25, 000 22, 500 21, 000 20, 000 18, 750 18, 000 17, 000 17, 000 16, 000 15, 000 14, 500 14, 500 13, 500 13, 500 13, 000 12, 500 12, 500 12, 500 12, 000 12, 000 12, 000 11, 600 11, 500 11, 500 Frederick L. Deming M. H. Strothman, Jr H. G. McConnell C. W. Groth Kyle K. Fossum _ Franklin L. Parsons A. W. Johnson R. K. Grobel M. B. Holmgren__ _ Clement A. Van Nice Ralph J. Dreitzler Oscar F. Litterer M. E. Lysen ___ F. J. Cramer John A. MacDonald R. D. Graham W. C. Bronner. _ John J. Gillette W. A. O'Brien Carl E. Bergquist Christopher Bjork C.W.Nelson M. G. Anderson Earl O. Beeth Howard L. Knous Title Principal assignment President _ Administr ati ve. 1st vice president __ Do. Examinations. Vice president and secretary Accounting, security safekeeping. Vice president and cashier Bank and public services. Vice president do .. _ Research. _ do Check collection, cash. Examinations. Chief examiner.. _ __ Vice president Fiscal agency. do Administrative (branch). __ Auditing. General auditor __ _ Assistant vice president Research. do Planning. do Personnel. do Budget, planning. Legal. Assistant secretary and assistant counsel Fiscal agency. Assistant cashier Check collection, cash. _ Assistant vice president Accounting. Assistant cashier do Bank and public services. Auditing. Assistant general auditor. _ Economist Research Examinations. Senior examiner Assistant cashier Discount credit. do Check collection. 3 > w w w < w H > 3 > GO Federal Reserve Bank of Kansas City Name George H. Clay Henry O. Koppang Clarence W. Tow John T. Boysen Ray J. Doll L. F. Mills Wilbur T. Billington _ _. H. W. Pritz George C. Rankin John W. Snider William H. Leedy J. R. Euans F. W. Alexander William F. Fairley H. L. Stempel Leon F. Hesser George R. Wilkinson Marvin L. Mothersead. J. T. White Harold E. Donovan George D. Royer, Jr John N. Blair James C. Craig Carl F. Griswold, Jr Walter L. Pleiss Title President 1st vice president Senior vice president, economic researchVice president Vice president and senior economist Vice president Vice president and senior economist Vice president do -doGeneral counsel and secretary. Vice president Cashier General auditor Cashier Agricultural economist Senior bank examiner Director of personnel Vice president Trust examiner Chief examiner Assistant vice president do do Cashier Principal assignments Administrative. Do. Research. Planning, accounting, cash. Research. Examinations. Research. Administrative (branch). Do. Do. Legal. Fiscal agency, discounts. Accounting, cash (branch). Auditing. Cash, building (branch). Research. Examinations. Personnel. Bank relations. Examinations. Do. Check collection. Cash. Planning. Check collection (branch). H H CO H % Federal Reserve Bank of Dallas Annual salary $40, 000 25, 000 24, 500 22, 500 21, 000 19, 000 19, 000 19, 000 18, 500 18, 000 16, 500 15, 500 15, 000 15, 000 14, 100 14, 000 13, 250 12, 600 12, 600 12, 500 12, 000 12, 000 12, 000 12, 000 11, 800 Name Watrous H. Irons Philip E. Coldwell _ J. L. Cook G. R. Murff T. W. Plant James L. Cauthen Ralph T. Green _ __ T. A. Hardin Carl H. Moore. _ Arthur H. Lang__ _ George F. Rudy _ Thomas R. Sullivan Roy E. Bohne__ _ _ _ James A. Parker. W. H. Pritchett J. Z. Rowe_ _ B.J.Troy __ A. E. Mundt Charles A. Gore _ James O. Russell T. C. Arnold Robert H. Boykin_ __ Fredric W. Reed Emmett A. Thaxton, Jr__ Leon W. Cowan_ _ Title Principal assignment Administrative. President Admin istrati ve. 1st vice president Administrative (branch). Vice president Accounting. Vice president and secretary. Cash, loans. Vice president and cashier Vice president __ _ Check collection. Research. do Fiscal agency. do Administrative (branch). do Auditing. General auditor __ Legal. General counsel Examinations. Vice president Administrative (branch). do Personnel. do Building. do Research. Director of research. Administrative (branch). Cashier Do. do Examinations. Senior examiner __ __.. Do. Chief examiner Administrative (branch). Cashier. Legal. Assistant counsel and assistant secretary Loans. Assistant cashier Cash, fiscal agency. do Examinations. Assistant vice president w tel < H 3 Federal Reserve Bank of San Francisco Annual salary Name Title $40, 000 27, 500 26, 500 22, 000 20, 000 20, 000 18, 000 17, 000 17, 000 17, 000 17, 000 17, 000 16, 500 16, 000 16, 000 15, 000 15, 000 14, 000 14, 000 14, 000 14, 000 14, 000 13, 000 12, 900 12, 900 Eliot J. Swan_ ___ _ ____ H. E. Hemmings _ David L. Grove-_ _ A. B. Merritt E. R. Barglebaugh C. H. Watkins E. H. Galvin J. L. Barbonchielli P. W. Cavan _ George D. Hartlin __ _ _ A. L. Price _ ._ W. F. Scott William M. Burke D. M. Davenport _ _ _ Gault W. Lynn, E. J. Martens,__ _ _ ___ W. R. Sandstrom_ J. F. Ahlf W. M. Brown _ __ George F. Dimmler _ _ R. Maurer, Jr _ J. R. Robinson. __ __ _ T. M. Simmons _ _ _ J. Norman Aamodt Herbert R. Runyon__ President 1st vice president __ Vice president do Vice president and manager do Vice president.- _ _ _ _ _ do _do _ _ _ _ _ __ General auditor __ __ Vice president and manager _ General counsel __ Senior economist _ Vice president __ _ Director of research- _ _ _ _ _ __ Cashier __ _ ______ Assistant vice president Chief examiner. _ __ Assistant vice president __ __ __ Economist- _ _ __ Assistant vice president _ Assistant manager _ _ _ Assistant vice president _ Senior examiner Economist A _. Principal assignments Administrative. Do. Research. Check collection, credits. Administrative (branch). Do. Examinations. Cash, fiscal agency. Personnel. Auditing. Administrative (branch). Legal. Research. Administrative (branch). Research. Accounting. Administrative (branch). Examinations. Administrative (branch). Research. Check collection. Accounting (branch). Administrative (branch). Examinations. Research. 3 M W < CO GO 340 THE FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS The CHAIRMAN. NOW, the Open Market Committee, all of you* attend that. Let's see, there are three of you Mr. W A Y N E . Mr. Ellis and I are associated along with Mr. Bopp, of Philadelphia. The CHAIRMAN. Yes. Well now, Mr. Ellis and you—there are you and Mr. Ellis and there are three from your area or from your Federal Eeserve district, are there not? Mr. W A Y N E . Yes. The CHAIRMAN. NOW, when you have matters to be voted on, do you three get together and decide how you will vote on that in case there is a controversy or do you do it by majority vote of the three or how do you do it ? Mr. W A Y N E . Mr. Patman, I have never caucused with anyone as to the position I would take in the open market discussions. I t is my understanding that we would approach it as individuals and attempt to bring a variety of independent judgments. I have never caucused with Mr. Ellis or any other member of t h e Committee. The CHAIRMAN. Although you do express your views at t h e meetings ? Mr. W A Y N E . Frequently and frankly. The CHAIRMAN. Frequently and frankly? Now, that being true, there are three of you there and only one is a member. So I assume that the one that is a member just votes his conviction, like you stated you vote yours ? Mr. W A Y N E . That is correct. The CHAIRMAN. Now, do you tell anybody about these meetings,, Mr. Wayne? To whom do you impart the knowledge that you receive at an Open Market Committee meeting? Mr. W A Y N E . There is present at the meeting of the Open Market Committee a number of my staff, the Vice The CHAIRMAN. A number of your staff ? Mr. W A Y N E . The Vice President and senior adviser, Dr. Katchford The CHAIRMAN. From each bank ? Mr. W A Y N E . That is from each bank. He is present in order that he may be familiar with discussions that transpire at the Federal Open Market Committee meetings. The CHAIRMAN. NOW, these meetings are secretive, I assume, because if the information were to get out it could be disastrous to your program ? Mr. W A Y N E . I t would be disastrous to the United States. The CHAIRMAN. Well, of course, you assume that your program is such that it is helpful to the United States and, of course, it could be disastrous to your program Mr. W A Y N E . My comments there are intended to say that if there were^ leaks as to what was being done at the Open Market Committee meeting it would open up speculative opportunities which would be inimicable to the public interest. The CHAIRMAN. People could make millions over night ? Have you ever known of a leak of the Open Market THE FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS M r . W A Y N E . No, sir. The CHAIRMAN. Have Mr. E L L I S . No, sir. The CHAIRMAN. Have Mr. SHTJFORD. N O , sir. Mr. BOLTON. H O W far 341 you? you? in advance would you feel that the decisions m a d e at the Open Market Committee could affect speculative interests ? I n other words, if a decision or a discussion at the meeting, and recorded in the minutes, took place in June, how far in x year ? Is this a matter that would only affect the market in June or would it affect it in October, December, January, or Mr. W A Y N E . My answer would be that it would vary under certain circumstances. The decisions under the Open Market Committee are made for a 3week period or until the Committee meets again, if they are on call. For this particular 3-week period any knowledge of it would have an immediate possible impact on the market. If the knowledge were made available subsequently, perhaps as far into the future as 3 months at times, where there had been a continuing thrust of policy without change and in which they have been pursuing the same general thing, it would leave the impression that one can anticipate and count on this being done. If what you are getting at, Mr. Bolton, is a question of a lag before 1:hese things could be freely discussed, I would feel that 6 months would be an absolute minimum because of this danger that you refer to. T h a t is a personal opinion. Mr. BOLTON. Mr. Chairman, may I just pursue this point a little further ? The CHAIRMAN. Surely, go ahead. Mr. BOLTON. I n other words, you would set 6 months as the minimum of time that the disclosure of the conferences and the discussions at this meeting or as a time that this would not have a speculative effect if it were known ? Mr. W A Y N E . I am speaking of the entire discussions. I see no reason in the world why a record of policy actions cannot be made available with 90 days' lapse after the concluding time. I am speaking now personally and not for the Open Market Committee. I believe that the policy which has been in effect in the United Kingdom for the last several years has much to commend it. At the end of each quarter there is issued by the Bank of England a discussion of the circumstances and conditions as they prevailed one quarter back, and a discussion is made of this particular thing in relation to the actions of the bank. Mr. BOLTON. Well, let me be a little more specific. If the minutes of the Open Market Committee were made public for the year 1963 would this hold any threat of speculative benefit from the knowledge gained thereby ? Mr. W A Y N E . YOU mean now or when ? Mr. BOLTON. NOW. Mr. W A Y N E . I would be reluctant to have them in the public domain now. I would like to repeat one point that was made this morning by Mr. Hickman, that there are in these minutes confidential discussions involving foreign governments and banks which I hesitate 342 THE FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS Mr. BOLTON. I understand this, sir, and I was dealing purely with the domestic rather than the international. Mr. W A Y N E . I would there feel, too, that this whole knowledge of the thrust of power—a statement of policy actions can be made earlier than the release of the total record. The total record would indicate the trend of minds of the various members of the Committee, and one can watch a changing trend and begin to anticipate. This is the dangerous thing, but the whole statement of policy action, on that I see no reason why they can't be made available after the passage of 3 months' time. I feel that the full minutes of the Open Market Committee are historic documents which, after a lapse of time, and here I would have in mind a couple of years, should be made available to everyone who is interested and wants to study them. That is a personal opinion, and I am not sure that my colleagues follow it. Mr. BOLTON. Frankly, I am only interested in the lapse of time, sir, which is the reason why I opposed the chairman's original motion for the submission of the minutes, and I appreciate the chairman yielding to me at this point. The CHAIRMAN. NOW, I want to ask you t h i s : You make a daily statement, do you not, Mr. Wayne ? Mr. W A Y N E . YOU mean the bank ? The CHAIRMAN. Yes. Mr. W A Y N E . Yes, sir. The CHAIRMAN. And each one of you make Mr. W A Y N E . Yes, sir. The CHAIRMAN. NOW, where do you get one ? the information to base that statement on ? Mr. W A Y N E . The comparative—what we call our daily statement or comparative statement is prepared from the books of the Federal Eeserve Bank of Richmond. Your question, I presume, points to the participation of the Federal Open Market Committee The CHAIRMAN. That is right. Does not the Federal Open Market Committee furnish you that information every day about the purchases and sales of bonds ? Mr. W A Y N E . The only time that it is furnished on a daily basis is where there is a change in participation. These participations in account are on a formula which would continue for a period of time unless there was a necessity for changing it* The CHAIRMAN. H O W do you arrive at the amount that you get? How is that arrived at ? Mr. W A Y N E . I wish I was able to answer it precisely. I t is a very involved formula which is worked out in the instructions of the Federal Open Market Committee. I couldn't recite it. The CHAIRMAN. Yes; I think we have that available, but the point is that the Federal Eeserve Bank in New York handles 99 percent of your money, do they not ? Mr. W A Y N E . The Federal Eeserve Bank in New York is the agent of all of the banks. THE FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS 343 The CHAIRMAN. And 99 percent of your income comes from that source, does it not? Mr. W A Y N E . T h a t is correct. The CHAIRMAN. I n other words, the amount of money you make, under the discount system, is insignificant and practically nothing in comparison to your expenses, is it not ? Mr. W A Y N E . Yes, sir. Mr. BOLTON. Will you yield, Mr. Chairman ? The CHAIRMAN. Yes. Mr. BOLTON. Historically, has this been brought about by the growth of the Federal debt? I n other words, were the activities of the discount window far larger when the debt was smaller, as contrasted to the present situation, where the commercial banks themselves find it advantageous to hold a large portfolio of Government bonds on their own account ? Mr. W A Y N E . When the Federal Reserve bank was established the outstanding Federal debt was infinitesimal, consisting primarily of issues in connection with national bank notes and the Panama Canal. As I read the record, it was assumed so that it would operate in bankers' acceptances and trade acceptances and papers arising out of commercial transactions. With the growth of the Federal debt, the debt provided a ready instrument in the Federal bill which became "near money" and was available for this particular operation, and with the transfer of banking resources heavily into the bond account, this was a perfectly natural development. As a matter of fact, when I entered a bank in South Carolina, and looking at all of the banks there in 1919, the total deposits of all of the banks in South Carolina then, there were $131 million, and the total loans were $137 million. Mr. V A N I K . If you will yield, what you are saying, in effect, if the gentleman will yield, Mr. Chairman, is that the great profitable business of the Fed has been a profitable result of our incurrence of this tremendous debt. This is about the only useful purpose that I see for it. Mr. W A Y N E . Well, I wouldn't, I am not sure that I could agree with that, but what the Fed has done is to use the instruments which it finds. The CHAIRMAN. I do not think Mr. Bolton is exactly clear on his suggestion. No, the national debt—directly it does not Mr. BOLTON. Not directly, Mr. Chairman, but The CHAIRMAN. Of course if the debt is larger than $33 billion it makes it possible, but I do not think that it is related to the subject matter, but I will leave that up to you. Mr. BOLTON. Well, if the chairman would allow me, the Fed owns approximately little more than a tenth of the Federal debt. I n the past, prior to enlarged Federal debts, which we are presently saddled with, the discount window was a major part of the Fed's operation. The CHAIRMAN. I do not think they are related to this. Mr. BOLTON. But today the commercial banks, on their own account, in their own system, have a sufficient number of Federal bonds which they have by themselves and which they do engage in daily 344 THE FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS transactions on, so that they do not need to go to the Federal Reserve for. I n fact, some of the members of the Federal Reserve have complained to me that the Federal Reserve System, in some of their banks, are sufficiently worried that they are not able to meet the demands 01 the local banks, and the banks are forced to go out in the market and, therefore, sell or to purchase their own securities as contrasted to going to the discount window in the Fed. The CHAIRMAN. Well, that is away from anything I had in mind at all. You see, what I had in mind was that the Fed's ownership of the $33 billion is really the only support that the Federal Reserve System has. Ninety-nine percent of every dollar that they spend comes from interest on that portfolio. And they keep the books in New York. They have got 12 sets of books, you might say, 1 for each bank. They keep your books for you. They give you notice at the end of every day as to what the situation is and, really, 99 percent of the Federal Reserve bank business is done in the New York bank, and I often wonder why we have these big buildings all over the country t h a t are used just for clearing checks and things like that. Why should the Congress and the Government pay the expenses of the private banks ? I t was contemplated in the Federal Reserve Act that the banks would pay for that under section 16, but when the Feds commenced to acquire a lot of bonds and making money, they started paying it. Mr. BOLTON. Will the gentleman yield ? The CHAIRMAN. Yes. Mr. BOLTON. Will you yield for a question ? The gentleman is exceedingly worried about the interest rates which a small depositor and small investor has to pay and rightly so, and we all are, and so is the gentleman from Ohio, and certainly the chairman would not suggest that we would assume the responsibility for the national check-cashing system and pass it on because this would raise the cost to every user of the commercial bank's facilities. The CHAIRMAN. I consider your argument extremely illogical. I n terest is never lower to the public because of this. Now, I have here the expenses of the Federal Reserve banks which our investigators obtained from the Richmond bank and the Boston bank and the St. Louis bank, and I will just scan through them now, but I would like to put them in the record. The Richmond bank: "The Federal Observer" which is a "house" publication is about $4,900; Richmond hotels and bills for expenses in connection with employees' annual dinner and the bank-sponsored employees' athletic activities come to about $308. I n employee relations, on that you have a number of expenses and in training and education, $1,278 for reimbursement of tuition and enrollment fee of 40 employees in an American Institute of Banking. And the point I am getting at there is that your employees are so remotely connected with banking—you see, they are clearing checks and doing mechanical duties and things like that. They are not making—even the presidents of the banks do not make as many judgments, I would not think, in connection with money and credit because you do not have the opportunity to. And THE FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS 345 then we have the educational features, and the bank-sponsored dinners held outside the banks. That runs into a lot of money. And the membership dues are $2,042 in the Richmond chapter of the American Institute of Banking. Why should a Federal Eeserve bank join the banking association? Mr. WAYNE. I would like to speak to that. The CHAIRMAN. Why should you join that and take money out of the Treasury down here to be used to join that association? Mr. WAYNE. We have felt, and have found, that by maintaining continued contact through the associations of banks that we have been able to achieve a closer working relationship that results in a more effective functioning of our organization. Mr. V A N I K . W h y could you not have a closer relationship with Congressmen ? Mr. BOLTON. W h a t is that? Mr. V A N I K . I suggest that they should have a closer relationship with the parties The CHAIRMAN. They have a closer relationship with the parties. How many banks do you have in Eichmond ? Mr. W A Y N E . 881 banks in early last year. I t is changing so fast that I would suggest it is about 840 or 850 now. The CHAIRMAN. Well, in 1960 you only dealt with 104 banks. Mr. W A Y N E . I n what respect ? The CHAIRMAN. I n discounts and advances. Mr. W A Y N E . That is right. The CHAIRMAN. And in 1961 it was 73 banks, in 1962 it was 67, and in 1963 you only dealt with 64 banks. Mr. W A Y N E . I interpret this, Mr. Patman, to mean your implication is that the only purpose for our existence is to carry The CHAIRMAN. Well, discounts and advances were originally one of the major purposes of the System, but you have kind of gotten out of that business these days. You used to make a lot of money through discounts because the banks had to come to you for funds, but now they have organized the Federal funds market which takes money away from the Treasury and you do not make money like you did heretofore that way, because it is practically nil. Mr. W A Y N E . I am a little puzzled over this statement that the Feds organized the Federal fund market. The CHAIRMAN. Well, you are cooperating in it very Mr. W A Y N E . A S a matter of fact, it existed long before we really became aware of it, and all we really do is the transactions—they come through our books. The CHAIRMAN. Well, you have not done anything else, have you ? Mr. W A Y N E . We think it is a good thing The CHAIRMAN. That is what I say. You are helping them to do this and you are not making much. The taxpayers are paying everything on this thing. Mr. BOLTON. Will the chairman state what the Federal fund market is? The CHAIRMAN. I t is where certain banks have reserves and they are not using them and they can transfer them into other banks to use during certain periods of time. I s that right ? 28-680—64—vol. 1- 23 346 THE FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS Mr. W A Y N E . Yes, sir; banks have an excess of reserves over required amount, but this is not uniform. Throughout the country some banks will be in excess and banks which are deficient, rather than coming to the Federal to borrow, will in effect borrow from the bank which has excess reserves in order to cover its own deficiencies. Mr. BOLTON. I n other words, if Charlie and I were in the banking business, and I had a loan to make and did not have sufficient reserves and he had overreserves and I wanted to borrow some of his reserves, I could do it at a half of 1 percent or The CHAIRMAN. YOU can do it within 24 hours or usually it is 24 to 48 hours. Mr. BOLTON. Well, why is this called a Federal market ? The CHAIRMAN. Federal funds market. Well, it used to be that the Feds made quite a bit of money Mr. W A Y N E . On that? The CHAIRMAN. N O , not on that, but on a similar thing. Mr. W A Y N E . This is called a Federal fund market because what transfers is balances on the books of the Federal Reserve bank, and that is Federal Reserve funds. Mr. BOLTON. These funds are already in being ? Mr. W A Y N E . Right. The advantage of the Federal fund market is that it makes more effective the funds available. The CHAIRMAN. That is right. I only brought it u p because on account of it the banks now very rarely use the discount window, and so you let the Government pay 99 percent of your operating expenses. Mr. W A Y N E . This is a matter of definition. I wouldn't agree The CHAIRMAN. NOW, you have travel expenses to conventions and meetings, and so forth. There are quite a few charges for that. And, myself Mr. W A Y N E . May I speak to the one on the American Institute of Banking? The CHAIRMAN. Yes, sir. Mr. W A Y N E . That is an educational organization, as I am sure you are aware, and we do encourage all of our employees to try to improve their education in ways that will enhance their value to us and our membership in that organization is for that purpose. The CHAIRMAN. Mr. Wayne, you are in the banking business and you do practically nothing at the discount window. THE FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS 347 Mr. W A Y N E . But banking consists of much more than discounts The CHAIRMAN. And you are teaching them something that would apply to commercial banks, but does not help them in your business because your business is clearing checks and things like that. Mr. W A Y N E . They teach some commercial law and negotiable instruments, which has a direct effect on us. The CHAIRMAN. All right. Now, the next one is St. Louis, and you have the Thanksgiving dinner in the bank dining room for all the officers and employees, and then the Christmas dinner, birthday luncheons and flowers for the birthdays, annual dues to the American Institute of Banking, and the tuition for Vanderbilt University, and so forth Mr. V A N I K . Here is an item that I do not understand: F r u i t and flowers sent to Hill employees. Now, I pay for my own flowers. Mr. BOLTON. But you do pay for it ? Mr. V A N I K . Yes, but I do pay for it and I do not know why the Federal Government should get into that sort of thing. Mr. SHUFORD. May I reply to that ? \ The CHAIRMAN. No, that IS about Richmond. Mr. V A N I K . Would you suggest that the General Accounting Office would ever approve this sort of thing ? I am sure it would not. The CHAIRMAN. And here is tuition for the University of Wisconsin and training and education, several of them sponsored, and sponsored dinners and luncheon meetings, $686, at the Statler Hilton; $425 to the Statler Hilton, and $1,250—you are paying dues there to the American Banking Association and $5 to the Missouri Banking Association; $115 to the Illinois Banking Association; $528 to the Chamber of Commerce of Metropolitan St. Louis, and the Better Business of St. Louis, $450; $300, Robert Morris Associates; $350 to the Committee of Economic Development, and luncheons and so forth and expenses to conventions. I n all of them the per diem that you give them is several dollars more than the top for Government employees. I think the top for Government employees is $16, and you indicate here that yours is from $23 to $27. And I will just put this in the record like it is. 348 THE FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS (The St. Louis account follows:) SL Louis EMPLOYEE Reference No. Date Amount 9126 Nov. 23, 1962 $1, 332. 00 9126 Dec. 27, 1962 20 170 295 434 579 105 9101 Jan. Jan. Jan. Jan. Jan. Jan. May 3, 1962 10, 1962 17, 1962 24, 1962 31,1962 9, 1962 10, 1962 30.25 30.25 38.50 30.25 38.50 18.25 120. 00 1080 Feb. 26, 1962 93.99 910 Nov. 29, 1962 12.24 July 6, 1962 33. 00 5, 1962 6, 1962 17, 1963 21, 1963 , 176. 77 179. 41 248. 78 261. 24 9154 9143 June 9120 June 9173 ! June 9147 I June RELATIONS 1, 336. 00 Thanksgiving dinner in bank dining room for all officers and employees. Christmas dinner in bank dining room for all officers and employees. 1 Birthday luncheons; a weekly luncheon is I held in bank dining room attended by | officers and employees whose birthday J occurs during that week. Flowers for birthday luncheons. Annual banquet of St. Louis Chapter, American Institute of Banking, attended by 20 employees who were enrolled in AIB classes or were local or national officers or committeeman. Leather-bound engrossed testimonial document presented as a testimonial from the directors of the bank in connection with the retirement of President Delos C. Johns. Floral offering in connection with the death of an employee. Annual dinner in bank dining room for all employees who have completed 10 years of service during the preceding 12-month period. Employees who are officers of the local chapter of the American Institute of Banking or who have been elected as delegates are sent to the annual convention of AIB. The following payments were for traveling expenses: To convention in Atlanta, Ga. Do. To convention in Denver, Colo. Do. THE FEDERAL RESERVE SYSTEM AFTER FIFTT TEARS St. 349 Louis—Continued TBAINING AND EDUCATION Reference No. Amount 9101 Apr. 25, 1963 9101 Jan. 9101 Apr. 1, 1963 9117 Apr. 2, 1963 9101 Mar. 7, 1963 9124 June 17, 1963 9101 9101 9101 9101 9101 May June Dec. Jan. Feb. 9101 Jan. 4, 1963 9117 Apr. 2, 1963 9101 Mar. 7, 1963 9101 Apr. 1, 19S3 4, 1963 18, 8, 12, 25, 19, 1962 1962 1962 1963 1963 $584. 00 Tuition, thesis binding, and microfilming, expenses at Vanderbilt University, Nashville, Tenn.; thesis was entitled "An Evaluation of the Consistency of the Defensive and Dynamic Objectives of Federal Reserve Policy." 400. 00 Tuition for 2 employees attending the Stonier Graduate School of Banking. 210. 00 Registration and tuition for 1 employee at the 1963 session of the National Trust School, American Bankers Association. 250. 00 Registration fee and tuition for 2 employees attending the NABAC School for Bank Audit and Control. 692. 50 Tuition foi 5 employees attending the Graduate School of Banking at the University of Wisconsin. 135. 00 Cost of night course entitled "Topics in Statistics," at Washington University, St. Louis, Mo. Employees who enroll in courses offered by the American Institute of Banking, who attend 80 percent of the class sessions, and who successfully complete the course are refunded tuition costs; the following are refunds to: 131. 00 5 employees. 468. 00 18 employees. 394. 00 Do. 252. 00 9 employees. 887. 00 32 employees. Advance payments of charges for room and board for employees to attend schools, as follows: 320. 00 For 2 employees to attend Stonier Graduate School of Banking at the University of Rutgers, June 9-20, 1963. 250. 00 For 2 employees to attend NABAC School for Bank Audit and Control at the University of Wisconsin, Aug. 4-17, 1963. 562. 50 For 5 employees to attend Graduate School of Banking at the Universitv of Wisconsin, Aug. 12-23, 1963. 190. 00 For one employee to attend National Trust School at Northwestern Universitv, Aug. 5-24, 1963. 350 THE FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS St. Louis—Continued RESERVE B A N K SPONSORED DINNER A N D LUCHEON MEETINGS HELD OUTSIDE T H E B A N K Reference No. Date Amount 9101 May 25, 1962 $668. 89 9101 Oct. 30, 1962 233. 37 9147 Feb. 14, 1963 143. 56 9101 Mar. 11, 1963 175. 44 9101 Apr. 425. 21 9, 1963 At Statler Hilton, attended by 14 officers of bank and branches, 25 directors of head office and branches, and 21 other guests— annual affair. At Statler Hilton, attended by 8 directors, 10 representatives of St. Louis Clearing House Bankers, and 12 officers of bank. At Motor Hotel in Columbia, Mo., attended by 22 members of the University of Missouri faculty and 3 officers of the bank. At Lennox Hotel, for the system committee on computers in research, attended by 5 representatives from the bank and 14 persons from other Reserve banks and the Board of Governors. At Statler Hilton, attended by a member of the Board of Governors, 6 bank directors, 10 officers, and 22 St. Louis area businessmen. MEMBERSHIP DUES, 9101 9136 9129 9101 Aug. Jan. June Mar. 28, 1962 $1, 250. 00 9, 1963 500. 00 11,1963 115.00 8, 1963 528. 00 9101 9101 9101 9101 9101 Jan. Nov. Aug. May Dec. 3, 1963 27, 1962 10, 1962 2, 1962 18, 1962 250. 00 400. 00 300. 00 250.00 75.00 ETC. American Bankers Association. Missouri Bankers Association. Illinois Bankers Association. Chamber of Commerce of Metropolitan St. Louis—for 7 officers. Better Business Bureau of Greater St. Louis. National Industrial Conference Board, Inc. Robert Morris Associates—for 2 officers. Committee for Economic Development. National Bureau of Economic Research, Inc. L U N C H E O N S I N B A N K D I N I N G ROOM OR $111. 52 9162 Mar. 29, 1962 9142 June 8, 1962 427. 50 9145 Aug. 28,1962 27.50 9157 9158 9146 9159 Oct. Oct. Oct. Mar. 17,1962 19, 1962 30,1962 1, 1963 55.00 51.70 53. 10 46.75 9151 May 17,1963 123. 75 CAFETERIA Incident to seminar on the uniform commercial code; attended by 28 representatives of Metropolitan St. Louis member banks and 11 officers of the bank. Similar to above; attended by 137 officers of Illinois member banks, AIB executive secretary, a local attorney, 21 officers of the bank, and 11 staff members of the bank. United fund, division planning committee; attended by 9 united fund representatives and 1 officer of the bank. 13 guest bankers and 7 officers of the bank. 11 member bankers and 7 officers of the bank. Do. 15 members of the agricultural committee of the chamber of commerce, 1 officer and 1 employee of the bank. 43 members of the St. Louis Convention Board and 2 officers of the bank. T H E FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS 351 St. Louis—Continued TRAVELING EXPENSES TO CONVENTIONS, CONFERENCES, MEETINGS, ETC. Reference No. Date Amount 25 Jan. 3, 1962 47 Jan. 4, 1962 47 829 —-do Feb. 12, 1962 829 829 9162 do do Sept. 17, 1962 9154 9165 Sept. 24, 1962 do 9164 Sept. 28, 1962 9142 Nov. 1, 1962 9142 9131 do Nov. 15, 1962 9117 9130 Nov. 20, 1962 June 28, 1963 9134 9101 229 229 Apr. 17, 1962 M a y 10, 1962 Jan. 12, 1962 do 229 471 9139 do Jan. 25, 1962 June 22, 1962 9148 9152 9107 9156 9127 Oct. Dec. Apr. Apr. Mar. 9150 June 2, 14, 24, 8, 12, 1962 1962 1963 1963 1963 3, 1963 Annual meetings of Allied Social Science Association in New York City, Dec. 2729, 1961. 192. 88 Meetings of American Economic Association in New York City, Dec. 26-29, 1961. 199. 10 Same as above, except Dec. 26-30, 1961. 172. 08 Mid-Winter Trust Conference, American Bankers Association, in New York City, Feb. 4-7, 1962. 189. 22 Same as above, except Feb. 3-7, 1962. 186. 48 Same as above, Feb. 3-7, 1962. 165. 45 Meetings of American Statistical Association in Minneapolis, Minn., Sept. 6-10, 1962. 156. 90 Same as above. 261. 40 Convention of National Association of Supervisors of State Banks, Bretton Woods, N.H., Sept. 16-21, 1962. 391. 89 Same as above (Bretton Woods) and American Bankers Association Convention in Atlantic City, N.J., Sept. 16-26, 1962. 205. 43 38th National Convention of NABAC in Bal Harbour, Fla., Oct. 21-26, 1962. 202. 78 Same as above, except Oct. 21-25, 1962. 123. 68 Southern Economics Association meeting in Atlanta, Ga., Nov. 8-10, 1962. Do. 123. 18 359. 22 Annual Conference of National Association of Accountants in San Francisco, Calif., June 23-27, 1963. Federal Reserve System meetings, etc., where meals and lodging averaged considerably more than $16 a day: 163. 25\| Washington, D.C., almost $26.50 a day for 101. 74/ 5 days. 142. 43 Washington, D.C., $27.83 for 1 day. 164. 26 Washington, D.C., over $23.50 a day for 2 days. 165. 00 Washington, D.C., $23.50 a day for 2 days. 149. 60 Washington, D.C., $24.75 for 1 day. 281. 85 Washington, D.C., over $23 a day for 2 days; the fare for this trip was $215.50 whereas fares for other trips were $103.10, $106.20, or $109.30. 205. 57 New York City, almost $27 a day for 2 days. 225. 96 New York City, over $23 a day for 3 days. 225. 95 New York City, over $24 a day for 3 days. 197. 95 New York City, over $23.50 a day for 2 days. 201. 20 Washington, D.C., over $23.50 a day for 3 days. 170. 68 Washington, D.C, over $25 a day for 2 days. $182. 10 352 THE FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS St. Louis—Continued DINNER MEETINGS OF VARIOUS ASSOCIATIONS Reference No. Date 984 Feb. 19, 1962 $80. 00 832 833 834 Feb. 13, 1962 do do 10. 09 10. 09 10.09 Jan. Mar. May Sept. Mar. May 19.25 16. 50 22. 00 35.75 30.25 19.25 382 1522 9158 9164 9144 9153 Amount 22,1962 20, 1962 28, 1962 28, 1962 28, 1963 17, 1963 Chamber of commerce annual dinner, 8 reservations. 1 Robert Morris Associates dinner meeting, | attended by 3. American Statistical Association dinner meetings: On Jan. 18, 1962, attended by 7. On Mar. 15, 1962, attended by 6. On May 25, 1962, attended by 8. On Sept. 27, 1962, attended by 13. On Mar. 27, 1963, attended by 11. On Mav 16, 1963, attended by 7. PUBLIC INFORMATION 30, 29, 6, 4, Mar. June Sept. Oct. 9000 Dec. 31, 1962 1, 830. 60 9000 Jan. 31, 1963 2, 379. 69 9101 Mar. 5, 1963 3, 204. 54 9101 June 24, 1963 1, 800. 88 9000 9000 9000 9000 9000 9000 Jan. Apr. Aug. Sept. Jan. June 31, 30, 31, 28, 31, 27, 1962 1962 1962 1962 $2, 407. 99 2, 345. 67 1, 621. 32 2, 209. 94 9000 9000 9101 9101 1962 1962 1962 1962 1963 1963 74.30 202. 46 93.85 243. 05 128. 48 109. 68 Printing of February 1962 Monthly Review. Printing of May 1962 Monthly Review. Printing of August 1962 Monthly Review. Printing of September 1962 Monthly Review. Printing of November 1962 Monthly Review. Printing of December 1962 Monthly Review. Printing of February 1963 Monthly Review (16,500 copies). Printing of June 1963 Monthly Review. Booklets entitled "Your Money Supply" and "History of Coinage and Currency" are distributed to students, teachers, bankers, and other visitors taking conducted tours of the bank. On request, booklets are also furnished to schools. The following represent typical monthly removals from stock of supplies: January 1962. April 1962. August 1962. September 1962. January 1963. June 1963. MISCELLANEOUS 1694 Mar. 30,1962 $215. 56 0123 Jan. 9, 1962 160. 00 First monthly payment to Delos C. Johns, retired President, as supplemental retirement allowance; same amount was paid each month end thereafter according to expense listings furnished by the bank to the Committee staff. Dow Jones news service for the month of January; same amount is paid each month. THE FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS 353 Mr.BROCK. Mr.Chairman? The CHAIRMAN. And here is the public information. You pay the Monthly Review, $2,400. Mr. SHUFORD. That is our economic review, yes, sir, the local district publication. The CHAIRMAN. Yes, I can see where that would be justified. I n fact, I do not say that all of these are unjustified at all, but some of them, as deserving as some of them are, and as much as we would like to give to them, I think they are clear out of line. Mr.VANiK. Mr. Chairman. The CHAIRMAN. This is just as though the Postmaster was spending stamp money for things like this. Mr. V A N I K . Mr. Chairman, I wonder if it would not be well to send these items over to the General Accounting Office and just to ask for an opinion as to which of these items would stand approval under Federal laws and regulations ? Mr. BROCK. May I ask a question at this juncture, Mr. Chairman? The CHAIRMAN. Yes. Mr. BROCK. W h a t members of the staff compiled this list? The CHAIRMAN. The two investigators, Mr. Schremp and Mr. Geist. Mr. BROCK. Are they employed by the committee ? The CHAIRMAN. Yes, sir. Mr. BROCK. And reimbursed by the committee ? The CHAIRMAN. Yes, sir, they are. Mr. BOLTON. Mr. Chairman, at that point The CHAIRMAN. They are on loan from the General Accounting Office. Mr. BROCK. And we are paying their salary ? The CHAIRMAN. N O , we are not paying their salary. W e borrowed them. Mr. BROCK. Well, the GAO is paying their salary ? The CHAIRMAN. Yes, and we will adjust it. Mr. BROCK. Because I think that might be possible, because there might be a conflict of interest The CHAIRMAN. All of it that I know of is reimbursed agency work. There might be an exception and there might not. Mr. BOLTON. A t that point, Mr. Chairman The CHAIRMAN. Yes, sir? Mr. BOLTON. W i t h due respect, I regret very much, because of prior plans, I must leave at a quarter of 1 to leave for Ohio, and I am exceedingly glad that there are no members here at the press table because I would like to register a small complaint : No. 1, if you remember, the chairman and I had a small dissertation on this point at the last meeting of the committee in which our memories did not jibe and, therefore, I ask the counsel of the committee to get a copy of the resolution of the full committee which, I am under the impression, specifically directed the chairman not to make any inquiries of the Federal Reserve unless it was authorized bv the full committee, and that that had not been done. The chairman's memory did not jibe with mine and I recognize this, and I asked the counsel for the committee to obtain a copy of the resolution, and this he has not been able to do because I believe the minutes are in the hands of the chairman. 354 THE FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS There has been a change in the staff and I am not meaning that the chairman has been trying to sit on the minutes and, frankly, I am very glad, and I want to underline this, I am very glad that any and ail information regarding the Fed or any of its operation came out in the open. The only point I was trying to make was that, as a member of this committee, I did not know of this investigation, I did not know that it was being conducted, nor did I have any of the figures. I have not seen the reports that are in the hands—that are on the other side of the table and, frankly, I have felt a little—granted I am a first-term member of this committee, at least under present ratings— but I have felt a litle slap on the wrist, shall I say, Mr. Chairman. The CHAIRMAN. Well, let me state to the gentleman that he has no right to feel that way. You know, the chairman has certain responsibilities and certain privileges, and if I know anything about the rules of Congress and the traditional policies of the committees, the chairman has the right to do this. And if the gentleman will remember, last year when this 7y2 million came up, why, Mr. Geist and Mr. Schremp were right down here. They answered all questions. They were over at the New York Federal Eeserve Bank. W h a t they were doing there was going through the books, according to my instructions, and I assume the gentleman was there. I know it was a full committee meeting, and there is nothing secret about it, nothing. Mr. BOLTON. And, Mr. Chairman, the point of my entire—perhaps you would refer to it as a diatribe, comes from the fact The CHAIRMAN. N O , nothing is a diatribe. Mr. BOLTON. My memory of the meeting at that time, which was when the full committee considered this whole question. The CHAIRMAN. I know, but only insofar as I went beyond my power as chairman. Mr. BOLTON. Mr. Chairman The CHAIRMAN. And that is where the committee would come in. Mr. BOLTON. I am perfectly willing to recognize, and do so not unwillingly—I want it understood—the full rights of the chairman, nor do I wish to impinge on them, but it was my understanding that in this instance, and again I want to emphasize that the chairman's and my memory disagreed, and this was why I asked the counsel for a copy of the minutes. We disagreed on the feelings and the instructions to the chairman of the entire committee. The CHAIRMAN. Well, nothing has been done here so far, Mr. Bolton, that the chairman does not have permission to do, nothing. Now, of course, if this committee wanted to meet and pass the resolution or vote, a majority vote, asking me not to do something I wouldn't do it; certainly, I would not. But there are certain things that the chairman has a right to do. The chairman gets up the program. The chairman calls the witnesses. The chairman directs the type of investigation and to whom Mr. V A N I K . Mr. Chairman, if the gentleman will yield, I would recommend that any discussion further along this line be reserved for executive session. THE FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS 355 The CHAIRMAN. Yes, I think so. Mr. HARVEY. But he is entitled to say that. H e has not seen these at all. The CHAIRMAN. This is the first time I have seen it. Mr. V A N I K . I t is the first time I have seen it. I t is being rotated. Mr. BROCK. Well, we were told that we would see advance copies of testimony. Mr. V A N I K . Well, Mr. Chairman, I make a recommendation that these items be referred over to the General Accounting Office for an opinion as to whether they are the type of things The CHAIRMAN. Let's see them in this record first and then we will pass on them. We will put all three in the record. (The accounts of the Eichmond bank and the Boston bank follow:) Richmond EMPLOYEE KELATIONS Voucher No. Date Amount 9767 Jan. June July Sept. Nov. May June Jan. —, —, —, —, —, —, —, 5, 1962 $1, 391. 01 1962 951. 90 1962 1, 826, 13 1962 969. 39 1962 1, 389. 65 1963 1, 836. 40 1963 1, 170. 82 1962 200. 00 10132 10315 10665 11201 10581 10967 11406 11645 Feb. Feb. Mar. Apr. Mar. Mar. Apr. May 1, 13, 7, 11, 5, 29, 25, 14, 1962 1962 1962 1962 1962 1962 1962 1962 11843 M a y 25, 1962. 48. 00 13710 N o v . 12, 1962. 20. 00 12795 13442 13952 14777 14695 14787 15899 Aug. 7, 1 9 6 2 . . Sept. 24, 1962. Oct. 30, 1962__ Dec. 2 1 , 1 9 6 2 . . Dec. 1 7 , 1 9 6 2 . . Dec. 2 1 , 1962. M a r . 12, 1 9 6 3 . 129. 80 150. 00 74.90 40.50 21.71 69.50 36. 00 160. 00 940. 00 285. 00 4, 917. 40 60. 68 52.50 308. 95 72. 80 " T h e Federal Observer" is a house publication written, edited, a n d published b y employees for employees. T h e following represent typical m o n t h l y charges for b a n k printshop expense: 1,800 copies. Do. Do. Do. Do. 1,600 copies. 1,700 copies. Wilbert Williams, Virginia Union University. 1 George Greene. 1 Wilbert Williams. 1 K e n n e t h A. Henderson, Jr. 1 Richmond Hotels, Inc. 1 Harris, Flippen & Co. 2 Broad Street Amusement Corp. 2 John Marshall Hotel. 2 Broad Street Amusement Corp. 2 F r u i t sent t o employees during extended illnesses. Flowers sent to employees during extended illnesses. [Expenses of bank-sponsored employees' [ social function. [Expenses [program. of Bank-sponsored i Expenses in connection with employees' annual dinner. 2 Expenses in connection with bank sponsored employees' athletic activity. Christmas 356 THE FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS Richmond—Continued TRAINING AND EDUCATION Voucher Date No. Amount 10924 Mar. 26, 1962. $1, 278. 00 12542 July 18, 1962. 860. 00 12367 July 9, 1962-_ 620. 00 Reimbursement of tuition and enrollment fees to 40 employees successfully completing courses offered by American Institute of Banking, 1st semester of 1961-62 session. Same as above, except 27 employees for 2d semester. Fees and charges for 3 employees attending ABA's Stonier Graduate School of Banking at Rutgers University. RESERVE BANK-SPONSORED DINNERS HELD OUTSIDE THE BANK 12268 June 27, 1962_ $91. 74 142. 71 132. 51 14694 Dec. 17, 1962 77. 15 17. 15 111. 45 At the Country Club of Virginia, annual dinner in connestion with joint meeting of the Richmond, Baltimore, and Charlotte boards of directors. At the Commonwealth Club; dinner for retiring directors at the conclusion of their 3-year or 6-year terms of office, attended by the bank's directors and senior officers. LUNCH EXPENSE IN BANK DINING ROOM OR CAFETERIA 16680 17213 15268 Apr. 25, 1963 June 5, 1963 Jan. 30, 1963 16769 May 3, 1963 $37. 45 [For guests on official business. 44. 01 77.20 Annual recognition lunch for 25 employees who voluntarily conduct visitor tours of the bank. 161. 11 Lunch in connection with operations and policy seminars for bankers. MEMBERSHIP DUES, ETC. 13565 Oct. 3, 1962 $2, 043. 00 13030 9835 9840 12636 Aug. 24, 1962 Jan. 8, 1962 do July 24, 1962 13203 10394 14266 11214 12419 10046 Sept. Feb. Nov. Apr. July Jan. 11, 1962 16, 1962 20, 1962 21, 1962 10,1962 25, 1962 1, 600. 00 750. 00 350. 00 320. 00 310. 00 400. 00 250. 00 187. 50 105. 00 80.00 Richmond chapter of American Institute of Banking. American Bankers Association. Virginia Bankers Association. West Virginia Bankers Association. NABAC, the Association for Bank Audit, Control, and Operation. Robert Morris Associates. Richmond Chamber of Commerce. Committee for Economic Development. National Industrial Conference Board. Systems and Procedures Association. Old Dominion Purchasing Agents Association, Inc. THE FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS 357 Richmond—Continued TRAVELING EXPENSES TO CONVENTIONS, CONFERENCES, MEETINGS, ETC. Voucher Amount 10566 Mar. 2, 1962 10566 do 10566 do 11701 May 15,1962 11701 do 11701 11930 12649 do June 5, 1962 July 26, 1962 12649 July 26, 1962 12649 13537 do Sept. 28, 1962 13952 Oct. 30, 1962 14035 Nov. 5, 1962 14035 do 14035 do 15305 Jan. 31, 1963 $408. 46 | ABA Midwinter Trust Conference in New York City, and participate in open market training program, Feb. 3 to Feb. 15, 1962; meals and lodging averaged over $24 a day for the 12 days. 188. 27 | ABA Midwinter Trust Conference and Conference of Trust Examiners in New York City, Feb. 4 to Feb. 8, 1962; meals and lodging averaged over $32 a day for the 4 days. 228. 01 | Same as above, except Feb. 4 to Feb. 10, 1962, and meals and lodging averaged over $27 a day for the 6 days. 175. 37 | Maryland Bankers Association Annual Convention in Atlantic City, N.J., May 4 to May 8, 1962; meals and lodging averaged about $30 a day for the 4 days. 148. 12 | Same as above, except meals averaged about $28. 240. 23 | Annual International Convention of the National Association of Purchasing Agents in Chicago, 111., May 5 to May 10, 1962. 562. 98 | National Office Management Association Convention in San Francisco, Calif., May 15 to May 24, 1962. 145. 12 | Annual convention of West Virginia Bankers Association in White Sulphur Springs, W. Va., July 19 to July 22, 1962; meals and lodging averaged over $36 per day for the 3 days. 56. 50 | Summer meeting of Old Dominion Purchasing Agents Association, in Hot Springs, Va., July 19 to July 21, 1962. 55.35 I Do. 216. 35 I Annual convention of National Association of Supervisors of State Banks in Bretton Woods, N.H., Sept. 16 to Sept. 21, 1962. 262.99 | National convention of NAB AC in Bal Harbour, Fla., Oct. 21 to Oct. 25, 1962; meals and lodging averaged about $20 a day for the 4 days. 290. 56 | Same as above, except meals and lodging averaged over $25 a day. 300. 96 | Same as above, except meals and lodging averaged over $27 a day. 80. 61 | Fall meeting of Virginia chapter of Robert Morris Associates in White Sulphur Springs, W. Va.; Nov. 2 to Nov. 4, 1962; meals and lodging averaged about $24 a day for the 2 days. 223. 97 | ABA national credit conference in Chicago, 111., Jan. 20 to Jan. 23, 1963. 358 THE FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS Richmond—Continued TRAVELING E X P E N S E S TO CONVENTIONS, CONFERENCES, MEETINGS, ETC. Continued Voucher No. Date Amount 16994 May 14, 1963 $285. 33 16995 16996 16680 do do Apr. 25, 1963 285. 33 285. 33 63.70 16680 do 52.35 PUBLIC Jan. — 1962 $1, 597. 08 Sept. —, 1962 Mar. — 1962 1, 508. 80 1, 299. 06 May — 1962 Apr. — 1962 277. 91 535. 73 Apr. — 1962 1, 997. 20 June — 1962 Sept.— 1962 | Apr. — 1963 Jan. — 1962 976. 22 1, 948. 25 2, 071. 47 685. 97 Oct. — 1962 Nov. — 1962 1, 096. 62 May — , 1962 2, 067. 00 Dec. — 1962 4, 710. 00 Dec. — 1962 915. 53 Apr. — ,1963 5, 550. 00 2, 127. 70 AIB national convention in Denver, Colo., May 27 to May 31, 1963, as delegate from Richmond chapter. Do. Do. South Carolina Young Bankers convention in Litchfield Beach, S.C., Apr. 19 to Apr. 21, 1963; meals and lodging average almost $25 a day for the 2 days. Same as above, including the $25 a day. INFORMATION Bank printshop expense for 2,700 copies of "Fifth District Figures." Same as above, except 2,600 copies. Bank printshop expense for 3,000 copies of "Business Forecasts 1962." Same as above, except 1,000 copies. Bank printshop expense for 2,000 copies of "Operating Ratios of Fifth District Banks." Bank printshop expense for 3,000 copies of "Virginia, an Economic Profile." Same as above, except 2,000 copies. Bank printshop expense for 4,000 copies of "Maryland, an Economic Profile." Bank printshop expense for 5,000 copies of "North Carolina, an Economic Profile." Bank printshop expense for 5,000 copies of "You and Your Money." Same as above, except 10,000 copies. Same as above, except 20,125 copies and they were printed outside the bank. Outside printing of 35,150 copies of "Readings on Money." Outside printing of 15,000 copies of "Your Money Supply." Outside printing of 35,050 copies of "The Federal Reserve at Work." Outside printing of 8,034 copies of "Notes on Central Banking." THE FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS 359 Richmond—Continued MISCELLANEOUS Voucher No. Date 11019 Mar. 29, 1962 $355. 00 Jan. —, 1962 175. 00 June —, 1963 Mar. 11, 1963 195. 00 2, 122. 56 May —, 1963 518. 79 May 9, 1963 240. 69 15867 16871 Amount Payment to Central Richmond Association to cover the expense of a luncheon for U.S. savings bond volunteers group, attended by local businessmen, the Secretary of the Treasury, and other Treasury Department officials. The bank was requested by the Treasury Department and authorized by the Board of Governors to incur this expense. Rental of Dow Jones news service for 1 month; same amount was paid each month through May 1963. Same as above, except increased rate. Aluminum frames for currency and coin exhibits: Bank printshop expense for 17,500 facsimile sheets describing currency and coin exhibits. Mementos for retiring directors. 360 THE FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS Boston ANNUAL MEETINGS OF STOCKHOLDERS Voucher Date No. 777 Feb. Amount 1, 1962 $1, 049. 65 7392 Oct. 30,1962 7603 7687 7688 7689 7690 7742 7782 7847 7871 7939 7612 N o v . 6,1962 N o v . 8,1962 do do do N o v . 9, 1962 N o v . 13, 1962 N o v . 15, 1962 N o v . 16, 1962 N o v . 20, 1962 N o v . 7,1962 7579 Nov. 8708 Dec. 19,1962 6, 1962 300. 00 Printing of 500 books—"Proceedings of t h e 37th Annual Meeting of Stockholders." T h e stockholders of t h e Federal Reserve Bank of Boston have m e t annually at t h e b a n k since 1923 (except for t h e war years of 1942-1943) in joint session with Federal Reserve Board directors and officers t o discuss m u t u a l problems and m a t t e r s of common interest. T h e proceedings of these meetings are published at t h e specific request of member banks and distributed t o t h e m . Services rendered by a professor in conducting a seminar for m e m b e r bankers a t t e n d i n g t h e a n n u a l meeting of stockholders on Oct. 25, 1962. 82. 66 430. 91 377. 25 780. 80 Reimbursement for t r a n s p o r t a t i o n charges 578. 84 I of stockholder delegates (1 from each 101. 84 [ m e m b e r bank) t o and from t h e meeting held on Oct. 25, 1962—custom since 1923. 69.58 123. 85 30.00 29. 16 164. 57 11 guests entertained at Algonquin Club of Boston, cocktails and dinner, b y t h e President of Federal Reserve B a n k in connection with t h e annual meeting of stockholders on Oct. 25, 1962. 2, 059. 20 Catering service: 429 lunches for stockholder delegates attending t h e Oct. 25, 1962, meeting ($4.80 each). 113. 60 Stenographic transcript of Oct. 25, 1962, meeting—71 pages, 3 copies. THE FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS 361 Boston—Continued CENTRAL BANKING SEMINAR Voucher Date No. 2689 Apr. 12,1963 2998 Apr. 26, 1963 2341 Apr. 2349 $372. 37 594. 08 do 2683 Amount 2, 1963 do 418. 39 62.00 83.00 For 9 successive years, the Federal Reserve Bank of Boston has run a 3-cUy central banking seminar for officers of member banks and teachers of money and banking in New England colleges and universities. The Reserve bank pays the expenses of those attending the seminar. 15 bankers and 17 teachers attended the 1963 seminar (Apr. 3-5): Apr. 3, 1963, banquet at the International House of New England. Apr. 4, 1963, dinner at the Algonquin Club of Boston. Apr. 3-5, 1963, luncheons in bank dining room. Room, transportation, meals, etc., for 1 banker member of seminar group. Same as above for 1 academic member. LUNCHEONS TO STIMULATE SALES OF SAVINGS BONDS 1069 1070 1071 1379 Feb. 13, 1962 do do Feb. 27, 1962 28-680—64—vol. 1 $44. 00 504.60 111.20 141. 45 24 The Federal Reserve Bank of Boston was advised by the Board of Governors that an arrangement had been worked out between the Board and the Treasury whereby Federal Reserve bank funds would be used to a limited extent in assisting in a program of luncheons for the purpose of stimulating sales of savings bonds in cases where the costs of the luncheons could not be underwritten privately: Montpelier, Vt., 16 luncheons. Boston, Mass., 102 luncheons. Augusta, Maine. New Haven, Conn., 40 luncheons. 362 THE FEDERAL RESERVE SYSTEM AFTER FIFTY YEARS Boston—Continued MEMBERSHIP D U E S AND CONTRIBUTIONS Voucher Date No. Amount 4255 June 18, 1963 $1, 493. 75 4985 July 18, 1962 1, 250. 00 Jan. 3, 1963 1, 000. 00 4968 July 17,1962 750. 00 6059 150 58 Sept. 5, 1962 Jan. 7, 1963 Jan. 3, 1963 200. 00 150. 00 520. 00 114 5503 5613 Jan. 4, 1963 Aug. 9, 1962 Aug. 14, 1962 450. 00 350. 00 330. 00 4496 June 27, 1963 310. 00 410 Jan. 16, 1963 300. 00 113 Jan. 4, 1963 300. 00 2904 Apr. 27,1962 150. 00 7095 Oct. 17, 1962 150. 00 60 Boston chapter, American Institute of Banking, 1963-64 budget. American Bankers Association, year ending Aug. 31, 1963. Massachusetts Bankers Association, year 1962-63. Connecticut Bankers Association, year ending May 31, 1963. Maine Bankers Association, year 1962-63. Vermont Bankers Association, year 1963. Greater Boston Chamber of Commerce, year 1963. New England Council, year 1963. American Management Association, renewal. Robert Morris Associates, year ending Aug. 31, 1963. NABAC, the Association for Bank Audit, Control & Operation, year 1963-64. Boston Municipal Research Bureau, year 1963. National Industrial Conference Board, year 1963. Algonquin Club of Boston, 50 percent, year ending Apr. 30, 1963. Do. MISCELLANEOUS 7589 Nov. 6, 1962 $2, 772. 00 8270 Dec. 4, 1962 720. 00 5283 5521 4129 Aug. 1, 1962 Aug. 9, 1962 June 11, 1963 77.42 160. 00 180. 00 7012 7801 8529 Oct. 11, 1962 Nov. 14, 1962 Dec. 12, 1962 216. 75 834. 75 642. 63 Payment for 2 duplicate currency exhibits with 2 sets of 2 shipping cases to permit shipment to member banks. 14 aluminum frames for currency display. Rental of Dow Jones ticker tape machine: July 17-30, 1962. August 1962. June 1963 (new monthly rate, effective June 1, 1963. Programing service by CEIR in connection with study of the functional cost of member banks in the range of $3.5 to $50 million in deposits: September 1962. October 1962. November 1962. (Resulting reports give participating banks information which guides management decisions as to pricing of bank services and as to efficiencies of bank operations.)
@FedFRASER